a16z Podcast - a16z Podcast: Beyond Lean Startups

Episode Date: November 7, 2015

What began as a scientific approach to creating and managing startups has now become a worldwide movement for companies of all sizes -- and for creating (or rather rediscovering) entrepreneurs in all places. Not just inside startups, not just for software, and not just inside Silicon Valley. It's about unlocking human creativity everywhere. Perhaps even reinventing the firm. As utopian as that sounds, Eric Ries -- who pioneered the lean startup movement and wrote the definitive book on it -- argues the case in this episode of the a16z Podcast. But has it become too much of a religion? One where people apply the letter of, but not the spirit, behind lean startup principles? Ries, who recently crowdsourced a leader's guide for practitioners to test and evolve the very concepts he first published 5 years ago, shares lessons learned -- as well as the true meaning of overused terms like 'MVP' and 'pivot'. Ultimately, lean startups are about how to make decisions and build new products under conditions of high uncertainty. Without having to chisel the principles into stone tablets.

Hi, everyone. Welcome to the A6 and Z podcast. I'm Sonal and Michael and I are here together interviewing Eric Reese, who wrote the book on The Lean Startup. And it's been actually now over five, is that right? Eric, about over five years since that book came out. Yeah, it came out in 2011. So next fall will be the five year anniversary of its publication. And of course, the publication was like the end of a process of blogging and writing and kind of building that community. I was about to say, because I feel like your book came out well after Lean Startup was already on its way. Yeah. Well, the other interesting thing that I think we'd like to talk to you about is how things have changed since then and now. But more importantly, we'd love to also – because one of the things that's happened is that lean startup is now outside of Silicon Valley. And it's gone also outside of startups, interestingly. So we want to hear a little bit about your insights from that. And then kind of talk about not just a lean startup, but what it means for the future of the firm. What is a lean startup? And if it's not a startup, how does that apply? Yeah. So the basic idea is to take a more scientific, more iterative, and more customer-centric approach to product development and customer building. It's called lean startup because we take ideas from lean manufacturing around cycle time and batch size and iteration. But we apply them not to the factory floor, but to the process of innovation itself, where the signal that pulls work from us is not the order from a customer, since in most startups we don't have a customer yet, we don't know who the customer is going to be. the pull signal is our hypotheses, our beliefs about what the customer will want in the future.

Or another way of saying it is we write these business plans that are full of assumptions and hypotheses and guesses about the future. And Lean Startup says rather than take those things for granted and hope that they're true, let's test them scientifically accepting the fact that every startup face is high uncertainty about the future. So how do you respond to critics who say, like I would say actually thinking about it more ethnographically, that you're essentially only. than building for people who know what they, like, it's based on what the market is saying is feedback versus, like, true internal creativity that's an internal compass. Yeah. It's an interesting thing because customers don't know what they want, and everyone knows that to be true or talks about it. And if you imagine I'm a scientist and I'm going to do chemistry and then I'm like, oh, shoot, electrons don't know what they want. And I can't do a focus group with protons.

Like, forget it. I guess I can't do it. You'd be like, that person is bonkers. I thought, what, what, that's on my mental problem. But for some reason we start talking about customers, we get confused about this. Taking a scientific approach means having a very strong belief, would someone say a visionary belief about what's going to work, and finding out if that vision is right. And what we discover with, if you look at the stories of entrepreneurs, not the kind of movie version and the Hollywood version that you read in the magazines. But if you get the real stories and not with actual entrepreneurs, what you discover is that even if the vision is right on and they see the future, the specifics of the strategy often have fatal flaws.

And until you systematically figure out which elements of the strategy make sense, right, do we have the right business model and the right target customer and the right approach to disruptive innovation? Are we on the right technology platform? Have we gotten our timing right? You have to work to get all those details right. And the best entrepreneurs I know are extremely rigorous in their thinking because it's precisely because they care so much about the vision. They feel like they have to get the details right. And so all we're saying is that we should approach that with the most, you know, scientific kind of rigor that we can. Right. Essentially, a business plan is a hypothesis. You can sort of test out not just whether it works or not really, but actually the details of how to execute on that because a vision is a large thing. So why is it then, we talked about this was the five-year anniversary. How is it that this has resonated so well outside of the Silicon Valley startup world? You know, what are the things that people are kind of grasping to, whether it's aspirational or really like, I can roll up my sleeves and do this? Yeah, you know, that's a question I think a lot about, because no one is more surprised than I am about how this has grown beyond just a book and beyond just a set of like idiosyncratic ideas, but into a movement, I mean, you know, I feel like I have to disclaim periodically that the startup is not a religion. And I'm like, if you have to say that, then something's, you know, something's a little suspicious here. Like, you know, I think that's fair game. I think that, first of all, you got to look at the timing of it. I started writing about this idea in 2008, 2009, right in the height of the financial crisis when people had kind of lost. confidence in kind of traditional ideas about how companies should be built. So there was a kind of a hunger for something new. I think having it called lean startup at a time when people

were freaking out about money was probably good time and good branding. And I think that as entrepreneurship has become more democratized, what do you mean by entrepreneurs that become democratized? So, you know, I think there was a time when if you wanted to become an entrepreneur, you had to have the right connections, you had to have access to a lot of money and capital. You had to kind of look at the part. And, you know, if you look at the like famous entrepreneurs in history. A lot of them came from very specific kinds of backgrounds. And it was a rare thing.

It was considered a little bit crazy. You know, as the semiconductor revolution has kind of systematically, you know, eradicated barriers to entry for everything, I think about it. You go back to the old Karl Marx idea of who owns the means of production. Well, we are now living through a time where you can rent the means of production, which means that if you want to test an idea, if you want to start something in your dorm room at Harvard, you know, just because you started small doesn't necessarily mean it can't scale to something, you know, massively large. And so you have that phenomenon. Plus, the fact of the internet itself has made

the idea of entrepreneurship as a possible career path accessible to people who, you know, you used to have to, like, know somebody in Silicon Valley to kind of like understand what's happening here. Now, Silicon Valley is like a reality TV show that everyone on the world watches. I want to go back to Karl Marx just for a minute. You say who owns the means of production. It sounds like Amazon does. But maybe owning the means of production isn't worth as much as, well, It's worth a lot to Amazon, but... Yeah, well, I think the kind of older industrial thinking was that if you own something,

then the right thing to do was to control it in order to maximize the return you would get from it. And I think what we were having a recognition, probably partly through just the realities of how technology works, but I think also partly due to, you know, like better management thinking, frankly, is that if you make those tools available to other people

so that you don't have complete control, if you turn it into a platform, if you give people open access, the sum total of the creative power that you unleash when you do that means that you have a smaller piece of a much larger pie. So speaking of the shift in management thinking, let's talk about the surprise that you have and that we're surprised by that big companies are trying to be lean startup like. I mean, because I think one of the things that's interesting about the management point is

that we're living through an interesting time right now where a lot of the old school theories about management, like they may apply in certain ways, but in other ways there's a real gap, a real need for like, how do you really, the world has changed. And it's very trite to say that, but it's true. So talk to us more about that. Well, I'll tell you a funny story. When I was doing the research for the Lean Start, this is probably my five-year anniversary.

I was doing the research for the book. I read everything I could get my hands on about management, business books. I felt like I need to really understand what came before. And I remember reading about the development of our modern accounting system, which I didn't really know a lot. I never thought about going back to the 1920s and Alfred Sloan and that whole movement. And I realized at a certain point that we had developed this accounting system not to keep track of the money, which is kind of how we think about it now.

It was originally developed as a system of accounting. accountability so you could figure out which managers are really doing a good job. Because if some manager makes more money this year than last year, they say, I should be promoted, but you're like, hold on, if you had a forecast, how much money you were supposed to make this year, and you fell short of the forecast, you don't get promoted for that. We take that so for granted in our world today. But when I first read that, I almost fell out of my chair because I was like, wait a minute, I'm sorry, you're telling me there's a part of the world or a part of history or anywhere where people make forecasts for things and then they come true. I never heard of that.

As an entrepreneur, I had no idea why I was always asked to make forecasts. I thought the spreadsheet I put in my business plan when I raised VC was like a kabuki ritual I did to show how much pain I could endure to show that I was tough. I didn't think anyone would read the content of those spreadsheets and take them seriously. We just made those numbers up. We had no idea. But of course, if you think about that, like that is so specific to my experience as an entrepreneur. And I was like, okay, well, how is it that I've never seen an accurate forecast, but in the real world, in mainstream business, forecast rule the world. Why? And so I, you know, study that and learned about it.

My realization was like, a forecast is accurate only to the extent that it is an extrapolation from a long and stable operating history. And so anytime you don't have that, either because you're doing something brand new or because your long and stable operating history has just gone unstable on you and, oh my God, then you're in a situation of high uncertainty. And since my definition of entrepreneurship is trying to create something new under conditions of extreme uncertainty, then you are an entrepreneur, no matter what it says on your business card. Now, when I first started saying that out loud, you know, talks and conferences, you know, a couple years ago, this weird thing would happen to me where people would come up to me after the talk and they would say,

oh, hi, I'm a general manager at such and such large business, and I accept your challenge. First time it happened, I was like, what are you talking about? What challenge? I'm not sure. And they're like, well, you said, because of the definition of it, this can apply to companies of all sizes, all sectors, all industries. I said, yeah, I did say that. So they're like, I would like to go, you know, prove that that can work. And I was, the first time that happened to me, I was like, good luck. Yeah. What does that have to do with me? Okay, that sounds great. This was just a deduction from a theory. That's not my responsibility. But then, luckily for me, really, some very visionary, you know, big company folks kind of dragged me kicking

and screaming to the realization that there were real, honest to God, entrepreneurs, just as visionary just as exciting to work with inside some of these large organizations as you walk down the street here in Silicon Valley. And is that lean startup kind of army being activated because of the conditions now facing these large companies that you describe? I think that's right. I mean, look, big companies have always faced the forces of disruption. That's an old phenomenon.

But the rate of change and the kind of existential crisis that so many of these companies find themselves in, I think is more severe than ever. And there's more of a recognition that they need entrepreneurs. entrepreneurial activity in order to survive. So I think that has created a fertile ground for these ideas to come in because so many companies want to act more entrepreneurial. You know, the idea that you're going to act like a startup or have internal startups is like almost to the point of cliche here. And yet most of the companies that I meet that have that as a plan, there's no plan. I mean, I don't actually know how to make it happen. Right. Exactly. But I do want to say that they

do have longstanding processes. I mean, R&D deciding about where to invest your resources. That's all about decision-making under uncertainty. And there are actually entire schools of portfolio management for managing R&D around that, which some of it is very not dissimilar to managing a portfolio as a VC with a lot of startups. And so I think I want to pause for a minute what you said about things happening faster and just make sure we reflect on what that really means. Yeah.

Because that's a phrase people use like rapid changes now. Things are dynamically evolving. What we're really saying is that these big companies, which before could have quickly acquired startups to help them do some of these things, now those companies get too big. They reaches a point where their market cap is too big. We've observed this. For them to even consider affording the ability to then take on that company. So it's a really big deal that they can't, some of these companies can't then innovate themselves. So it's a big problem you're talking about is how to get at that. So anyway, so given this condition, like how, what have

you seen about how people are becoming? I mean, isn't there a word called entrepreneurs? That's spend it on forever. Like, what does that mean? Yeah, I, you know, I don't actually like that word that much because I feel like, you know, an entrepreneur is an entrepreneur. It doesn't matter if they live in a garage or they wear a suit or they have health benefits or they eat ramen noodles. Like the surface details don't matter. What matters is the fundamental, you know, reality of their job, which is they're trying to create something fundamentally new. And, you know, a lot of big companies actually have outstanding research labs where they're doing breakthrough science and they manage the scientific uncertainty really well. And yet, as soon as

they take those discoveries out of the lab, it's like, okay, we're done with the science, now the astrology. And it's like, they take these world-class scientists and like, forget everything you know about science. Now we're going to build a business plan. Tell me what's going to happen in the future. And then make it happen through the power of your mind. That's actually a great analogy from science to astrology. Are you talking about that? That doesn't make sense to me. And when I go to, I've now worked with a lot of big companies and a lot of companies with high science research labs. I meet these scientists and I say, so tell me about some of the great breakthroughs you've had in the lab and they're very excited. Tell me about

that's so great. Tell me which of those have been commercialized and are in products today and which ones are sitting on a shelf. And now you may as well start the violin music because it is really depressing, life-saving treatments, unbelievable breakthroughs sitting there. And it's like these companies can spend through their technology readiness level analysis and portfolio. Like they can do the smart research to spend $5, $10, $50 million to have a breakthrough. And then they often are not able to spend the like $2 million extra dollars that would be

necessary to commercialize it because they're organized around functional silos. And there's nobody whose job it is. to actually take it out of the lab and make sure that the businesses that operate that are mostly tied to quarterly short-term incentives, you know, have the ability and the incentives and the time and the space to figure out how to commercialize. How do you mean that it's nobody's job to do that? I mean, $2 million that should get done and then we're off and running, right? It's like everybody's job.

Yeah, it's everybody's job, which means that it's nobody's job. My observation is that in most companies, there's a missing function for entrepreneurship. So there's just nobody in charge of making sure that new ideas are taken. from concept to execution. There's not a discipline, systematic way of testing new ideas. So I used to think I'm a Silicon Valley person, quite arrogant about the world. Our way is the best. You know, I used to think if I set a big company person down, I said, hey, do you have any ideas for how your company could be better? That they wouldn't have any good ideas because people are dumb if they work in big companies. That's what I used to believe. And, you know, what I've learned in the hard way is that that's actually a dangerous question to ask because you've got four or five hours to spare to get the answer because you can't shut people up.

They got tons of amazing ideas that things a company could do better. The biggest thing is that disruptors always know what's coming. It's not like they don't. Yeah, it's like they know. The information and the ideas are in the company already and the talent is in there too. If you want to shut them up real quick, just say, okay, tell me the process to test out those ideas to see if they're any good. And they're like, I guess I got to ask my manager to ask their manager to go across the silo the other manager. So like visualize, you put the idea in a pneumatic tube. It gets sucked up the org chart somewhere, sent somewhere else sent down, and they're just like, forget it. And nobody pays attention. No one pays attention. It's like just just the, just discussing the process is like so painful. They're like, forget it. I'm just like, forget it. I'm just. going to go back to doing my job. But isn't that, so here's the thing, it sounds to me like these large companies are coming to you in some sense for youth, like you see in the movies where, you know, they're the witches sucking the youth out of a child. But isn't it the natural course that these companies, they get big, they get old, and they

get plowed under? I mean, that's a very common belief in Silicon Valley. But are you going to change that? I basically used to think that too, but I don't believe it anymore. I think that, you know, I come in as a consultant, so I come in as an outsider. And one of my strengths is I don't run a consulting company that I don't have 50 the associates I'm trying to feed. I come in, I can tell companies the truth. When I tell them is, listen, as a consumer of products in your category, I don't care if you live or die.

I know that five or ten years from now, the person who provides me this service, it's going to be technology enabled. It's going to be developed according to these principles. It's going to be rapidly evolved to suit my needs. So as consumer, I'm fine. Either because you will have adapted to that new reality or some startup, my friends down on Sand Hill Road are funding right the second will disrupt you and displace you, and I don't personally care. So whether you live or die. Now, as a consultant, that's not generally considered a nice thing to say, but it helps because people who don't want to hear that kick me out of their office and we save ourselves a lot of time and heartache. The ones that have been willing to say, okay, what would it take to do the

transformation? And it's hard, I think have seen really dramatic results. So I have become a believer that even that the bureaucracy and slowness and kind of ossification that we take for granted as a result of scale is not an inevitable development, but it's a choice about the systems of management that we use. So can you tell us a little bit more than about what you've seen on the big company side because frankly I think yes you're right there isn't like a chief entrepreneurial officer that owns a function or the process for that matter but there are groups within a company that try to like they have weird titles often yeah often which is probably also a sign of not a good thing but um that do own this in some way shape or form I mean what's the

how do you prevent the risk of that just being yet another idea that doesn't go anywhere like how do you yeah how does lean startup kind of help with that like what have you seen on the front lines of that. Someone once came up to me after a talk and they said, I have a question for you. There's this guy in my company who has a sea level title. I think it was title. It was like chief information, chief innovation officer or something. He's like, that guy always comes to work in red pants. He has no responsibility. He doesn't do anything as far as I can tell? He doesn't have no operational. He's not response for any quarterly targets. He's like, if I came into work dressed like that and talking like he'd be fired in a heartbeat. He's literally like coming up to me like, can you explain to me what this person does? And of course, I was like, yeah, the guy in the red pants. You mean that guy in the red pants? Yeah, you know, I was like, I don't. Like, Don't blame me. Paying lip service innovation is easy. Doing it is really hard. And the question I always have is, like, if I want to find an entrepreneur inside a large organization, I can usually, I go to the middle manager and I say, listen, do you, I got this

kind of wacky, crazy project. Do you know a lunatic who would be dumb enough to sign up for this suicide mission? They're like, well, let me show you my secret black book. There's these certain people that are known in the organization. If I pull their personnel file from HR, they are full of black marks. Do not play nice with others. My favorite is like refuses to obey the standards. They defy the standardization of work, and that drives people crazy.

A lot of companies, they get fired and bought back more than once sometimes for their startup. I mean, it's just, it's crazy. Look, these people exist. And it's like, what's their job title? In some companies, they're a product manager, their engineer, they're a marketer, whatever they are, they're like, how do they get promoted? If they're good at what they do, if they were really good entrepreneurs, how do they get promoted? Where do they live in the org chart? Who do they look up to?

And what I've been working on lately, I've been thinking about it as like a grand unified theory, of entrepreneurship, which is this. In most companies, including, by the way, startups that have gone through hypergrowth. Like Google. I mean, how many people leave Google to start startups now? I mean, it's unbelievable. You have basically four completely different jobs that to me are the same. Okay. You have somebody who's like a product manager tasked with leading a brand new product development. So you say, we're going to enter a brand new market with something that's radically different. We're going to try to be the disruptor for once. You're that person. You have someone in charge of a new internal system. And think about how many new IT systems you spend.

spend years and millions of dollars on and they're dead on arrival. It's like, it's the same old waterfall development. It was the old school Silicon Valley way. Too much money, too little customer feedback, too long development. That's true for new HR policies, new finance policies. I mean, you name it. That's actually an entrepreneurial challenge too. Then you have somebody in the business development, you know, office who's supposed to be evaluating outside startups for purchase. And they make these catastrophic errors. You know, they'll buy a startup for $900 million dollars and three years later it's worth 15 million dollars you're like that in most parts of the corporation making catastrophic errors like that would get you fired but but in biz dev

it's like we don't know how to ask the right questions to figure out who's doing good job and who's not we went up flooding the entrepreneurial ecosystem with dumb money and then you have people who are responsible for partnering with startups most big companies are terrible partners they don't understand how to pilot things they don't understand how to work with startups in a way that don't kill them they spend way too much time on contract negotiations and they just they're unreliable Oh, and then you have the not invented here syndrome, which pretty much kills anything if you have an internal group of any sort. So what all those jobs have in common, to me, is this entrepreneurial reality that they deal with situations of high uncertainty. And therefore, we need a discipline as a company to be able to look at what are the right metrics to hold those people accountable?

How do you identify who's actually good at that job and who's not? How do you share best practices across these similar things? So you start to add up these tasks, a career path, a sense of professional pride and accomplishment, standardization, you know, having the right. metrics. You're like, gosh, that sounds a lot like a corporate function, right? That's what we do that in marketing. We do that engineering. We do it in R&D. And people are like, well, entrepreneurship is too creative to be managed. But it's like, if we can manage R&D, like we can manage Muppet Labs, you know, people working on Nobel Prize. Even they can be managed. That's right. So I just, I don't buy it. I think that we have just made a mistake about how

the companies are organized so that we can pay lip service to innovation and claim we want to have continuous innovation. But I ask these CEOs that I meet with all the time, who's in charge of making sure that that happens. And they don't know. There's not, there's nobody in the organization they can point to for accountability on that score. So what are these organizations that you talk to who are, you know, stuck in the present and perhaps in the past, you know, when you think about the organization of the future, what does that start to look like? You know, when you look at the org chart or when you look at it sort of structurally otherwise. And just a pause there for a second. I think we're not just asking about, you know, what does this lean startup

applied to a big company? It's really about reinventing. the nature of the firm. Yeah. So people talk about lean startup for startups and then lean startup for the enterprise, which I think is really silly. I understand why people do it,

but it doesn't make sense to me. And the reason is only the bad startups are small companies. People are unintentionally small companies, but that's not what they're trying to do. And I need all kinds of entrepreneurs who became an entrepreneur because they hate working for big companies

and they find them bureaucratic and sclerotic and they just, and I always ask them the same question. I say, listen, if you hate big companies so much, why are you trying to create a new one? And what happens is five years later, they have all the success, they achieve product market fit. You know, in the blog posts and the books, you know, in everywhere except for Ben's book, it sounds like when you get product market fit, all your problems are solved. But, you know, like the reality is everything gets way harder. And the curse of it is you have these founders who I meet with all the time now who have a 100,000, 500,000, 5,000 person organization.

And they're like, you know, if you kind of get them privately off the record, they'll be like, Like, I'm not sure I would even want to work here. Right. I mean, I got a good gig because I'm the founder's CEO, and that's pretty fun. But, like, if I wasn't, would I actually want to, like, be a regular employee here? And if I was trying to do something entrepreneurial here, like, would people understand how to do it? And they don't. And even the founder CEO is, like, desperate to hold on to that feeling of how it was in the first year, first five years.

Right. Yeah. They can feel the loss of it. And they feel the frustration because people come to them with plans. I mean, I was just talking to a very famous recent mega success story, and they were telling me this unbelievable story where the founder was being pitched on a new app, you know, the new line of business for them. And it was like, the founder was like, okay, that seems like a pretty reasonable experiment. It should take about two. I could probably code that in a week or two weeks.

It's like, I could probably do it in a week, so you get to it. And the team was pitching him on like a $12 million, like, mega plan that's like over-engineered to the max. And he's just like, what have I done? How could I possibly have a company where people think that's a good idea? And the challenge for me, you know, talking to them is to be like, look, I hate to be the bearer bad news. But you need to look in the mirror and now you're looking at the problem because you have to make a fundamental choice as any kind of leader. Are you trying to preserve that entrepreneurial feeling for yourself? Or are you taking the steps necessary to push that entrepreneurial opportunity down into the ranks of your company?

And in fact, most of the CEOs who are good at this realize that they are so used to being on one side of the accountability table. They're the entrepreneur pitching on their board and their VCs are always asking them about progress and they're having that negotiation. What they don't realize is that now the roles are reversed. For the people inside their company, they're the VC. They're the source of funding and political capital that everybody needs to sustain what they do. So when they're being pitched crap, it's the same as I know a lot of board members and all the companies that are like, why are they? these companies always give me these stupid reports and these dumb updates, because that's what they think you want to hear. So if you want them to do something different, you have to be the one

to say, here's how I intend to hold you accountable. And then when we have that real conversation, a lot of these entrepreneurs, they themselves have amazing intuition and really good natural instincts for like, what are the right metrics to look at? What are the right, you know, they all kind of naturally gravitate to the minimum viable product and the idea that, you know, a small number of extremely passionate customers is way better than a large number of people who kind of are indifferent about your product, but they don't understand why the people that work for them don't have those incidents. So what's the hard? I mean, it all sounds pretty hard, I'll be honest, but what stands in the way? Like, again, if I know what I need to do, if I've done it before as a startup,

and now my startup has grown and successful, like what stands in the way in the companies that you talk to from them actually realizing their entrepreneurial kind of style and flavor and goals? Yeah, the problem is strictly scale. So the founder can go lead up, They can kind of go on a side project and be like, forget it. I'm going to do it myself. And I'm going to take my, I'm going to step out of the CEO chair and go show this project team what to do. But they can only really do that one, like at most one project at a time. But these companies are too big for that.

They need to be doing, you know, if you want to have a new successful disruption every couple of years, you need to have hundreds of experiments going at any one time. So then it's like you need to have a way to train and reward the entrepreneurial people in your organization. And they have natural instincts for that. But that's really different from saying, how do you teach that approach to other people? And that really, I think, is why Lean Startup has taken off inside these larger organizations, which, by the way, is both legacy organizations that are like 100 years old and are now adopting it recently, as well as these companies that started as Lean Startups, but then blossomed into this traditional company.

And by organizations, that includes governments. Oh, yeah. Because I've heard, like, the former CTOs of the United States talking about how they're trying to adopt a Lean Startup like methodology inside government. And it's amazing. I mean, I was actually just in D.C. the other day. and meeting with teams, they showed me this, there's almost unbelievable story about this team inside of the immigration service that processes applications still on paper.

And the paper applications can't be stored in a normal office building because the backlog is so large that the physical weight of the paper requires a structurally reinforced room. Oh, my God. And therefore, at one of the processing centers, I think they said in Kentucky, the processing center is literally in a cave. That's not a metaphor.

Now, they have historically had these big outside contractors come in and do these multi-billion-dollar IT initiatives. They were telling me about one that they spent, I think, a billion dollars in seven years, and it couldn't process even one form faster than paper. But the great thing is the solution was to move to a cave. Right, right, right. You think about the poor, I always think about the human cost of these bad management systems. Think about the poor people actually trying to get this work done the best way they know how, and that's the best they could come up with.

They sent a lean startup team in, I think, from the United States Digital Service at the White House. and, you know, they partnered. It wasn't just IT people coming and telling everybody what to do, but they had real partnership, real user-centered design, real lean startup experimentation techniques, and they built a small team of technologists and people who are experts in the processing center, and they're now processing something like 40% of the applications digitally.

I think it took like six months. So instead of spending a billion dollars in kind of, I call it now the health care.gov plan. Instead of executing the health care.gov plan, we did something a little bit better. And I love those stories because when I meet with private sales, sector folks. I'm going to meet a lot of CIAos now and they'll tell me about some new major initiatives they haven't going and I'll say, oh, that's great. It sounds like the

healthcare.gov plan. I'm sure you'd be fine. And they're like, how dare you suggest such a thing? That's government. I'm like, listen, let me draw your little chart. Here are the things they did in healthcare.com, right? Big upfront design, no customer like, no iteration, right? You know, requirements. And so that, and let me show you that chart for what they did and what you're doing. So what's the difference? And they get all, they get mad at me, but it's like, look, the truth is that system of managing work is not a good one for our time. Maybe it was Maybe it made sense in a different era, but it really doesn't make sense now, and there is a better way. But you're really getting at, and I don't think this is as evident to people who aren't necessarily inside the software industry, is that in a lot of ways lean startup is almost synonymous with the world being eaten by software, because it's really about a mindset for how people move fast, have a certain methodology, the ability to democratize, as you talked about, the ability to be agile, whatever all those adjectives are. They actually have meaning. They're buzzwords, but they have meaning.

Yeah. Tell me more then about how software reinvents the firm as a consequence of this. It's really interesting because I'll tell you two stories that I think are interesting. One, I was talking to a company that was really struggling with its agile transformation. Forget Lean Startup, they're still trying to get their software that they employed lots and lots of software developers. They're trying to get everyone to go agile. And I was meeting with the folks that they're, you know, in the software part of their business. And they said to me, you know, we're really having a hard time getting the non-software functions in the company to do Agile. We're doing pretty good in the engineers, but like getting people in the

hardware manufacturing supply chain, but also HR, finance, they're like straight up leadership managers to understand agile. They're like people like, I don't want to do some like software thing. Lean startup has created a neutral terrain where different functions can come together to do this. And I think there's just a natural resistance to doing a methodology from someone else's function. So like if you ever try to get software engineers to do design thinking, you're trying to get non-supply, non-manufacturing people to do lean manufacturing. You know, you try to get non-operations people that do DevOps. It's like people going to feel like, that's not my thing, that's their thing, and what are they trying to do? DeLean startup is a neutral terrain.

It is, you know, not associated with any one specific function. And therefore, it's denominated in terms of business results only. So people talk about, oh, we show, you know, people in finance our burn down chart and they can see how fast we're making this. And people in finance don't care. Like, well, how much money am I going to make? And, you know, we have this thing in a startup called Innovation Accounting, which is a formal methodology for translating what we are learning about customers in our business plan into financial performance results that give us leading indicators and confidence about the future.

It's very important part of the method. So that's one thing is that although this is software-enabled, it is not a software-specific thing. But the point you made that is exactly right, and this is true for every kind of software or semiconductor-related change, it really is about mindset more than tools and materials. And I'll tell you a funny story.

I was working with a consumer electronics company, and they were building this new device. for their confidentiality, I won't tell you what it was. But whenever I work with hardware, I'm a software guy by nature. I grew up in my parents' basement programming computers. Like, that's me. So whenever I deal with hardware things,

and I've worked with the G.E's of the world, the Toyotas of the world on big physical. If it can explode, I tend to be very humble. You know, it's like, well, the nice thing about software is it doesn't tend to explode. I always appreciated that. So I, you know, I was working this team, I said, gosh, it's probably going to be very hard for us to build a product.

It's like we had to build a minimum viable products. Instead of building 10,000 units or 100,000 units, what would it take to create five or 50 units or even one unit? And I was like, gosh, that's probably going to be really challenging. And, of course, whenever you have engineers in the room, once you frame the problem correctly, they're like, oh, that's no problem. We've actually already done that. We were just playing around with some 3D printers and soft tooling.

We have a prototype of it in our office right now. Well, then the problem is, all right, how do we find an MVP sales channel? You're not going to get Walmart to carry some unknown prototype device. We're probably got to find a local store. So I start to like, how can we find a place? They're like, well, actually, we run a model store. in our company, you know, where we can showcase new technologies for customers. So customers are in there 24-7, you know, looking at new things.

And I said, oh, well, the problem must be then that that store is really far away. Or, like, how do we get? I'm like, how do we get access to the store? And they're like, no, it's in the same building where we work? I was like, okay, is it like on a different security system? You don't have the right badge to get down there? Or like, is it a different team that operates? So they're like, no, we operate the stores.

And I was like, okay, do we need like a dolly or something to move the thing, the hundred yards from your office to the model store? They're like, no, we could just pick it. It's heavy, but the four of us could easily carry it there. And I was like, okay, timeout. You have everything you need. You have the advanced. Now, if you look in that story, why do they have a model store? Why were they able to produce this prototype? Like, there's software lurking in the edges. Here there be drag into that story in many places. But it's not really about software. It's about the fact that the company has the capability to work in this new way, but it had never occurred to them to do it. When I said, you should take this thing out of your office, walk at 100. meters to the store and offer it for pre-sale to customers. They were like, they thought I was crazy. They looked at me with wide eyes. Like, what are you suggesting? That seems nuts. But then we really walked through the method and walked through the reasoning from first principles about why that would be a good idea. And it revolutionized their business. And they eventually got to a place where they can show, they can iterate on this so quickly now. They can build a new version of that device every week. It used to take them three to six years to build a new model. Now they can do a new

a new version every week. So they're constantly getting testing iteration with customers. And like that's not going to scale up to a million units, but that could get us, you know, it's like, well, if customers don't ever want to buy the thing, we'll never have to scale up to a million units. We just saved ourselves a lot of cost and time and energy. So like what's a high level moral of that story? So there's a couple things. One is just people use it as an example, I think, to see how minimum viable product thinking can work, right? So reduce scope, reduce the number of customers affected. Try to figure out what is that experiment that can help us learn whether our strategy is actually right. And in this case, what they learned was that what they thought

customers wanted was wildly different what they actually wanted. But the other moral of the story is that this, before it is anything else, is a management issue. It is not a technology issue. It is not a process or tools issue. It is really about how do we manage people. Most companies have all the raw material they need to work in this more entrepreneurial way, including, by the way, the actual people that you would need to act in this creative way. I mean, I'm amazed at the caliber of people who work at these companies who are being told what to do. You're right. And in fact, I think people are born and really do have, I always think of this analogy of children always coloring when they're little. That's incredible. Who beats the

coloring out of them as an, I mean, now there's actually this trend where there's all these adult coloring books, which is something in and of itself. But the point I think is that that creativity never dies. It never dies. I'll just tell you one more story. It's such a cliche, and I hate even saying it, that we're going to unlock the creativity of our people. But I'll tell you the story. You tell me how to describe this. That doesn't sound cliche. I was once sent to one of my workshops. A 25-person team was sent by their company. It was the true multi-headed hydra of the most despised functions in corporate America. It was a joint finance and IT committee tasked with creating a new finance IT system that would be a new global standard for how this giant corporation would do. Oh, my God. It's not even just the entities you're describing. It's the fact that there was a task and a committee. and a standard. I mean, there's just a lot of crazy stuff.

When I talked to startup-e and product people about the story, they start moaning and groaning before I even get to the – I haven't got to the setup, let alone the punchline. Right. Oh, God, right. You know exactly. And it was like, these people were not happy to be in this workshop. You know, they've been sent to this thing, and they were just like, what?

And when I have in there, I was like, okay, if you want to do this, you know, think like a startup. You're going to adopt a customer service mentality. And really, like, you got to understand that the people who use this product are your customers, even though they're employees of the company. And I thought I was going to be burned alive. I mean, the looks I was getting from people were just like, well, what are you, who is this kid, telling us what to, you know.

But we did the work. And we went through the method. Like I said, I think being able to derive lean startup from first principles is very helpful. You know, accepting people's skepticism is natural and being able to walk them through. Look, be skeptical, but what is the experiment that could demonstrate? After three days working with this team, they were totally transformed. And they changed their plan from this, their original plan would take this huge committee. They're basically going to spend 18 months gathering requirements.

hand those requirements off to all these implementation teams around the world who would spend another 18 months doing the healthcare.com approach, basically. I mean, it's just health care like, listen, first of all over again, right? It's just like, listen, first of all, one of my rules is the laws of physics are required. Everything else is optional. So the word requirement just does not apply to like a giant worldwide focus group of random things that customers ask for. Those are not requirements. Those are hypotheses.

Those are guesses about what customers might want. So instead of doing this big global thing, it's going to take three years, and it's going to have no accountability, right? Because the committee will disband, the things won't be done correctly. there'll be no productivity savings, we'll be in the same IT finance mess we're in now. They took a different approach and they decided on their own accord

to condense down to a five-person dedicated cross-functional team. So no 25-person committee. They went to their customers, the P&L leaders of the different businesses in the company, and they made them an offer. They said, whoever says yes to this offer, the next day our whole team is on a plane

to your headquarters, wherever you are in the world, where you're going to sit with your people and build the software live before your eyes. And we will show it to you every month, or every couple of weeks. I remember the Sprint iteration cadence right now, but we'll show it to you periodically. And when you voluntarily decide to adopt it, you adopt it. So no corporate mandates.

We will show that it's better than what you have now. And we will not leave. We will keep iterating in this software for as long as it takes to prove to you, P&L leader, that you have an actual productivity improvement. So not we met the requirements and now good luck, but we will keep measuring how much work is actually done in this function. It's kind of complicated what the thing was. but we had the metrics to prove that it's a good idea.

And then and only then will we take it to a second P&L, a third P&L, and then eventually scale it up to the whole company. Right. This is what goes back to your point about the methodology for scaling and that being one of the biggest challenges. Yeah, exactly right. Someone told me the easy way to remember it is start small, think big, start small, scale fast. It's like that's really that is, right?

So prove that it works at scale X, then prove that it works at scale 2X and just repeat until you have the whole thing. These guys transformed into honest-to-God entrepreneurs. Every bit is enthusiastic. and creative as the people I meet, you know, in Soma every day. Right. So even though it is really cheesy, I agree to say like unlocking human potential and creativity, I do think it's a really important argument for a future of a world because when we talk about everything becoming software like, companies changing, everything changing

for a world where more things are getting automated and being able to really have something to contribute as a human being with judgment and creativity, something you can't codify into a program. The debate over robots stealing all the jobs and everything has baked into both sides of the disagreement, this fundamental premise that work is boring. And so like should we let robots do the boring work or should we let humans do the boring work? And it's like, no, no, no, no. That's just evil. I just cannot buy into that idea at all. First of all, work that is monotonous and routine should be automated because every human being has a right to use their creativity and their job.

This is a lesson going all the way back to the Toyota production system of years ago. even on the factory, like the canonical job that was supposed to be no, you know, all creative creativity sapped out by Fred Taylor back in the days, right? Someone just doing the repetitive, you know, stressful work on the line. Even there, human creativity can be, can work to our advantage, how much more so in knowledge work and in management and all these kind of systems we're talking about. So to me, this is saying these companies have locked up a massive amount of human potential. I think the scale of this is hard even to fathom because these companies are so large and so many of the people are trapped in systems that prevent them from exercising their independent judgment and creativity. I mean, that's just people debate whether that could be changed or it's a law of nature,

but it's a fact that is happening today. And what I have seen is that you can change it. It's hard not to sound utopian about it, but I really think it's going to have a profound impact. I just want to ask the distinction, though, between, does that mean everyone needs to be an entrepreneur or entrepreneurial? Yeah, that's a great question. It's a source of great confusion because the companies that have adopted this system formally, you're usually, like, even lean manufacturing, the Toyota production system, it's not called Lean Manufacturing. It's called the Toyota Production System. Every company makes it their own.

So like a GE, they have this program called FastWorks, which is their version of Lean Startup. but into it. They have a program called Design for Delight. Everybody has their own, you know, version of it. And one of the questions they get all the time is, well, does this system apply only to special projects or is it applied to everyone? And every company has had to deal with this duality where they say, actually, there's two versions of this. There is the version for, like, when you want to make a big bet, disruptive new product, like there's a, I think we talked about as a startup as an atomic unit of work. It's like one of the reason why Amazon is so effective, they have the two pizza team rule, right? They can say, that's a good idea.

let's throw a startup at it. Right. Just to clarify the two pizza team role being that the team should be big enough in size to only feed with two pizzas. Exactly. And, you know, just like, but it's basically just the way of saying small teams.

Small teams can try things. So they have like a, it's a tool in the management toolbox to throw a team at something and not let it turn into a big sprawling committee but keep it focused, keep the people cross functional and dedicated. No multitasking,

no passing work between silos. That is the death of innovation. But then you also have, like at G, they call it fast works every day. And they said, look, no matter what work you're doing, even down, they always give this example of you're preparing a PowerPoint presentation for a meeting. Even that very simple task, you can ask yourself, who's the customer for this task? And is there a minimum viable product version?

Is there a way to test an experiment? How do I really know that this work is valuable? And the number of people in corporate America who do work, where I ask them this question, I say, listen, what is the evidence? How do you know that the work you do every day matters to anybody except your boss? I used to think everyone would just be like, oh, of course I know. And the number of people who are like, I don't know, I just assume. We're just kind of moving along like zombies in the workplace. And then you're like, what kind of job is that?

Like how are you going to feel at night when you go home saying, gosh, I hope I accomplished something today. Versus now like imagine a world in which everybody knows it in their bones because they just, they had the scientific rigor to always be testing. And when you see that, I mean, I've seen people go before. I've seen the before and after photos, so the people have gone through that transformation. And it's truly powerful, even in places, you know, I'm thinking about, like, a factory where we did this transformation. And we're talking to, like, the union reps for the people in the factory and to see them go through the transformation, even places where I think we have a prejudice that like they're, you know, certain cultures, certain places, certain functions, those people would never get it. I've seen it everywhere that you can see it. And it's really a wonderful thing to see.

So I want to wrap up on then kind of revisiting the question of. how do people adopt this amazing movement and mindset, as we've said, is important? And the tools that come with it, without veering into cult territory where then they start holding on to like the letter of the rule versus the principle behind the rule. Because that seems to be a phenomenon that happens with anything. Of course. But it's also we've observed happening with even with things like lean startup. So how do you sort of...

Oh, certainly. I mean, I hear many of my VC friends complain about lean washing they call it. It's like people like the same old crappy. That's so funny. It's like greenwashing. Crappy Venture Pitch, but now it's lean. It's like lean crappy venture pitch. And I'm just like, look, first of all, do not, please, if you're listening to this,

as you're trying this at home, do not use the terminology to, like, dress up your dumb idea. In fact, I don't care if you use a terminology at all. In fact, I have a secret product managers, like a meetup group that I do for one of the big tech companies where we get together, it's secret. I can't name the group. What's the name of the group? Yeah, I can't tell you. Can't name of the company. Yeah.

Because they work in a company that has a real strong, non-invented. hear culture and lean startup is forbidden. So if they talk about minimum viable product or pivots, like inside the company, it's just like, do not want to hear about it. So what they have figured out is like they have to create a company-specific vocabulary version of it. So we meet periodically to talk about like how do we get people to adopt these concepts without officially. We were like putting code names around it. Yeah, because like to be honest, what matters is that you have a precise and clear language that you can communicate with your coworkers about. I don't care if you use my language or somebody else's as long as it has a

rigorous foundation. So, and the people who argue about, like, I get, period I get a phone call from someone, and they're like, so-and-so is blogging a bad thing about Lean Startup. Like, they're using it wrong. You need to make them stop. Yeah. And I'm like, I'm not the Pope. I can't excommunicate anybody. Like, what power do you think I have to make somebody stop? Like, that kind of like inside baseball. Hold on. Let me get the stone tablets here. Yeah. It's like, oh, we're going to chisel an extra. You know, and it's funny because I said in a recent talk, I was like, listen, Lean Startup stands for what works. So if you're just, if you're I said something wrong, if we discover ourselves as a movement, we use our own scientific

process to discover new things, they obsolete the old things. And we should always be getting better. And what we wrote five years ago should always seem a little bit creaky. Or we're not learning. To close it out, then let's just take the two most popular terms, which are also often specifically or used. And I think therefore have a lot of misunderstandings around them. And pivot and MVP. And I would love to start with MVP for minimum viable product, because one thing that I've seen on the other side is that people sometimes mistake doing an MVP when

sometimes a big visionary ideas require you to overinvest and not under-resource a minimum viable product. So you actually sometimes don't want to so I'd like to talk about that. Yeah, I'll have to talk about that. It's really interesting because people really love the bumper sticker version of lean startup.

There's certain concepts that just people really gravitate to pivot MVP, continuous deployment, you know, and some of the like lean buzzwords are people all excited about. But if you actually read the book, which I think a lot of people who are doing this buzzword bingo haven't actually done, if you read the book, the vast majority of it, the bulk of it by weight is not about, you know, this jargon, but it's about the management system. It's about the innovation accounting. It's about the math that underlies this way of

working. And, you know, I get that accounting doesn't make a good bumper sticker and we can't cram the math into your slogan. So I understand why the slogans get the attention. That makes sense to me. But one of the problems with that is people who have a kind of a flip understanding don't really have the context to do it correctly. And so a minimum viable product or MVP, that is a pretty common problem. The core mistake I think people make is they think that it's a minimum product, right? Like if you're trying to do something small in this world, you don't need to do an MVP. You just do it. Like if the thing itself is cheap and easy and has an obvious application.

Especially if it's software. Yeah, you don't need to test it. You don't need to experiment. Just ship it. It's only people who have a consequential vision that this is a good idea for or is necessary for it all. In fact, the first part of my book is called vision because people think like, oh, taking a scientific approach to innovation means taking the creativity out of it, which I think is very insulting to our friends who are scientists. I'm sorry, I think science is one of humanity's most creative pursuits. And someone once said to me, if you could turn entrepreneurship into a science and everybody could do it, and that wouldn't be good.

I was like, first of all, science is a science and very few people are good at it. Okay? It's actually like, it's really hard. With all due respect, like some of the smartest people who've ever lived have been our scientists and not just smartest are most creative people. So science is not just turning a spreadsheet, right? It really is having those leaps of insight to form good hypotheses in the first place. And that is what, and all MVP is saying is take those hypotheses and put them to the test in a cost-effective way so that we can sustain our investment in the vision over time. Some visionaries in this world are independently wealthy and can sustain investment in their project for as long as they want. Some have the knack for raising money just on the strength of their personality. And some can even take a company public and resist the temptations of Wall Street and just do what they. I mean, there are some people who have that ability to sustain their vision indefinitely. But most people do not. Most people, even the ones that have very, very powerful vision, struggle with how do I command resources? How do I get resources put to me? And they feel, frankly, a lot of resentment about the just huge amount of

bullshit that is required to do what we call success theater, putting on a show about how good your thing is doing so that you keep attracting investment. And I think every ounce of energy we force visionaries to put into success theater is an ounce of energy they didn't put in to making their vision a reality. They didn't put into serving customers. So I think of lean startup and MVP's in particular as a way to demonstrate progress towards the vision to sustain that interest over time during the long flat part of the hockey stick when the vanity metrics are really low and there isn't instantaneous overnight success. So then the last word, pivot, completely overused. I mean, it's actually just, God, I can't, we wait just along to even say it on this

podcast. Yeah, I try. I mean, I have to like, I'm a little bit embarrassed now almost how much it's become an overused buzzword. And I saw this, there's this cartoon, you can Google it. There's a cartoon in the New Yorker magazine a little while ago where there's a man and a woman sitting in a cafe and she says, I'm not leaving you. I'm pivoting to another man. I just thought, what have I done. I'm sorry. No, well, it is, I mean, you called it a movement when we were talking about it. And I mean, that's kind of part of it, right? I'm sure people have pivot tattooed. That would be a weird tattoo to get. I've seen some pretty odd things. But it is part of this kind of, I don't know, language and culture and fascination with what you've done with lean startup. Yeah. You know, first of all, I don't apologize for the fact that pivot is a very useful concept for startups.

In fact, you can go back and read stuff that was written about startups before that word came into the comment. vocabulary, and people struggle to explain this weird phenomenon, which is, it seems like the great entrepreneurs persevered through everything, and they, you know, stuck to the vision no matter what. And yet, they also were super flexible about certain details. So, like, that's odd. Like, how do you, what do you do that? So, like, I, so I, for the people who are new to the concept, the right definition of a pivot is a change in strategy without a change in vision, right? So the vision is our true north, our destination. But the specific strategy we're in, like, Like, what is the business model?

What kind of product is it? Is it software? Is it hardware? Is it a device? Is it a service? Like, think about, you know, the Google search appliance and the pivot to ad words, right? That didn't give up on the vision of organizing the world's information. But they said, that's a dumb business.

And this is a good business. So, like, that's okay. But if someone had said, like, let's get out of the search and information business and just sell cars, you know, they would have been like, oh, that's not a pivot. That's abandoning our vision. Although, of course, now they are going to sell cars. So, you know, the vision expands as you have success. Actually, I think it is still connected to all the world's information, right? Yeah, well, exactly right.

So, you know, the vision is personal, and it's deep in the minds and the souls of the founders and eventually into the whole company and its DNA. So it's, from the outside, it can be a little bit hard to understand, like, what really is the vision and what are the incidental bits? Like, I think people, you know, certainly would have thought a certain point that Netflix is all about sending you DVDs by mail. And when they first, I remember people were, it was very controversial when they started become an online streaming service that would actually have fewer movies and less options. It seemed like it was getting worse.

Like, it's not an abdication of the vision. And now to programming their own content. I mean, yeah. So you never know where, you know, you have to be flexible about the specific strategy, but you have to be willing to, you know, to invest and stay true to the vision. So that really is why the concept of pivot is so important. And the reason it's such critical part of lean startup is if we can get to the moment of pivoting sooner, cheaper, faster, then we extend, it's like magically extending the runway of the startup without raising more money.

And that's why it's such a powerful idea. It's a movement. It's not a cult. Yes, sir. It's gathering momentum, you know, outside of Silicon Valley and, and, and, you know, beyond and we'll try and extract the information on your secret product management group later. I'm going to start tailing you and driving, following you everywhere, see where that goes. Thanks so much for coming.

Look forward to the next book. Thank you, Eric.