153. How Experimentation Empowers Vision & How Corporates Create an Innovation Culture (Eric Ries)

Eric Ries Lean Startup Way The Full Ratchet

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Eric Ries, author of the Lean Startup and The Startup Way, joins Nick to discuss his new book and his response to the naysayers. In this episode, we cover:

  • Eric’s backstory and path to working in tech
  • Steve Blank was on the program and mentioned Peter Thiel’s famous comments where he decried the MVP and lean startup approach. Steve thought he was entirely wrong. But I’d love to hear your response to Peter.
  • Peter said in his book, “forget minimum viable products. Ever since Apple started in 1976, Jobs saw that you could change the world through careful planning, not by listening to focus group feedback or copying other’s successes.”
  • For those that read the lean startup some time ago or maybe those that are newer to tech, can you provide a refresher of the key concepts?
  • Why’d you write The Startup Way?
  • Who is the audience for The Startup Way?
  • Is this for transforming existing, large organizations or for companies establishing their culture and their process?
  • In part one of the book, you talk about the modern company… What, in your estimation, is the biggest problem with the today’s corporation?
  • You’ve said that “the way to stay on top can be traced to two things: treating employees like customers, and treating business units like startups.” This runs counter to the common capitalist mentality where there is a focus on margins, incremental product development and creating value for shareholders, not necessarily employees. Are you suggesting significant cultural and strategic change and, if so, how is that possible to achieve?
  • Can large organizations really apply the concepts from the lean startup in the way that a startup can?
  • Do you have a tech and non-tech example of organizations that have successfully applied this methodology?
  • Tell us about the ‘Big Picture’ elements and your unified theory of entrepreneurship.
  • Mark Suster was on the program and stated that it’s nearly impossible to innovate behind the moat… meaning that large corporations should invest in venture and startups on the outside b/c it’s too hard for them to disrupt from the inside.ย  How would you respond to Mark’s comments?
  • What would you say to those that claim that the entrepreneurial-minded folks often leave large corporations and those that stay are not inclined to embrace these principles?

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Transcribed with AI:

0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran, and this is the full ratchet

0:23
Welcome back to TFR for the first episode of 2018. We’re kicking off the year in a big way as we feature Eric Ries author of The Lean Startup in the startup way. If you’re wondering where buzzwords like MVP, split tests and pivots were popularized look no further than today’s guest. Eric has had a breadth of experience working as a founder VC at Kleiner, Perkins, and consultant helping both startups and large corporates. Today he weighs in on how his principles can be applied effectively in big business. In this episode, we discuss Eric’s backstory, his response to Peter TEALS disparaging comments about his methodology, the key concepts of the Lean Startup, why he wrote his new book The startup way, if it works better for existing large organizations, or those growth companies, establishing culture and process, the biggest problems that Eric sees within corporations, how a lean innovation philosophy can work in organizations with principles that often run counter to it. Eric walks through an example where he applied his approach. He gives his response to mark Schuster’s comments that organizations cannot innovate behind the moat. And we wrap up with his thoughts on how companies can remain innovative. When the innovative employees often leave all that and much more. In today’s interview, I put Eric on the spot a couple of times in he answered in a very candid and thoughtful way. I appreciate his candor, and I hope you do as well. Here’s the interview with Eric Ries.

2:06
Eric Ries is an entrepreneur and author of The New York Times best seller, the lean startup. He’s the creator of the lean startup methodology, which has become a global movement practice by individuals and companies around the world. Eric has advised on strategy for startups, venture capital firms and large companies including GE, he served as an EIR at Harvard Business, School, audio, and pivotal. And Eric is the founder and CEO of the long term Stock Exchange. It’s Eric’s lean startup methodology that underpins his latest book on innovation, the startup way. And he’s here today to talk more about it. Eric, thanks so much for joining us.

2:42
It’s my pleasure. Thanks for having me.

2:44
So walk us through the backstory. How did you first get involved in tech in in startups? Well,

2:50
you know, it’s some ways a very cliche story. I, I was one of those kids who grew up programming computers in my parents basement, I, you know, when I, one of the greatest days of my childhood, I found out you could get paid for programming. I just thought it’s something you did for fun. And, you know, I was going to be a programmer. My whole career. That was That was definitely my plan. I got a computer science degree, I just, I really love technology and software. But I happened to be in college, during the.com bubble. And so I got swept up into.com Mania. And if you’ve seen the movie, The Social Network, I had the first half of the movie experience where you know, my friends and I create an amazing company from scratch in our dorm room and the whole thing. But when the.com bubble burst, you know, our company was no Facebook. So we didn’t have the experience of making a lot of money and suing each other and all that stuff. That was my entree into the startup tech world. And then once once I tried it, I was I was hooked.

3:45
Awesome. So how much before writing, the lean startup was that experience. So that

3:51
was a full 10 years before the the lean startup was published. I got to do a series of startups after that I moved out to Silicon Valley. And I was like, I’m gonna apprentice myself to the best technologists and entrepreneurs I can find. And I did the absolutely classic venture backed startup thing, where we have joined a company that was going to spend five years and $50 million in stealth r&d. We had something like 200 employees before customers ever saw the product, the global launch, you know, followed by this massive hockey stick that was supposed to materialize. And of course, you know, didn’t. So I was just an engineer on that team. And I thought, you know, my job was to make sure that technology was highly scalable and anticipation of the customer demand that we’re going to have. And of course, we didn’t really have any scalability problems, but not because my engineering was so great, because we didn’t have any customers. And I was like, What a weird experience because like, wow, this is basically the same kinds of mistakes that I made in my dorm room, but At a way higher price tag is like two orders of magnitude more expensive. Wow. And I was just like, there’s gotta be a better way. And that kind of set me on this path of that ultimately led to the lean startup in 2011, of trying to say, hey, there’s just got to be a better way.

5:14
So were you were you a student of, you know, lean methodology? Were you studying Toyota Production System? I’m nothing like

5:21
that. No, no, yeah, no, I encountered lean manufacturing, very late in my career, I had done a bunch of these startups. And I was always the one in side, each of these companies advocating for faster iteration, agile development, extreme programming, getting customers involved more more directly. In a company I founded called in view, you know, I was the one who brought split testing, AV testing into the company. And just to give you a sense of how much the world has changed, when I was trying to convince my team to use AP testing, they’re like, why are we going to use some direct marketing technique? What does it have to do with product development. And it wasn’t like, wasn’t like today, where you just go grab an AV testing, you know, service off the shelf, I had to write my own AV testing libraries, because there weren’t any, wow, it was a very different world than it’s been in just a few years. So. So I always had this intuition that there was a better way to work. And I was lucky to have Steve Blank as an advisor and investor in some of these companies. You know, he had this theory called customer development that was about how to get to understand what customers really want before it’s too late. And, you know, kind of putting some of his ideas together with some of these others, I was able to have success in my career. But I had a problem. I couldn’t explain to anybody why it worked. It drove everybody crazy, because I would say, Look, you know, especially as you started to grow, you know, I was in charge of hiring all our engineers, and I would hire someone who was far more experienced in the industry than me, and they’d show up and say, Listen, kid, this isn’t how it’s done. You got to build a product requirements, document technical requirements document, we got to do this thing and that thing, and I’d have to say, Listen, with all due respect, you work for me. So why don’t we try it my way first. And then if that doesn’t work, then we can talk about something different. And what was so interesting was, we could see the evidence with our own eyes, our team was much more productive, we were able to get product out much faster, we had much better customer feedback, we could do what we would now call a pivot, change in strategy without a change in vision to get closer to that ideal. So we were having all this success. But then even the people who liked it were kind of like, but why I understand why it works. It’s like we were defying the laws of engineering as they had been taught. And so I was hunting around for ways to explain and describe this concept to people. And that’s when I discovered lean manufacturing. And I was like a half Finally, here’s a conceptual vocabulary that with some tweaks can be used to make sense of my experience. Awesome,

7:50
awesome. Well, you know, I don’t want to put you on the spot here. But Steve was on the program about three, maybe a little three years ago, maybe a little longer than that. And Steve mentioned that he mentioned Peter Thiel is famous comments where he sort of decried the MVP and the Lean Startup approach. And Steve thought, you know, Peter was entirely wrong. But I’d love to hear your response to Mr. TEALS comments?

8:15
Oh, sure. I mean, I actually think that Peter gets a lot of mileage out of attacking the straw man of the lean startup. So I don’t actually think that he’s wrong, so much as he’s always trying to prove a point, you got to you got to understand Peter is a multi dimensional chess player, you know, like, he’s up, he’s always up to something he’s, you know, for those of us who study political philosophy, he, you know, he’s a devotee of Leo Strauss. So there’s the, the, they call it the esoteric and the exoteric interpretation of what someone says. So I think I’ve had the conversation with him directly about this. So it’s not like he’s ill informed. I think that if you look at the specific recommendations that he makes about how to build a company, I don’t really have any disagreement. You know, he praises Facebook for creating an early version of the product that could attack and dominate a small market, he doesn’t think it should be called a minimum viable product, it should be called, is a different terminology that he prefers. But if you look at that, those of us when we started moving with say, hey, that’s that’s pretty much what we would recommend. So we don’t have a disagreement there. I do think that what frustrates him if I could kind of read between the lines though, is a lot of people over the years have pitched him as a VC, the same old crappy pitch and kind of use Lean Startup as an excuse. So they said, Hey, we don’t have any vision. We’re just iterating our way to find out what the market wants. And and I hear that criticism so often that after I’ve been asked this question number of times, I went back and I was like, You know what, I’m gonna look, I’m gonna reopen the lean startup. And I’m gonna see on What page did I address this misconception says like, boy, is it my fault that I didn’t do a good job making this clear? And it’s literally on page nine. In the introduction where it says, Look, this is not about replacing vision with experimentation. It’s not about just asking customers what they want. It is about using experiment methods to test your vision to figure out which elements of your strategy are right. So, you know, I don’t I don’t know what else to say about that, I think we’ve been really clear about what we’re up to. And I think the kind of idea that we don’t believe in vision or that MVP is a replacement for having some kind of long term plan is a misconception.

10:17
Love it. So. So for those of us that maybe read The Lean Startup some time ago, or maybe some listeners that are are newer to tech, can you give us a quick refresher on key concepts?

10:27
Sure. So the basic idea of the lean startup is, whatever is in our business plan, whatever we think is going to happen with a startup we don’t know, like, the defining characteristic of a startup of entrepreneurship is the extreme uncertainty we face about the future. So it’s not to say that we shouldn’t have a plan or that we don’t believe in having a vision as I was just talking about, in fact, I feel like I’m the last person in startup land, that’s pro business plan, the business plans are excellent. But not the fiction writing part of them will be speaking grandiose language, in Word, the Excel part of the business plan, and what’s valuable. So we have these predictions about how customers will behave in the future. And the theory of Lean Startup says, hey, those are hypotheses in the scientific sense, those are predictions about what’s going to happen. Let’s treat them like we would treat a scientific hypothesis let’s as quickly and inexpensively as possible, experiment to discover which of those hypotheses are true and which ones are false. We call those experiments, minimum viable products or MVPs. Because it’s not about it’s not about market research, or some kind of theoretical or academic science, we say that everything a startup does is an experiment, whether you admit it or not. And once you adopt that experimental framework, you can discover true startup efficiency, which is not how do I achieve the specification with minimum effort? But rather, how do I learn what I need to learn at minimum cost. So we can do things that are much less expensive than a full blown product in order to discover what customers actually want, how they will real how they will really behave in the real world. We call that process of continuous iteration, the build measure learn feedback loop. And that’s a whole. For those who know theory of constraints or maneuver warfare or lean manufacturing. There’s all this kind of ideas around cycle time, and the heuristics we use to drive that cycle time down without sacrificing the inherent quality of the product itself. And last, if we discover that some aspect of our strategy is flawed, instead of persevering the plane straight into the ground, we should pivot to a better one, but without abandoning the vision. So I think that’s what makes entrepreneurship so hard is you have to be willing to be very flexible about certain things, but be really rigidly committed to other things and discovering which is which, that’s really, to me the essence of the entrepreneurial mindset.

12:46
So we talked a little bit about the lean methodology. And clearly you’ve written one of the most important books for founders. So So why did you write the startup way?

12:57
So I can remember when main startup was very controversial, and people thought it was basically crazy. And then, during the initial kind of hockey stick of interest in Lean Startup, I can remember all the questions I would get about different applications. Okay, how does it apply in consumer internet enterprise software? How does it apply to physical product? How does it you know, just as apply in consumer electronics, I was applying health care or food or, you know, just that was the time when I was literally in line at one of my favorite food trucks in San Francisco. And the guys behind the counter are like, Hey, are you the lean startup guy, and explain to me how they use this food truck to pay, you know, do an MVP of a restaurant. And you know, it’s just like an incredible expansion of ideas into new domains. It was very exciting. And then I kind of remember when, like, those questions ceased being really interesting and provocative and sort of by my rope, you know, be asked the same question over and over again, and be like, well, how does it apply in food and be like, Why don’t we play out applies in food as a plant hospital. And then I was like, oh, at a certain stage, hey, maybe the best way to get this information out would not be like to answer people’s questions, one company at a time, but to you know, use some kind of one to many transmission technology like a book. It’s like, Well, hey, that’s a good idea. Because it can be a lot with a little slow on the uptake that time and a similar thing started to happen to me over the last five years, I have been, you know, as soon as lean startup was published, it was this rocket ship that that just drove all this interest in C suites around the country and around the world. In adopting these these methods, and all different kinds of companies, first of all, many of the early adopters of Lean Startup, their companies got big. So you know, you think about like a Dropbox or a Twilio, when I first met them, they’re just a few founders in a garage. How those are huge companies. And so many of those founders were really interested in trying to figure out how do they maintain that startup DNA in an innovation culture as they scale and that became kind of an interesting set of conversations and at the same time, a number of business executives, you know, CEOs of public companies, As cabinet secretaries in the government, just a lot of high, you know, large organizations were asking me to come in to say, hey, how do we recapture that startup DNA that’s been lost? Are there ways that we can be more innovative. And the first couple times I did those transformational projects, they were really interesting. So I built this program, called fast works with GE, we did this big program at Intuit, I was, you know, tangentially involved, but a number of Lean Startup allies built the United States Digital Service, and 18 f inside the federal government. So I kind of just was seeing these different patterns. And then its word got out of the success of those transformations, as well as more and more of the startup started to grow larger, I was being asked more and more often to answer these questions about how did the mechanics work at scale. And I had that same kind of insight was like, Hey, wait a minute, maybe this is not the best done like one company at a time, but but through some kind of one to many vehicle, and that ultimately will lead to this sort of way?

15:57
Who would you say? Is the the audience for the startup way? Is it different than it was for the lean startup?

16:01
It’s confusing, you know, ever since that lean startup was published, my audience has always been divided between folks who you would recognize as like scrappy entrepreneurs, you know, who kind of looked apart, and then these more corporate innovation, people, and it’s always been that split audience. And so the startup way, is no different. I think it has, it has been well received both by you know, fortune 500, CEOs, and also by founders. Because many of the examples in the book, like are intentionally chosen from bureaucratic organizations, that probably skews a little more corporate than than the Lean Startup did. But actually, my true mission and passion with this is not so much to transform companies that are already bureaucratic, although I am happy to help them called upon, I really think the most important thing is for us as an ecosystem, to influence the next generation of entrepreneurs so that they won’t build those their next companies, the new companies that are coming up should not be built to this old 20th century bureaucratic template, like we can do better, there’s a better blueprint available. And if we start those companies, right, with the right blueprint from the star, we won’t have to do a corporate transformation, there’ll be built for continuous transformation from the beginning.

17:16
Yeah, so that’s an interesting distinction there. I mean, is this something that you think can be applied as a transformative tool, you know, for large corporations with a set culture? Or do you think it it really has application for earlier stage companies that are sort of trying to establish that that culture

17:37
I’ve been I’ve just, you know, I’ve been on book tour with this book. And so I’ve you know, I’ve been an entrepreneurial audiences and corporate audiences all around the world, and it no matter who I’m speaking to, the most controversial thing I say right now, is that the process of a startup going through a hyper growth expansion, that s curve, that that process is structurally similar to the process that a big corporate goes through when it does a company wide transformation. This pisses off everybody, people in the startup world can’t bear to be compared to big dumb corporate. So like, How dare you suggest such a thing? You know, entrepreneur, like, I believe that people that drive that transformation are entrepreneurs, just like the kids in Soma. And a lot of VCs have upgraded me for that. How dare I suggest such a thing? You know, entrepreneurs are the hardest working smartest and best looking people on the planet. But my experience is, that’s just not true. I know, corporate people just as innovative, just as hard working just as talented. But a lot of corporate people are offended to how dare I suggest that some pee on you know, in kid like Mark Zuckerberg, you know, in the early days, that that’s somehow the same as their big highfalutin, fancy corporate stuff. So I get it from both sides. And I kind of remember that controversy, that feeling of controversy and being called crazy from the early days of lean startup. So I actually view it as a good sign. But yeah, I was a skeptic to accept that I’ve now seen it really up close and personal over and over and over again, that there are these deep, deep structural similarities. And it shouldn’t be a surprise why it goes back to the word blueprint I used a moment ago, even our most innovative companies today are built to the exact same org structure, they have almost the exact same corporate systems that these big dumb corporates have. It’s It’s shocking how similar they are, such that if I reincarnated the ghost of Alfred Sloan, who built like the original matrix management, multi division management system, way back in the 1920s, and I showed him the X ray of pick your favorite unicorn startup and said, Here’s the org chart. He’d say, oh, yeah, that thing. Cool. You know, like he’s a, you’ve made some tweaks and improvements along the way, but it’s still fundamentally recognizable. And I just think, you know, surely we can all agree that a few things have changed since 1920. That maybe maybe we’ll call for some new management ideas, some new structures, couldn’t

19:54
agree more. So in part one of the book, you’re talking a lot about sort of today’s my During a company, yeah, what in your estimation is the biggest problem with today’s corporations.

20:07
So today’s companies are built from the ground up for predictability and low variance situations that everything’s about making and beating the forecast, which is fine. People view that as some kind of criticism or something bad. But no, that’s good. That’s why our global supply chains work at all, most of business is highly repeatable, so it makes sense to be able to model it and forecast it, I have no objection to that. But where do accurate forecasts come from? My claim is that an accurate forecast is always an extrapolation from a long and stable operating history. And anytime we don’t have one of those elements, our forecasting ability goes down. So if the world changes around us and the world gets more unstable, it gets harder to forecast. But often, we’re the source of instability ourselves, because we’re building a new product, and we don’t know what it’s going to work or you know, like we’re entering a new market, and we’re not sure how it’s gonna work out. So anytime we have uncertainty about what’s going to work in the future, we can’t make an accurate forecast. And all of a sudden, we can’t hold people accountable anymore. Because the fundamental like operating mechanism of our companies today is you make a forecast and beat it. That’s how the stock price works. That’s how promotions work. That’s how incentive pay works. So we ask our internal entrepreneurs, to make forecasts and beat them. But all of us in the venture world know. And a seed stage startup forecasting is a joke. Okay, the reason startups make forecasts at seed stage is because some VC made them do it. And so the night before the meeting, when they’re fundraising, they made a spreadsheet because they had to make a spreadsheet. And that’s what it is, you know, and it’s not, it’s worth not even worth the paper it’s printed on. But, and today, modern VCs have really figured this out, like in the old days VCs was when I was trying to use those business plan forecasts as tools of accountability. Like I remember one of my early startups, I had an investor once who said, hey, it’s six months since your investment. And your plan said you would have X number of customers, how come you don’t? And I was like, Oh, my God, you believe that forecast? Like you understand I just made that up the night before, you know, like, best I could, because you asked me to make a spreadsheet, like I was like, you weren’t serious, right? But most VCs today, I think, have gotten smart about this, to understand that, you know, whatever, whatever an entrepreneur promises you buy, by way of forecasting is, at best, a loose approximation. So the problem for most corporate structures is, what do you do, then we doesn’t make sense to hold people accountable to the forecast, the forecast is just a fantasy plan. But that doesn’t mean we shouldn’t have any accountability. Whenever you have a corporate project with no accountability, it becomes like a tumor. And everyone knows these, like, you know, corporate IT projects that just spin out of control waterfall style, and they consume infinite budget and time and they just never ship like you don’t want to do that. So like I would say that the fundamental defect of our contemporary corporate structure, is we don’t have a rigorous methodology for holding people accountable under conditions of extreme uncertainty.

23:11
So this is an interesting point, because, you know, I don’t think we’re going to sort of change the modus operandi for corporations overnight in forecasting, right. You’ve also said that, you know, the way to stay on top can be traced to two things, treating employees like customers and treating the business units like startups. This also seems to run counter to a lot of common sort of capitalist mentality where there’s a focus on margins, incremental product development, creating value for shareholders, and not necessarily employees. So, you know, are you suggesting a significant cultural and organizational shift? A strategic change? And if so, how is that possible to achieve?

23:55
So here’s the problem with this. I am quite, I’m quite a radical, I am a revolutionary, I think our entire mental model of how corporations work and the management systems we’re accustomed to, is due for a significant overhaul. And anyone who says that that’s not true. I just like have you really been paying attention to the 21st century like, we’re going through the kind of crazy changes that our management ancestors could only have dreamed of, I mean, probably Cuba, hard to imagine. And I think those of us who’ve been paying attention can all agree that we have already lived through the calmest years of the 21st century, right? So the future is going to be even more crazy than now. And as crazy as now feels, it’s going to seem like the good old days pretty soon. When people hear that they sometimes like oh, one of these Silicon Valley assholes who’s just gonna say everything’s wrong, and I’m smarter than you and blah, blah, blah, and they’re not going to have it’s just gonna be some manifesto for change, and there’s no details. There’s no so like, here’s the crazy thing. The kind of revolutionary change I’m talking about is totally achievable. And I’ve seen it with my own eyes. So of course, if you read the book, I tell story after story after story of everyday, normal people that are not Silicon Valley magic wizards or anything like that they’re just regular people given the opportunity to work in a new way, and being absolutely supercharged by the experience. And I’m not just talking about one project, you know, here and there. I mean, at GE fast works, we’ve trained something like 70,000 people in it. So like, these are significant, transformational efforts. And the problem is they work so well, that when I describe them, to most managers, it sounds a little bit like magic. And I’m not promising overnight Nirvana, like the G fast Works program took several years to get going. And it’s still frankly, in its early days, because although 70,000 People sounds like a lot 300,000 people work at GE. So you know, we’re still in the early days of it. So what I would say is, if you read the startup way, it is explicitly not a manifesto, can we just agree that we have many manifestos are like broad saw prescription about how to experiment with these methods. And it’s broken down into like distinct phases of kind of how to get started, how to start small how to make sure we scale fast. And it’s full of really detailed, just explanations of how I’ve seen the negotiation happen between its formation office and the other functional gatekeepers of the corporation. So like, next time, every one of these business manifestos be like, Okay, that sounds great, but like, how exactly do I get finance to implement this? But what about legal? What about it? What about HR? What about marketing? What about supply chain? What about what about what about that all those details in the book? So I think what I would say to people who are skeptical that this is possible is you got to try it. This is an experimental scientific theory, you got to try it yourself. And luckily, innovation is relatively cheap. So you can try it relatively quickly and easily if you want to. So kind of what’s, what’s our excuse for inaction? You know, we can do it, we have the tools now. Let’s go. Yeah, well,

27:03
it’s one of your comments was related to how if you ask a lot of CEOs who’s responsible for innovation, he says, We all are. But if you ask them, you know who’s responsible for finance, or for product development, or for HR? It’s clearly not ever, like, everyone’s

27:22
in charge of finance. So we don’t need a financial function. And we don’t need a CFO. But also like, can you imagine you’re like, oh, you know what, to foster more finance thinking in the organization, we’re going to create a Finance Lab, we’re going to build this cool building, that’s like all Accounting II, and we’re going to put it in, you know, in whatever city, you know, like the equivalent of Silicon Valley, and we’re going to, like, have cool accounting stuff happen there. And like, we will, will basically delegate the finance to the Finance Lab. And just like, that’s just sounds so ridiculously stupid. And yet, that’s how we talk about innovation. In corporate settings, we have an innovation lab, and innovation is everybody’s responsibility. Or even for companies that have a chief innovation officer, they have no operational responsibilities, they just ride around on a Segway and think great thoughts. Yeah, but no, this is ridiculous. I call it the missing function. In our corporate structure. It’s as dumb as if we were missing finance, or marketing, or it or HR, we need a function, I think we should just call it entrepreneurship. And we should get as good at entrepreneurship, as we are at supply chain management today, like take it seriously as a function, figure out how it integrates with the other functions, build a career path around it have its own metrics for advancement. And what’s super cool about it. And this kind of gets towards the towards the end of the book, not, you know, spoiler alert, this is what the book is driving towards. It enables what I call the unified theory of entrepreneurship, that today, corporations do a number of different things, I think I have a list of nine of them in the book that happened in different parts of the org chart today that are managed completely separately, that I think are actually the same. So if you’re building a new product from scratch, that’s considered product development. But if we’re buying a seed stage startup, that’s considered corp dev. You know, and the way you know, these are the same thing, as if you ever sat in the meeting, where corp dev has to hand off the thing you just bought to product development? I have got product comments in there. Like, what? You paid $800 million for what? And Corp does like good luck. You know, like, yeah, you’re gonna make all these great revenue growth and productivity, things like See you later. And it’s like, this is ridiculous handoff. And of course, going back to the theme of accountability, because accountability is the foundation of all management. How do you hold this group accountable? If the if the productivity savings don’t materialize? Like, you know, these stories were like, you buy something for $800 million, then you’d like sell it back to the founders for $18 million. Right. So we lost $700 million. Whose fault is it? Well, corp dev says Product Development, didn’t do a good job commercializing it right and Development says corp dev bought a lemon. What were we supposed to do? And we just do that over and over and over again, it’s even more ridiculous because a lot of the time the company is that you’re buying is founded by an ex employee. So why are we calling that a corp dev victory instead of an HR failure? Yeah. The person had the idea when they were working for you in the first place. But they couldn’t implement it within your corporate walls. Why is that? Good? So anyway, I think we should treat all three of those problems, the product development problem, the HR problem and the corporate problem, as should, those should be managed centrally under a single organization, we should call that functional location on the org chart entrepreneurship.

30:36
I like it. I’ve actually spent five to six years in corp dev, and about three years in product development, and I feel your pain on this one. It’s seen it from both sides, right? Oh, God. And it’s when you’re in the organization, I mean, just every organization is different, right. But an approach towards innovation. I mean, it just, it can be a stifling atmosphere, right to try and move the needle and get things done and be agile is just almost completely counter to sort of the the way, a lot of these these large companies work. And,

31:10
you know, I have to give credit to Alexander Osterwalder who recently wrote a terrific article, saying that this has to be a board level and an investor level concern in private and public companies. And I just thought that’s so right on like, we just allow companies to spend m&a dollars in a totally undisciplined way, and have these make these kinds of mistakes with basically no accountability when we know there’s a better way. And so, you know, for a company to be as equally rigorous in its m&a activity as it is in this new product development. That’s got to be a board concern.

31:42
Couldn’t agree more. If memory serves, he’s the the originator of the business model canvas.

31:47
Does that? Yes, yes. That’s the very same.

31:49
Got it. So you talked about this concept of the big picture and the unified theory of entrepreneurship. But it sounds a little abstract. Can you can you break that down and explain it a bit more?

31:59
Sure. So where the rubber meets the road is like, what do you do with individual teams? So let me just tell you a story of one team. This team was building what’s called a diesel reciprocating platform at GE. Now, when I first met this team, I was there at the invitation of the chairman and CEO. And a number of the top executives asked me to come in and see if lean startup could be applicable to ge. And the chairman, Jeff ml at the time, said, you know, chairman’s prerogative, I get to pick the project, the pilot project, and to hell with no, no way. Is it going to be some software app thing for this guy from Silicon Valley? Let’s pick something hard. Okay, something industrial, something, you know, real heavy metal. So they said it’s gonna be going to work on a diesel reciprocating platform. I said, Hey, no problem, but I just have one question. What is a diesel reciprocating platform? And, you know, they looked at me like, oh, boy, you know, Silicon Valley, dude. Right. So they had to explain to me, this is a diesel engine that’s used in fracking and mobile drilling, marine electric locomotive, or as I used to kind of have a little mnemonic for myself, like, okay, you know, on land on some by sea, on a boat, on a plane by train, wherever you need an engine. This is called the series X engine is there. And they asked me to do a workshop at GE is legendary Croton Ville facility as part of a pilot program. So I showed up there, beautiful business school style classroom, if you’ve never been prone, build an amazing place with deep, rich history. And in the room is me at the front of the room. In the first row, we have three people from the series X team who’ve been summoned up from Texas to this meeting. And in the back of the room, we have 25, corporate vice presidents, you know, they’re just to observe. So it’s not like the greatest setup for a workshop in history. These four guys from Texas, you know, have to be here with me this workshop. And so we started out by I asked the team, could you please present the currently approved business case for the series X engine to get us all on the same page? And they said, Sure, no problem. And they started to explain here are the five use cases that no stationary drilling, here’s mobile electric and all the different use cases. They showed the business plan this was going to the company was planning to invest something like $300 million over the course of five years to develop this brand new technology global launch. And then they showed a slide that I’ll never forget as long as I live. It is revenue forecast by year for the series X engine for the next I think it was 25 years. There it is. There’s a bar chart. And this is the funny part. First of all, the first five bars are blank. They’ve included the bars on the chart, but there’s no bar there are just five blank spaces for the five years of stealth r&d, followed by a escalating series of bars that have the typical hockey stick shape, the beautiful hockey He stick shape of all fantasy plans. And I remember thinking to myself, well, I don’t know what a diesel reciprocating platform is. But I know this shape very well. I have made this slide many times like step into my office, my friends, hockey six and Jakers love them. Yeah, this is this is Silicon Valley’s like third leading export after hype and buzzword. So you know, now we’re talking and I said, hey, everybody in the room, raise your hand, if you believe this forecast. And I’m not making this up. Every person in the room raised their hand. Wow. And they were a little bit miffed. Or like, Hey, kid, I don’t think you understand the brightest minds of the G Corporation have vetted this forecast. And this is the basis of our $300 million investment. And how dare you suggest? And I’m like, hold on, hold on. I’m so sorry. No offense intended. But can I just get a quick reality check? No, really? Which of you honestly believes that in the year 2035, we’re going to make exactly you know, whatever it was $4.8 billion in revenue. They’re like, well, when you put it that way, all the hand, like, wow, okay, exactly that month, and okay, I was just like, come on. We

36:04
don’t know only certainty with forecasts is that they’re not accurate. Yeah,

36:08
like, come on. And like, this is in the energy business, you can’t even forecast the price of natural gas versus Diesel, like one year out, you’re going to tell me what the utilization rate of this is going to be in the developing world and 2035? Like, come on. So can we have an honest conversation about what we know, versus what we believe? We hope? What are our hypotheses? And of course, the team was spending most of its time and energy focusing on the technical, what we call leap of faith assumptions, how do we get the efficiency to be right? How do we figure out all these like very hard technical problems in material science in, in engine construction in supply chain, and of course, buried in appendix B, you know, some bullet six, you know, footnote seven, in the business plan is like, Oh, and by the way, we have to build a new distribution network from scratch, to go up against an entrenched competitor who has excellent service and support. And you’re like, I felt a little bit like Monty Python, like, you already got one of those. Right? Like, we’re gonna go get the Holy Grail, like, I already got one, like, you gotta get her over, you have to build this new thing from scratch. And of course, we’re like, No, we’re gonna build a new one from scratch. It’s like, well, what are we going to do that? Obviously, after the product is done, great. Okay, okay. Okay. So it turns out that one of our leap of faith assumptions about what customers want is wrong. When do we want to find that out? We want to find that out now. Or in five years. So we started have a real conversation about what would the minimum viable product look like, for the series X engine, and a running joke through all my years at GE was Listen, kid, nobody wants to buy a minimum viable engine. You know, these things explode. Like, okay, yeah, got it. Got it. No, you don’t want to fly in an airplane. There’s a pilot comes on. Congratulations. We’re testing a minimum viable Engine today. Right? No, of course not. We’re not going to cut corners in quality, safety and compliance, what we’re going to do is think about how do we make the customer requirements easier, so that we can solve the engineering problem sooner? I hate the word requirements in product development, because seriously, the laws of physics are required. Everything else is optional. So we have hypotheses. So anyway, we’re having the conversation with the engineers, and we try to only figure it out. Okay, if we were willing to focus on just one of the use cases, maybe we could get the product to market, you know, in two years instead of five years, because, you know, making this thing work on a boat is really different than making it work in, you know, stationary drilling environment. And then we started talking about, okay, if we were willing to skip some of the supply chain issues, if we said, look, I don’t need to create, like 10,000 engines, just give me one engine, a prototype that I that, like, works, and that is safe, and has been as compliance but doesn’t have a full supply chain behind it, you know, how long would that take? Oh, maybe more like a year. And then one of the engineers said something I’ll never forget. He said, Well, you know, if you’re willing to pick this specific use case, we already have an engine that’s kind of similar. And we could kind of modify it to have the performance characteristics of the series X. I’m like, Ooh, how long is that going to take? And they’re like, oh, you know, maybe three months. They’re like, okay, maybe six months. And I’m like, Hey, have corporate vice presidents in the back of the room, and you have a customer that might want to buy this engine. And one of the VPS is like, as a matter of fact, I know, just who we could sell it to. And I’m like, Okay, sweet. Here we go. Minimum Viable Product in six months, instead of 60 months, a full order of magnitude improvement in cycle time, this is going to be a home run. I was like, celebrating prematurely. Until one of the officers in the back of the room said hold on, I have a question. What the Bleep is the point of selling only one engine? Right, like a second ago, we were talking about making billions of dollars. And now what’s our profit gonna be on one engine like $1,000? And of course, one of the helpful engineers is like, oh, no, no, sir. We’re actually going to lose money on the first sale? Because we had to sell it at the series X price. And he’s like, Oh, you’re gonna lose money? What are you talking about? Just like he couldn’t take it anymore. And I had to be like, Listen, sir, you’re totally right. And to answer your question, if we already know that the plan is going to work, then this whole thing is a waste of time. There’s no point in doing it. We don’t need to learn anything. And I’m not making this up. He was like, great. Okay, good that I’m out of here. Like he was totally satisfied with that answer. And luckily for me, his colleagues, the other VPS, in the room said, whoa, whoa, wait a minute, buddy. Didn’t we just say a minute ago that we’re not sure about this forecast. And we don’t know what’s going to happen in the future. And they started to have a conversation amongst themselves, about their leap of faith assumptions, and what kind of experiments are needed. And then they were off to the races. And I worked with that team as a coach that were the first pilot program of hundreds and then 1000s. And what I what I think startup and VC people plummets on hard to believe that team leader is a founder, just like the guys here in South San Francisco. And that team had just the kind of entrepreneurial energy and spirit you see in Y Combinator, or wherever they just, you know, they work in a corporate setting. So I tell you that story, that’s kind of like the whole story, the whole theory in microcosm, like, that’s how we got started with one project, re conceiving it as a startup, rather than as a corporate committee, and changing the structures around that company around that one team, how they were funded, how we held them accountable, the metrics we use, we created a board for them to report to, you know, it’s like using a lot of the management systems we’ve pioneered in the startup movement, bringing them into a corporate environment.

41:42
Love it. So this kind of relates to a point that Mark Schusterman, when he was on the program, where he stated that it’s it’s nearly impossible to innovate behind the moat, meaning that large corporations should invest in venture and startups that are on the outside, right? Because it’s, you know, it’s too hard to disrupt from the inside. cannibalize your your existing p&l. So how would you respond to tomorrow’s comments?

42:08
Well, Martin, I’ve had this conversation too. And I respect I respect his point of view, but I respectfully disagree. And and I don’t think that he’s coming from a bad place. If you’d asked me that same question. 10 years ago, I would have answered it in the exact same way he answers it today. So I just think he hasn’t had the chance to see what I’ve seen. And look at the business theory, dominant business theories say that you can’t be can’t do this, the innovators dilemma makes it impossible to do this behind the moat. But I’ve seen it up close. It just it’s just a fact it can be done. But it requires a real change in how you do team construction. So in the book, I tried to outline a series of practices that we in the startup movement, universally practice, but we never talk about, you know, like, we don’t talk about it as a management system, we just pretend that startups are just loosey goosey, and do whatever you want a founder can do whatever. But like that’s not true, we have a very specific approach that we do to like how teams are funded. So like, can you imagine if a VC investment us a million dollar seed investment in a company, and then a few months later said, oh, you know, what, we’re having a bad quarter. And I have some of the money back, like that VC out of business, currently, right? Like it would be a death sentence. Never, never happened, right. But that’s, that’s a very, like the fact that that never happens, tells you something about a management system, we consistently do what we call metered funding versus the entitlement funding of corporate setups. Every startup has a board, I don’t care how wacky it is. So we always have a board structure, I sat in so many startup board meetings, like many, many sort of board meetings, there’s a lot of differences in terms of, you know, specifically how we run the company, and the culture and the whatever. But like, the topics of conversation are basically the same. The kinds of metrics that we look at are like, they’re not the exact same metrics, but the same kind of metrics, our beliefs about that small teams can beat big teams, right? Like that’s like one of our most universal and cherished beliefs, you know, our faith in meritocracy, although we often fall short of the ideal. We have these universal beliefs and practices. So if we’re willing, at great expense, and tremendous political difficulty, but if we’re willing to replicate those same beliefs in a corporate setting, you can innovate behind the moat, you don’t only have to invest in venture. And here’s what’s really funny to me. When our companies, our Silicon Valley company, grow up, they forget the same lesson. So like, when you’re in Y Combinator, everybody knows that small teams beat big teams. But then you’d see all these giant tech companies throw big teams at problems. Like they forgot the fundamental lesson of Y Combinator. And in fact, I was talking to a YC grad whose company is like 500 700 people, I think now, and he was recounting to me a very frustrating conversation he was having with one of his product managers, where he had told them to go build a new product on their platform. arm and take them into a new market segment high uncertainty, you know, visionary product. And he’s like, Listen, you have my full support my full backing, you know, go nuts. And that team went off and they were doing stuff. And you know, the founder was busy running his core business. So he’s busy, busy, busy. But he saw the project, that project was like on the deck of funding, you know, he got regular updates from his product, we had a product about all the different things that we’re working on, and it was status green this whole time, checks in with them, like six months later, Hey, how’s it going? Just walking by as the unit tell me about what you learn from the product, you’ve shipped customers, you know, feedback you’ve gotten? And they’re like, No, we haven’t shipped anything yet. And he’s like, What? Like, no, we’re still working on the requirements document. The what? Like, well, we first had to make sure we had to get the brand sign off from the marketing team that this is going to be compatible with our brand architecture is like, and then we had to go talk to the scalability engineering team and make sure that it was compatible with them. And we’ve just started working on the customer service response plan, and the press release. And we’ve got the QA team, like ready to go and he’s like, okay, but if you build anything at all I get you haven’t shipped anything, but have you actually built anything? We’re like, no, no, we’re almost ready to start implementation. This founder was like, Are you bleeping kidding me? Like he was ready to take their head off? He’s like, Don’t you realize that if we had adopted this way of working, when we founded this company, we wouldn’t be having this conversation right now. Because a company would be dead. And the poor product manager was like, No, I wasn’t there. Like, I didn’t know that. What are you talking about? Like, this is the rules, right? And the founder was like, really mad. And I was on this call, I was kind of coaching this founder. I said, Hold on, hold on, hold up. I get that you’re mad at this product manager. But whose fault is this? Really? If you had pitched this plan to Paul Graham, when you were in Y Combinator, what would Paul have said? And he’s like, oh, man, if I had dared suggested to think Paul would have humiliated me in front of the whole class ticking by and I was like, Okay. And he’s like, what, you know, now that I’m thinking about it, I never would have gotten this far. Long before I pitched this to Paul, like, I would have been embarrassed at the weekly dinners with my part, like, you know, like, long before it got to the point where Paul Graham is chewing me out front of the whole class, like, I would have realized that this was a bad idea of like, okay, so all the things you just mentioned, the weekly dinner, the demo day, the fundraising that mentors, the partners, Paul, like, how much of that infrastructure have you provided to this product manager? He’s like, Oh, none, right, so you’re mad at him. But you wouldn’t have even been able to do this if you didn’t have the massive support system of Silicon Valley behind you. So whose fault is it again, who were supposed to be mad at, and that guy, you know, they was like, took that lesson to heart, they created an internal Y Combinator for their product managers and for their new products. They have a quarterly demo day that they show, I mean, like, they really like took it seriously, wow. And they’re way back there. And they’re able to do stuff behind the moat that they previously weren’t able to do. So I think even we, in the in the startup movement, have to have to kind of take this lesson to heart and realize that we have to maintain our beliefs, even as we scale. Well,

47:54
it gets it gets more and more difficult, right, as you grow. And sometimes you lose the entrepreneurs, you know, the entrepreneurial minded folks, and, you know, the Agile folks, and those that kind of have this, you know, more innovative mindset. So, you know, what would you say to those that claim that all the entrepreneurs and all the innovative folks leave the large corporations and those that stay? Well, they’re the ones that are inclined to embrace your principles. I

48:23
mean, look, that that is an empirical statement of fact about what happens today. But the idea that that’s a law of nature, rather than an indictment of our HR policies is ludicrous. Like if, if a good people are quitting, why it’s not an intrinsic condition of the corporation, it’s just that you how you don’t have a way to put them to work in an environment where they’re productive. You can’t ask them to flex and become corporate drones. Like, that’s not right. But, you know, you have to find some other way of putting them to work. And if you have the entrepreneurial function, and what we call it, the startup as an atomic unit of work, like, there’s certain problems in life where you’re just like, gosh, a startup is the right corporate tool to use on this problem. If you have that method. I mean, Amazon is terrific at this, right? They have their two pizza teams, and when they want to try something new, like AWS, or whatever, they just throw two pizza team at it. And they therefore there’s a place for entrepreneurial style leaders to thrive and grow. We can create that same management infrastructure in every company.

49:24
I love it. I love it. I, I founded my own disruptive product, but it was within an organization. It took me three years and I had one executive that was championing the process, but everybody else was against it. And it was very, very difficult. And just to get the whole thing through, it had to be a creative, both top line and bottom line. So you know, it couldn’t really cannibalize the business. It was it was a challenge on many fronts, and ultimately, it drove me out of the organization. So we had a lot of success with it, and it was a banner success, but you know, ultimately, I couldn’t thrive within within the walls of that corporation and And it’s it’s unfortunate. I mean, I, I definitely appreciate appreciate the vision here with the startup way. Yeah,

50:06
look, I get that it’s controversial, but I really believe we can do better. Eric, if

50:11
we could have any topic or any guests here on the program, What topic do you think should be addressed? And who would you like to hear speak about it?

50:17
Oh, that’s a great question. I think, you know, I don’t know how much you’ve done on diversity and inclusion. But I feel like that is like the the topic for us as an industry right now. And it’s not just, you know, as a matter of moral necessity, which of course it is. But also, because the size of our sector is being artificially constrained, there was an amazing new study that came out the other day, where they reported that America could have four times as many inventors, if we gave every child equal access to the kind of networks and resources that the future inventors have. So like, the size of the VC asset class, and the size of the sort of ecosystem is being artificially constrained by the exclusion of folks who need to be here. So, you know, I would, I think there’s this there’s a number of amazing people, you know, there’s this kind of the Susan Fowler’s of the world are free to come for Klein or even Ellen Pao, who are pioneering this, you know, in the in the VC world, you have Isley Lee and Adam Yuriko. And, you know, I could go on and on. But I feel like if you have not spoken to those folks, if you haven’t made that a topic of the program, I would really encourage you to do so. Eric,

51:24
would a person in the startup community has influenced you most and why?

51:28
Well, it’s hard to get out of the gravitational orbit of Steve Blank because he surely is larger than life. Yeah. And, and I am so grateful to him for taking a chance on me early in my career.

51:40
He’s amazing. And finally, just wrap up here, Eric, what’s the best way for listeners to connect with you?

51:46
I’m very easy to connect with. You can learn more about the new book at the startup way.com. My personal blog is called Startup lessons learned and we every year put on a lean startup conference at lean startup.co. So between those those tidbits, I think you ought to be able to get a hold of Awesome.

52:04
Well, for the past four years, I’ve been looking forward to the day that I interview Eric Ries, so this has been a huge pleasure for me, and I appreciate you doing it.

52:12
Oh, it’s really my pleasure. Thanks. And thanks for really, really insightful interview.

52:22
All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email, let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over prepare, choose carefully and invest confidently thanks so much for listening