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

by Eric Ries

phases: SEED PHASE: Learn as much as possible about the market, business model, and the technology involved. LAUNCH PHASE: Develop technology. (At this stage, some products would be tracked through a stage-gate process, especially large things like blowout preventers or gas turbines, which have a critical safety process.) GROW PHASE: Scale up learnings and production.

Citi’s Discover 10X program (D10X) seeks to identify solutions that are at least ten times better for its clients and customers.

David Kidder and Bionic

“It’s given us a process and a system to validate what our clients need, even in many cases where they don’t yet know what they need.”

One of the scourges of internal innovation teams is that existing divisions of the company want to impose “taxation without representation.” They often want control over the project (because they are afraid of negative consequences to the status quo), but they don’t want to provide funding for the project (because they would much rather invest in the short-term things that are working today). This combination gives rise to the problem outlined in Clayton Christensen’s The Innovator’s Dilemma.

Innovation accounting suggests one possible way to solve that problem. Along with division- and function-level growth boards, which allocate funding and hold teams accountable within their existing structures, how about a corporate-level growth board that can fund and accelerate new startups that no existing division wants to fund. Create “M&A” and “IPO” analogs, just like an external startup. If, at some point in the life of an internal startup, a division wants to exert control over its destiny, let them acquire the internal startup out of their M&A budget. IA will give finance a rigorous methodology for assigning it a fair price. And if no division wants to pay this price, create a mechanism to allow the startup to “IPO” and become a new stand-alone division—if its results warrant. If you’ve gone that far, why not use these “M&A” and “IPO” events to encourage finance to create real internal startup equity that is tied to the success of the project. Not—as in so many ill-conceived corporate bonus plans—as bonuses paid out for interim short-term milestones, but as real equity tied only to long-term performance. For most organizations, these ideas are too radical to be considered, so I leave them here as provocations. But especially for the next generation of founders, who are considering the kind of organization they want to leave behind, why wouldn’t you want your best employees to experience the rewards, the focus, and the growth that comes with true high-stakes entrepr...

PART THREE The Big Picture

So who, exactly, are these people? They are entrepreneurs. A corporate transformation is—in every way—a true startup, with the same kind of risk, rapid growth, and profound impact that an external startup contains. The ROI on these transformations can be massive, and they require the same kind of governance, funding, and process models as startups. Excellence at founding a transformation requires a skill set similar to what is needed to build a new startup from scratch.

It is also a huge part of the power of Silicon Valley (see LinkedIn co-founder Reid Hoffman’s blitzscaling thesis1)

CHAPTER 10 A UNIFIED THEORY OF ENTREPRENEURSHIP

In other words, just as The Lean Startup argued for a shift in thinking from innovation to continuous innovation, I hope this book will leave you with a hunger not only for transformation but for continuous transformation.

future. I predict that twenty-first-century managers will live through as many organizational transformations as new-product platforms and come to see organizational forms the same way we see our smartphones—as something disposable that’s top of the line for a few years, then rapidly surpassed.

Here’s the good news, which has taken me as much by surprise as it has anyone else in the past few years: The very skills that are required to do the Startup Way transformation are deeply transferrable. They are better seen as a permanent organizational capability than as a one-time event.

Think back to the original definition of a startup I settled on more than five years ago: a human institution designed to build a new product or service under conditions of extreme uncertainty.

It requires: Leadership skills of a most distinctive kind, since transformation pits its leader against the hostile reactions of experienced people whose lives and careers are deeply invested in the status quo. Audacious experimentation, since beyond the general framework I’ve presented so far, every organization has to find its own distinctive shape, its own unique adaptations to the specific context in which it operates. The boldness to invest in sweeping, company-wide change—and the patience to wait until just the right moment to make this commitment. The discipline to start with small experiments that might hasten the arrival of the right moment without growing too big, too bloated, too fast. The most difficult kind of cross-functional collaboration: enlisting functional leaders in the creation of new and competing functions, thereby breaking down old functional silos and requiring old enemies to make common cause.

I believe that corporate transformation—the complete overhaul of an organization’s existing structure—is corporate entrepreneurship.

Today, most organizations (no matter their size) do some amount of the following activities: Build entirely new products and seek new sources of growth. Build new “internal products” such as IT systems and HR policies. Do corporate development: buying other companies and startups, spinouts, corporate venture, tech licensing/tech transfer. Do corporate restructuring or transformation, such as building a corporate team (like FastWorks) to introduce a new way of working.

What matters is that the organization does the following: Assigns responsibility for the entrepreneurship function to somebody (too many orgs have nobody). Gives these people real operating responsibility instead of designating them merely as futurists or instigators (as too many “chief innovation officers” are). Builds a career path and a specialized performance development process for entrepreneurial talent (producing a common standard that can be used across the pillars, no matter which function or division is affected). Facilitates cross-training of entrepreneurs across the pillars. (This is why VCs who have had real-world operating experience as founders are so highly prized, though I should note the many VCs who have succeeded despite not having it. What matters is the mindset, not the résumé.) Offers training, mentorship, support, coaching, and best practices designed to foster excellence in entrepreneurship across the organization. Somewhat counterintuitively, takes responsibility for educating the non-entrepreneurs in the organization, who, though not necessarily acting as drivers of change, will still need to adopt a more entrepreneurial way of working. Gives entrepreneurship a seat at the table when the other functions—especially gatekeeper functions—are setting company policy. This is incredibly important for finance, legal, HR, and IT in particular.

They need the same things every entrepreneur needs: limited but secure funding to get started, clear access to scalable resources (when the need is proven), appropriate standards for strong accountability, a commitment to the truth about whether their transformation is working or not, a cross-functional dedicated team, and a growth board to which to report progress. And as I’ve now seen across many organizations, they really benefit from a community of like-minded entrepreneurs working on unrelated startups under the same corporate umbrella.

This is the true promise of the Startup Way: a management system that contains within it the seeds of its own evolution by providing an opportunity for every employee to become an entrepreneur.

CHAPTER 11 TOWARD A PRO-ENTREPRENEURSHIP PUBLIC POLICY

One recurring theme of this book has been the importance of seeing entrepreneurship as a tool for developing business ecosystems.

1. Vision and Upside A longing to improve the world is critical: That’s vision. But where do people get the ideas that lead to real, valuable change? And what role models inspire them to think they’re qualified to pursue those ideas? Anything we can do to help people find and believe in valid ideas for improvement will increase the rate of entrepreneurship. Of course, for someone willing to endure the pain of entrepreneurship, the payoff has to be correspondingly large (although not always financial, as we saw in Chapter 3 on the “stake in the outcome”). This has implications for both education and fiscal policy. 2. Skills and Resources Vision can be a daunting thing. Many people never pursue their dreams because they can’t see a way to get started. Providing a way is one of the big impacts that the Lean Startup movement has had to date, encouraging would-be entrepreneurs to “Think big. Start small. Scale fast.” Any policy that helps people take those tentative first steps will have big returns on the rate of entrepreneurship, even if most experiments fail.

3. Risks and Liabilities All entrepreneurs, whether they admit it or not, are obsessed with failure. It’s impossible not to think about all the ways your venture might fail and the myriad consequences, personal as well as professional, that might follow. Of course, part of the art of entrepreneurship is to assess the risks rationally, filter out those that are endurable (like embarrassment) from the ones that are more serious (like fraud or a faulty product), and maintain confidence in the face of these realities.6

According to the U.S. Census Bureau, 700,000 fewer businesses were created between 2005 and 2014 than between 1985 and 1994. The number of startups that contribute disproportionally to job and productivity growth has been falling since 2000.8

Creating what psychologists call a “growth mindset” is the key to encouraging kids to take risks and learn from their mistakes—which sounds a lot like the mindset of an entrepreneur.10

Forty-four percent of Silicon Valley startups have immigrant founders.13 Fifty-one percent of startups worth a billion dollars were founded by immigrants.14 Many more of the most successful American startups have at least one immigrant founder. Openness to immigrants is one of the cultural values that predict future economic growth on a city-by-city basis (one of several data-based indexes that Silicon Valley routinely leads the pack in). As Richard Florida writes in The Flight of the Creative Class, the United States “doesn’t have some intrinsic advantage in the production of creative people, new ideas, or startup companies. Its real advantage lies in its ability to attract these economic drivers from around the world. Of critical importance to American success in this last century has been a tremendous influx of global talent.”15

I believe a new kind of union-management relationship is available for organizations that are willing to break the mold and try some experiments. I think of it as a “pro-productivity” union: a trade of more flexibility for more investments in workers, the tying of wages and benefits to productivity improvements in the company, and a proactive agenda to create entrepreneurial opportunities for all union members. The goal of a “pro-productivity” union is to align its members financially with the health of the company and encourage managerial flexibility to enhance the long-term profitability of the company.

This could follow an idea that has been circulating around Washington, D.C., to create a new kind of statutory entity for a “growth startup corporation” distinct from existing classes like a C corp, LLC, or partnership. These “G corps” would be available only to companies that are human-capital intensive, have equity that is widely shared with all employees, invest in worker training, and so on. In exchange, they would be able to “grow into” various rules and regulations only as they scale.

As I discussed in The Lean Startup, these kinds of bad incentives trickle down from the public markets and infect everything that public companies touch, including the environment, politics, public safety, and, of particular concern to me, the whole entrepreneurial ecosystem. If the goal of a startup “exit” is either to be acquired by one of these public companies subject to short-term pressure or to IPO and then be subject to them directly, then founders will inevitably face pressure to maximize their company’s attractiveness to those systems. Even worse, the corporate development departments of public companies then wind up anointing the next generation of leaders in startup hubs simply by being the ones who decide which companies to acquire for outsize valuations. It’s corrosive.

Companies that do IPO are doing so many years later in their life cycle, which is causing a number of bad things to happen: A lot more private financing, with no audited financials or transparency. Our grandparents learned the hard way what happens when too much money is chasing exponential growth without oversight, governance, and disclosure. Although the documented instances of fraud are few so far, the temptations are immense. Lack of liquidity for limited partners. Without a robust secondary market governed by any kind of governance and disclosure standards, all secondary market transactions happen in the shadows. This is another market ripe with opportunities for fraud: If the founder of a company wants to sell you his or her shares, ask yourself what he or she knows that you don’t know. Lack of liquidity for employees. With employees having to wait even longer for liquidity, there is now a whole new variety of ways for them to be deprived of any share of the company’s eventual success. For example, most stock options are today set up with two bad design features: a ten-year expiration and a ninety-day exercise window. When companies used to routinely go public between roughly four to seven years of existence,31 these terms were just fine. But as the time to do so stretches longer, these two terms create two new ways for employees to wind up with options that they cannot exercise. Once a company has an extremely high valuation, exercising stock options gets expensive....

It’s creating that result because it’s distracting companies away from fundamental value creation. And if companies are distracted from fundamental value creation, they’re empirically less valuable. The result is that it’s not just the companies that suffer, but their investors, too, because the company is not doing what it needs to thrive. And, in a low-growth world, this is also a bad policy outcome, since the broader public is barred from taking the kinds of prudent risks that delivered growth in previous generations. Remember, the Amazon.com IPO raised only $54 million.33

As Noah Smith has written, “Structured management turned out to account for 17 percent of productivity differences between companies—half again as much as differences in employee skill levels, and twice as important as use of information technology.”1

Our project in the years to come will be to advance a positive vision of what liberal democracy can deliver with the new tools that technology is placing at our disposal. Its pillars must be: Broadly shared prosperity. Democratic accountability. Scientific inquiry and truth-telling. Long-term thinking. Universal entrepreneurial opportunity. Profound investment in the public goods that benefit everyone: basic science, R&D, education, health care, infrastructure.

Every organization owes this simple bill of rights to its every member: The right to know that the work I do all day is meaningful to someone other than my boss. The right to have my idea turned into a minimum viable product and evaluated rigorously and fairly. The right to become an entrepreneur at any time, as long as I’m willing to do the hard work to make things happen with limited resources. The right to stay involved with my idea as it scales, as long as I am contributing productively to its growth. The right to equity ownership in the growth I help to create, no matter my role or job title.

No doubt that’s in part because it got its start from the community that developed around my Kickstarter MVP book, The Leader’s Guide. I owe a huge debt to the nearly 9,677 people who backed the Kickstarter campaign, making possible the research that eventually led to The Leader’s Guide, as well as everyone who joined and participates in the Leader’s Guide community on Mightybell that has become a dynamic, active place for discussions about the principles in the book.