The Startup Way: How Entrepreneurial Management Transforms Culture and Drives Growth

by Eric Ries

This setup flips Karl Marx’s old dictum on its head. What he called the means of production can now be rented. Entire global supply chains can be borrowed at little more than the marginal cost of the underlying products they produce. This dramatically lowers the initial capital costs required to try something new.

You’re telling me that … once upon a time … people made forecasts … and they came true?

Early in my career, I knew why I had always made a forecast for my businesses: you can’t raise money for a startup without one. I assumed forecasting was a kind of kabuki ritual where entrepreneurs prove to investors how tough they are by showing how much spreadsheet pain they can endure. It was a fantasy exercise driven by our desire to show an outcome remotely plausible for an idea that was—usually, at that point—totally unproven.

Eventually, though, I found out that some investors actually believed the forecast. They would even try to use it as a tool of accountability—just like Alfred Sloan. If a startup failed to match the numbers in the original business plan, the investors would take this as a sign of poor execution. As an entrepreneur, I found this reaction baffling. Didn’t they know that those numbers were entirely made up? Later

But managers, lacking any other system to use, need something to hold on to. Without an alternative, they cling to the forecast—even if it’s just made up.

You’ve probably started to sense the problem here: An older system of accountability, designed in a very different time and for a very different context, is still being used in situations where it doesn’t work. Sometimes, failure to hit the forecast means a team executed poorly. But sometimes it means the forecast itself was a fantasy. How can we tell the difference?

One day, as I was meeting with a Six Sigma black belt from one of GE’s industrial businesses—who was quite skeptical— I found myself distracted by the mug on his desk, which read: FAILURE IS NOT AN OPTION. Nobody in the startup world could have such a mug, I mused; it would be ridiculous. My experience is full of situations where reality proved too unpredictable to avoid failure. I thought of the best, most successful entrepreneurs I know. What would their mug say? I settled on: I EAT FAILURE FOR BREAKFAST.

There was a time when producing high-quality products on time, on budget, and at scale was one of the preeminent problems of the age.

But it, too, has run into some of the problems we typically associate with traditional, more established companies. Why? Because over the course of its tremendous, and tremendously fast, growth, the company was built to a familiar blueprint. It lost some of the first principles of product thinking that made its initial success possible. Its launches of two new flagship products, Mailbox and Carousel, were, in Agarwal’s words, “disappointing. There wasn’t the massive scale we wanted and we ended up having to sunset them.” The reasons for these failures were familiar. Says Agarwal, “We did not get enough pertinent user feedback. We were building and building but not listening enough.”

“It was the most painful experience the company has gone through,” Agarwal says, “but also the most rewarding and important one. It taught us so many things about what we were doing wrong building new products. It’s important that you accept the pain and do all the postmortems and you learn from it. And that’s how you get better and stronger.”

Whatever the Fire’s original business plan was, it surely didn’t predict what happened. But the phone was built with an assumption of risk that created space for the company’s reaction when it didn’t play out as expected. It’s that long-term vision—the understanding that the lemonade itself might end up not being a long-term bestseller, but instead some other bet might be—that allows the creation of a portfolio of experiments.

Not because these organizations aren’t filled with smart, ambitious people, but because they lack the tools to make proper use of them.

Do we want to leave behind an organization to the next generation of managers that is stronger than the one we inherited? What do we want our legacy to be?

One of my favorite stories about Sheryl Sandberg, Facebook’s dynamic COO, comes from a company meeting in which employees were complaining about the “unfairness” of having their performance evaluated based on the success of the projects they had worked on, rather than just their individual contribution to those projects. Sandberg acknowledged these concerns, but her reply has stuck with me for years. She asked the employees to imagine a favorite company of theirs that had been disrupted. Kodak, say, or RIM. Imagine all the employees of that doomed company, in the months and years leading up to the disruption. Think of all the people who got positive reviews, got promoted, got paid bonuses for their excellent functional contribution—all while the company went down to ignoble defeat. Do you really want to be one of those managers?

Jeffrey Liker’s magisterial The Toyota Way

“This is the missing half of the Toyota Production System. We have a system that is outstanding at producing what we specify, with high quality, but we don’t have a corresponding system for discovering what to produce in the first place.”

A modern company is one that has both halves, both systems. It has a capacity to produce products with great reliability and quality, but also to discover what new products to produce.

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. AN OLD-FASHIONED COMPANY is founded on steady growth through

MODERN COMPANY has a new tool in its arsenal: the internal startup, filled with a small number of passionate believers dedicated to one project at a time. Like Amazon’s famous “two-pizza team”—no larger than you can feed with two pizzas—these small teams are able to experiment rapidly and scale their impact. Their ethos: “Think big. Start small. Scale fast.”

In the typical organizational structure, who’s in charge of grappling with uncertainty, unlocking unexpected and dramatic new forms of growth and impact, translating research insights into viable products, and harnessing the forces of disruption in the organization? For small organizations, it is clearly the founders. But once an organization grows large enough, the honest answer usually is: nobody. But even if there was somebody, what, exactly, would that person be in charge of? The lack of a system for acting on new ideas is a huge problem for existing corporations that have had decades—sometimes longer—to become encumbered by layers of bureaucracy or hampered by burdensome “this is how we’ve always done it” practices. But the problem is also not all that uncommon in hypergrowth startups. At the end of their incredible expansion, the original employees, who personally lived through the early stages of the company’s development, are vastly outnumbered by the employees who did not—often by a factor of five or ten to one. Imagine where all those hundreds or thousands of new employees used to work. How many, do you think, were part of the extremely early stages of another successful startup? The law of large numbers says very few.

When I meet with CEOs, I often ask them: Who in your organization is responsible right now for the following two things? 1. Overseeing high-potential growth initiatives that could one day become new divisions of the company. 2. Infusing everyday work across the organization with an entrepreneurial, experimental, iterative mindset. Rarely do those responsibilities show up on the org chart.

Nobody is waking up every day determined to invest in the next generation of entrepreneurial leaders, fight off the forces of disruption or harness them for new growth, and ensure that every person in the organization is seen as a resource for potential new ideas.

So it’s time to move beyond these half-hearted measures and to see entrepreneurship as a core discipline of a modern company.

They need the ability to consistently and reliably make bets on high-risk, high-reward projects without having to bet the whole company.

And they need to find, train, and retain the kinds of leaders who can pull this off. After witnessing and working with many companies, large and small, grappling with this, I believe we should simply call this function “entrepreneurship.”

Because the types of projects that startups spearhead are best understood as experiments, internal startups must blend the scientific rigor of R&D, the customer-centered focus of sales and marketing, and the process discipline of engineering. Is it any wonder they don’t have a logical home in the traditional org chart?

including mentorship in the high-impact techniques that accelerate growth. Figuring

Fundamentally, the question is: For any experiment that succeeds, how will it find a home in the organization? Will it be absorbed by an existing division or become an entirely new division? How is that decided? Whose decision is it?

Experimentation is just a generally useful tool.

This conflict will always—always!—wind up climbing the chain of command.

What makes someone an entrepreneur is not that she or he got assigned that role by someone at corporate HQ.

In order for an organization to take advantage of the latent entrepreneurial talent within it, it has to invest in making the broad pool of its employee base aware of the possibilities of entrepreneurship as a career path.

And, since most ideas are actually bad, it must give employees the platforms for experimentation to discover this on their own.

It’s because of this wide-ranging mandate that the Startup Way transformation inevitably winds up focusing on ways to make the company more meritocratic: eliminating bias, encouraging more scientific decision making, and inspiring better resource allocation and HR policies.

Most companies are more likely to fire those who show entrepreneurial initiative than to promote them.

United States Digital Service and the Technology Transformation Service

The promise of adding entrepreneurship as a function is the chance to create an environment where experimentation is encouraged, where ideas can be tested and then assimilated into the culture, where the passion to pursue the unexpected is not marginalized but systematized, not stymied but supported.

“island of freedom” or “sandbox”

It’s one of the only environments in which there is a countervailing force constantly working against scope creep.

This requires creating a new kind of milestone that can work even in situations where we are unable to make an accurate forecast.

investment decisions primarily based on the quality of the team: They look at the people first, then the idea. Of course, they believe that if a strong team has a solid idea and a seemingly sound strategy, the team is more likely to succeed—but

a team that shows promising traction in terms of revenue, the reactions from its first groups of reference customers, and validated learning (insights based on real data) is more likely to prove a good investment. But again, not because of the traction itself but because of what the traction reveals about that team’s ability to execute.

The investor saw our presentation as a window into the way we thought—and the way we acted. We demonstrated fast cycle time, rigorous scientific decision making, product/design savvy, and good use of limited resources.

“If the government is doing a big, important system, by definition, it can’t be that important if we don’t have hundreds to thousands of people assigned to the project.”

When asked to present their problem statement, they said, “The problem is, our company doesn’t have sufficient market share in this market.”

One IT team in a large enterprise I worked with refused to see the employees who used their product as customers. They insisted that employees had no choice and that IT could mandate the usage of any product. But the word customer always implies a choice in the matter, so rather than argue, we decided to go see for ourselves.

Customers, even internal ones, always have a choice.

profits.” In Chapter 9, we’ll explore the reasons why impact is a better way of evaluating startups,

Silicon Valley’s way of working is to make sure that every employee has a stake in the outcome,7

Startup equity is a complex financial derivative that powers the entire venture/startup ecosystem. It’s not profit-sharing. It’s not a union. But it is the greatest tool of employee empowerment I’ve ever seen.