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

by Eric Ries

The Startup Way combines the rigor of general management with the highly iterative nature of startups. It is a system that can be used in any organization that seeks to practice continuous innovation, regardless of size, age, or mission.

CONTINUOUS INNOVATION: Too many leaders are searching for that one key innovation. But long-term growth requires something different: a method for finding new breakthroughs repeatedly, drawing on the creativity and talent of every level of the organization. STARTUP AS ATOMIC UNIT OF WORK: In order to create cycles of continuous innovation and unlock new sources of growth, companies need to have teams that can experiment to find them. These teams are internal startups, and they require a distinct organizational structure to support them. THE MISSING FUNCTION: If you add startups to an organization’s ecosystem, they must be managed in ways that confound traditional techniques. Most organizations are missing a core discipline—entrepreneurship—that is just as vital to their future success as marketing or finance. THE SECOND FOUNDING: Making this kind of profound change to an organization’s structure is like founding the company all over again, whether it’s five or a hundred years old. CONTINUOUS TRANSFORMATION: All of this requires the development of a new organizational capability: the ability to rewrite the organization’s DNA in response to new and diverse challenges. It would be a shame to transform only once. When a company has figured out how to transform, it can—and should—be prepared to do it many more times in the future.

Nor does it mean that every employee magically starts acting like an entrepreneur. Instead, the goal is to make it possible for startup teams to operate reliably and give every employee the opportunity to act in an entrepreneurial way. This allows for the emergence of people who are naturally inclined to work this way—or could be inclined, given encouragement and permission.

You might think an organization that measures its employees against strict quarterly deadlines, the way most companies currently do, would operate with a mindset that encourages rapid experimentation on an abbreviated schedule. But what actually happens is the opposite. Because of the short-term pressure, anything that can be done in one quarter has to be highly predictable in order to make future commitments based on its results. Instead of seeing the innovation opportunities that come with thinking in short cycles, companies become conservative and focus only on the projects they believe will maximize that quarter or fiscal year.

“HYPERGROWTH FOR A COMPANY ALSO REQUIRES HYPERGROWTH OF THE PEOPLE INSIDE IT.”

It’s a surreal experience that involves unlearning habits and patterns that helped them earlier in their careers.

A modern company is one in which every employee has the opportunity to be an entrepreneur. It respects its

employees and their ideas at a fundamental level. A modern company is disciplined at the rigorous execution of its core business—without discipline, no innovation is possible—but it also employs a complementary set of entrepreneurial management tools for dealing with situations of extreme uncertainty.

Who in your organization is responsible right now for the following two things? Overseeing high-potential growth initiatives that could one day become new divisions of the company. Infusing everyday work across the organization with an entrepreneurial, experimental, iterative mindset.

The company’s leaders need to understand the startup as an atomic unit of work, distinct from other kinds of project teams that companies typically employ.

The entrepreneurial function is not “just another function”—because it also impacts and supports the other functions in doing their work more effectively. It requires a level of integration with the company and its culture that is uniquely challenging even compared to other difficult corporate transformations. And this boundary-blurring behavior is just the beginning of the story, because…

Entrepreneurship Is Not Just for Entrepreneurs

Ultimately, the non-entrepreneurs are just as important customers of the entrepreneurial function as the entrepreneurs themselves, for three reasons: Lean Startup—style tools are incredibly useful in a wide range of applications that don’t have the extreme uncertainty of a new product but still have some uncertainty. I’ve heard dozens of stories from people who were tangentially involved in Lean Startup training who subsequently used some of the techniques on seemingly minor projects—sometimes as humble as creating a PowerPoint presentation for their boss—to great effect. Experimentation is just a generally useful tool. Non-startup managers need to know what is going on. This is critically important, because there is

no way around the fact that entrepreneurs cause trouble! They foment conflict. Many internal startups are intentionally designed to challenge existing biases or sacred cows. This conflict will always—always!—wind up climbing the chain of command. Even if the startup’s immediate manager has been trained in the Startup Way, what about all the other managers above her or him? You never know who the entrepreneurs are going to be. We’ll see this idea again in the next chapter, but startup-style meritocracy is a little different than what most people are used to. Even if you wanted to design a program that was only for entrepreneurs, it would be impossible to do so. What makes someone an entrepreneur is not that she or he got assigned that role by someone at corporate HQ. Good ideas come from unexpected places.

That’s why, in the tech industry especially, small teams put a huge premium on reusing existing technology and assembling products out of preexisting components. More than at any other time in history, these components can be combined without requiring explicit permission or a business-development relationship. As reddit and Hipmunk co-founder Alexis Ohanian wrote in Without Their Permission, “The Internet is an open system: It works because you don’t need to ask anyone’s permission to be creative and because every address is equally accessible.”5 Imagine how Facebook would look if Mark Zuckerberg had needed to sign twenty partnership agreements before he was able to start experimenting with his idea on the Harvard campus.

Amazon uses a method called “working backward” to make sure that discovering a true customer problem is the very first thing a team focuses on. It starts with one of the internal press releases I mentioned in the Amazon Fire phone story in Chapter 1. The audience for that document is the new or updated product’s customers, internal or external, and it details not just the problem itself, but the current solutions and the ways in which the new solution will solve the problem better than anything before has.6 Until the team can truly articulate the problem from the customer’s point of view, nothing gets built. This hypothesis is crucial to keep the focus on learning.

Silicon Valley–style companies aspire to delight customers by providing a solution that is dramatically better than anything they’ve seen before.

So what can make a startup more valuable? Acquiring valuable assets, such as developing new products, hiring new people, and gaining more revenue. Changing the probability of future success (the 1 percent that achieves $100 billion above). Changing the magnitude of future success (the $100 billion above).

By giving employees access to equity, startups directly incentivize learning in the most dramatic way. Equity ownership is not a cash bonus. It’s a measurement of what the startup has learned about far future profits. It’s a way to financialize learning.

Equity ownership allows for compensation, risk-taking, and investment in whatever is necessary. This means that during the early life of a startup, its management looks like that of a nonprofit organization: it’s all about impact and future impact.10

Compared to other forms of compensation (sole proprietor, nonprofit, corporate bonuses, etc.), equity ownership is the least distortionary set of incentives. It allows employees’ intrinsic creativity, commitment, and motivation to flourish.

Most organizations subject their internal teams to an endless stream of meetings: formal reviews, budget updates, and a constant barrage of middle manager check-ins. I have spoken with many managers who report that simply keeping up with these (and their attendant politics) accounts for more than 50 percent of their time, day in and day out. It’s an astonishing tax on their productivity. Instead, we in the startup movement favor a system that encourages the flow of information in a way that doesn’t hinder progress, so that employees and managers can focus on producing results instead of just reporting them.

Vision is often discovered through the process of building a startup. As the process unfolds and the visionary is forced to confront difficult choices about what to change and what to stick with, she actually comes to realize which aspects of the original vision are expendable and which are essential.

1. Leap-of-Faith Assumptions (LOFA)

Among its leap-of-faith assumptions, a startup has two that are fundamental: the value hypothesis,4 which tests whether a product or service really delights customers once they begin using it; and the growth hypothesis, which tests how, given some customers, it’s possible to get more. (See chart, this page.)

As Mark Zuckerberg says in

his famous manifesto (in Facebook’s S-1 filing): “Try to build the best services over the long term by quickly releasing and learning from smaller iterations rather than [by] trying to get everything right all at once….We have the words Done is better than perfect painted on our walls to remind ourselves to always keep shipping.”5

In today’s marketplace of uncertainty, whoever learns fastest wins. The lean manufacturing concept of “fundamental cycle time” is defined by the time elapsed between receiving an order from the customer and delivering a high-quality product at a good price. For a startup “innovation factory,” the fundamental cycle time is defined by how much time elapses between having an idea and validating whether that idea is brilliant or crazy. Teams that drive down the validation cycle time are much more likely to find product/market fit,6 because it increases (not guarantees, of course) the probability of success.

It’s uncomfortable to put an imperfect, messy product out there, especially when we are enthralled with the big vision for our project, as most entrepreneurs are.

“The thing about Minimum Viable Products is that while you decide what’s Minimum, the customer decides if it’s Viable,” writes David Bland, a consultant and early Lean Startup evangelist. “You’ll need to lead your team out of the trough of sorrow after they experience this despair for the first time. Minimum Viable Products are optimized for learning, not for scaling. This is one of the hardest things to convey to people who’ve spent their lives building to build, not building to learn.”7

To see a number of types and examples of MVPs, go to Appendix 2 (this page), where I’m delighted to be able to share Intuit’s internal MVP catalog and guidelines—with their permission, of course.

What’s most important, though, is to always brainstorm multiple MVPs for any given project. At Intuit, one of the core pillars of their Design for Delight program (their version of a Lean Startup program, similar to FastWorks) is “Go Broad to Go Narrow.”8

It’s important to help teams consider radically different alternatives. In my more basic workshops, I will often ask teams to pick a single assumption from their plan and then brainstorm three different MVPs. We start with the easy one: the thing they already want to do. Then we do a fun one: one that is dramatically more expensive (the ultimate, gold-plated version). Finally, I ask teams to try to create a third possibility—one that is as distant in complexity and cost from their original design as the gold-plated MVP but in the direction of simplicity. That is, something so stupid and simple, they’re almost embarrassed to admit they thought of it.

For teams that are ready for a more advanced technique, here’s a chart I’ve used with a number of clients to help them decide which MVP is worth pursuing. This creates a common scorecard for evaluating the prospects of the brainstormed MVPs. (See chart on this page.)

However, what all of these behaviors have in common is an exchange of value. Value can be anything scarce a potential customer is willing to give up in exchange for access to the product: sometimes that’s money, but it can also be things like time, energy, reputation, or detailed feedback.

For metrics to support a valid inference, they must follow the three A’s: actionable, accessible, and auditable.

ACTIONABLE. For a report to be considered actionable, the data must demonstrate clear cause and effect and be related to changes in the product itself. Otherwise, it’s merely a vanity metric. The fact that a website has seen an uptick in visitors doesn’t necessarily mean the product is improving. What does it mean? Why are visitors there? What are they doing? What product changes drove this result?

ACCESSIBLE. Everyone involved in the project should be able to see these reports and understand them, or there is no way they can be put to use. Many organizations use public screens to follow data. The Washington Post is a recent example; under Jeff Bezos’s ownership, the company created a technology platform called Arc that aims to translate Amazon’s understanding of the customer experience to the newspaper business. Arc tracks readers’ interaction with the website and apps and integrates targeted marketing based on the user experience. The company now offers Arc as a service to other newspapers around the world.10

AUDITABLE. The data has to be credible. Often when projects are killed because of poor metrics, a team or an individual will challenge that decision. What’s it based on?

The numbers and the analysis must be clear and sound, not complicated...

Often the hardest part of running a startup is simply getting everyone on the team to agree on the same set of facts. Only then can we figure out if we are making progress.

In the PRFAQ, the team writes a press release (similar to the Amazon process) and FAQ document for the customer, including information like the product launch date and cost (or at least a good estimate). Then the team sits down with customers who’ve been given the release to get feedback.

Sometimes customers—internal as well as external—will say they aren’t at all interested in an idea. Other times, they’ll say they can’t wait to start using it, at which point the team will dig deeper. And sometimes, the response includes requests for features that the team hadn’t even considered.

What did you learn? How do you know?

If only customers would read the business plan, then they would know how to behave!

To incubate a new culture requires individual teams to self-organize. New cultures come from the lived experience of seeing a new way succeed. These teams can become the seeds of a new company-wide culture if carefully nurtured. In fact, in many successful transformations I have witnessed, future leaders who became instrumental change agents began as ordinary employees working on early pilot projects. Once they saw what was possible, they made the choice to dedicate their careers to bringing those benefits to others in the company.

this new way stands on the shoulders of revolutions past: scientific management, mass production, lean manufacturing, Six Sigma, agile software development, customer development, maneuver warfare, design thinking, and more.