The Startup Way: How Modern Companies Use Entrepreneurial Management to Transform Culture and Drive Long-Term Growth

by Eric Ries

Another good early indicator is customer satisfaction and engagement.

another important leading indicator: team morale.

A little farther along on the path of experimentation, it’s important to create metrics to measure the success of entrepreneurial projects. This entails replacing traditional metrics—often ROI—with validated learning: scientifically gathered information based on frequent experiments.

Dropbox’s two basic metrics were: Virality. “We did not want Paper to become a single-user tool. If someone was using Paper to replace [to-do list software] Evernote, we weren’t interested in that. We needed it to spread and be collaborative.” Week-two retention. “We invited someone, they tried it. Did they come back in week two?”

Metrics are critical, Lefler says, because “when leadership can’t measure results, the common response is to require all decisions to go up to their level.

Without such a sponsor, the team will have to spend precious resources explaining, navigating, and apologizing for their methods to others in the organization.

It need not be the same sponsor for every team—but every team needs at least one.

It’s fine to have coaches help along the way, but an outsider pushing the organization to change is doomed to failure.

they launched the GE Beliefs at the annual officers’ meeting in August of 2014: Customers determine our success. Stay lean to go fast. Learn and adapt to win. Empower and inspire each other. Deliver results in an uncertain world.

What was done ad hoc and by decree in the early stages must now be systematized.

Advice and mentorship are available to startups in the portfolio, but they are never—ever—substitutes for leadership. Nobody is forced to talk to any specific mentor or do what that mentor says. Advisors take on the role of coaches—not spies, not leaders, not executives, not substitute board members.

In a company of any size, there are already lots of people who are naturally gifted at coaching teams. Ignoring this preexisting resource is tremendously wasteful, since key early adopters combine a knack for the new way of thinking with a deep understanding of the company as it exists today.

If teams feel entitled to funding, it’s almost impossible to generate the energy and focus that startups require. Innovation without constraints is no blessing—startup mortality rates are unusually high for overfunded projects, with many infamous examples.

This is the deal with metered funding: absolute freedom to spend the money, with extremely strict criteria for how to unlock more, denominated only in validated learning.

“If in Stage One your money is 80 percent for learning and 20 percent for outcome, in Stage Two it’s more like 50/50,” says Zwane.

Measuring the ROI of an MVP is like measuring an acorn and then cutting off its water supply because it hasn’t yet grown into a tree.

But when I speak to the leaders of finance functions around the world, they universally agree the mechanics of how to build this kind of “internal equity” are not especially complicated. What’s missing is the willingness of general managers to commit to specific milestones for valuing the project’s success. Working together in a cross-functional way shows a possible path forward: a stake in the outcome for internal startups designed by finance, backed by the conviction of senior leadership.

In other words, we had addressed two important parts of the startup valuation formula: our probability of future success and the presumed magnitude of future success.

Innovation Accounting (IA) is a way of evaluating progress when all the metrics typically used in an established company (revenue, customers, ROI, market share) are effectively zero.

Innovation accounting is a system for translating from the vague language of “learning” to the hard language of dollars. It puts a price not just on success but also on information.

Every flavor of innovation accounting is designed to demonstrate validated learning in a rigorous way. As you’ll recall from Chapter 4, this requires showing a change in customer behavior from experiment to experiment. Those behaviors are the inputs to the business model, the leading indicators that drive future outputs like ROI and market share. The innovation accounting process begins with a simple dashboard full of metrics that teams can agree are important. Many teams aren’t yet aware of the drivers behind their revenue projections. They’re focused instead on the financial goals or “outputs”—things like ROI, market share, and margin—and not on the power required behind the scenes to grow them.

LEVEL 1 DASHBOARD HLS MVP 1: Street corner lemonade stand/tables and chairs

In particular, every metric in the dashboard should correspond to a specific LOFA from the business plan, and there should be no extraneous metrics included.

In particular, it’s essential that the dashboard encompass the value hypothesis and the growth hypothesis (from Chapter 4). Making these two concepts quantitative is a big improvement over the common way investors and entrepreneurs alike talk about product/market fit.

What is the specific customer behavior that indicates delight with the product?5 In Level 1, we might use a proxy variable for this, like net promoter score (NPS)6 or GrowthHackers founder and CEO Sean Ellis’s “very disappointed” survey.7 These are good indicators of customer satisfaction, but they are hard to translate into dollars and cents. How do we know what NPS score is “good enough” to convince people to invest more time and money into a project? By contrast, a Level 2 value hypothesis indicator should measure a behavior like repeat purchase, retention, willingness to pay a premium price, or referral. What threshold is “good enough”? That’s easy to answer now: whatever number is required to make our business plan’s spreadsheet add up.

LEVEL 2 DASHBOARD HLS MVP 2: Simple landing page with order button

The goal here is to re-run that initial spreadsheet with new numbers learned from experiments and see how things change. In all likelihood, when we do this with our very first MVP, the hockey stick will become a flat line (a depressing but necessary first step). From that point on, every new experiment means a new set of inputs to this model. Each new run of the model yields a new graph, and a new set of projections. And these projections can then be rendered into net-present-value terms using standard finance tools.

Level 3 dashboard literally makes everything we learn translatable into net-present-value terms.

Every new MVP, every new test, reveals a new NPV, which is, with luck, closer to the fantasy plan.

LEVEL 3 DASHBOARD NET INCOME, MILLIONS

Whose responsibility is it to develop these metrics and establish consistency across the whole portfolio or even the whole company? If this were any other kind of project, the answer would be obvious: finance. A finance function that wants to support innovation (instead of hindering it) will have to do this work, hopefully in partnership with the new entrepreneurship function. For the largest organizations, this will have to include establishing an “innovation audit” process to ensure this new kind of standard work is being adopted everywhere.

It is for this reason that, at GE, the initial rollout of FastWorks involved the Corporate Audit Staff (CAS). It was not just an engineering, HR, or marketing initiative. Finance was on board from the start. Every single one of the early FastWorks projects had a high-potential leader from CAS assigned. At first blush, this might sound strange—who wants an accountant on a startup team?9 But being able to build the kinds of models that innovation accounting requires was a huge help to those initial cross-functional teams.

The key to this is not to compare the interim progress (which will often be quite modest) to the fantasy plan in the business case, but rather to compare it to the previous milestone. In this way teams can show progress over time. Growth boards can value the overall worth of their portfolio, and the company can have confidence that its investments are likely to pay off in the future.

“Growth boards are operationalized venture capital funds,”

What matters is not the exact composition of the board but that its membership is consistent from meeting to meeting.

Members of the board should be individuals who have a point of view about their investments, who will stick with teams—as long as they are showing real progress—even when the metrics are small. Board members also have a clear opinion about what kinds of leading indicators are valuable and will drive much better returns

HOW GROWTH BOARDS OPERATE Apart from its legal and compliance obligations, a startup board has three primary responsibilities: To be a sounding board for the founders and executives, helping them plot strategy, and hosting the pivot-or-persevere meeting (see Chapter 4). To act as the central clearinghouse for information about the startup, taking on the burden of reporting on behalf of the founders to key financial stakeholders like general partners and limited partners of the investment firm (see Chapter 3). To be the gatekeepers of future funding, either by writing checks themselves or by encouraging (or vetoing) sources of outside funding (see Chapter 3).

The best boards are able to push founders to think deeply about their progress and question whether they really have achieved validated learning or just wishful thinking. This is different from a stage-gate (“go/kill”) review and is not effective if adversarial or imperious.

The existence of a growth board forces middle managers to think carefully about whether they really, truly have a problem that needs solving, while giving them a clear and direct path to getting it solved if they do.

internal startup that is funded—as well as coached—by a growth board has a true scarcity mentality. In order for metered funding to work, growth-board funding decisions have to be simple: denominated in a fixed budget of either time or money.

I recommend: The startup is allowed to spend its growth-board money on whatever it wants, without micromanagement. But it must bear the full costs of anything it uses: salaries, equipment, facilities. This is not a matter of allocating partial overhead costs from the parent organization, either.

There should be no part-time costs—unless the startup decides to hire part-time or contract labor from the outside. I’ve seen internal startups go to outside vendors, like IT, when internal gatekeepers are intransigent. As long as they are spending their own money, this is fine.

The money is yours, but you cannot get a penny more if you do not show validated learning.

Action Oriented: Growth boards must make go/no-go decisions at the meeting.

Bionic: bionicsolution.com

Moves the Needle: movestheneedle.com

Corporate Entrepreneur Community: corpentcom.com The Corporate Entrepreneur Community (CEC) is a peer-to-peer network of large enterprises sharing best practices and challenges to drive real entrepreneurial growth. The CEC facilitates the development of entrepreneurial skills through a vetted community of innovation leaders at distinguished organizations.

MVP METHODS at INTUIT For a downloadable PDF including examples for each MVP method, visit thestartupway.com/​bonus.