On The Startup Way and the architecture of entrepreneurship

I recently finished reading Eric Ries’s much-anticipated new book, The Startup Way. Many of you will already know the author from his bestseller The Lean Startup, which for me has been a big professional influence. In his latest tome, Ries talks about entrepreneurship and large-scale change in the context of ‘existing organisations’ such as corporates, as opposed to traditional startups. I think the following quote surmises the premise well:

“A corporate transformation is — in every way — a true startup, with the same kind of risk, rapid growth, and profound impact that an external startup contains.”

Despite this, organisations often appear to go out of their ways to quell any entrepreneurial spirit. For example:

“Corporate finance professionals, generally speaking, have been trained to withdraw funding from teams that miss their accountability targets by even a few percentage points.”

Whereas the contrast with non-corporate startups is stark:

“Being a startup investor often requires doubling down on teams that miss their accountability targets by orders of magnitude.”

Let’s not beat about the bush:

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

While my experience suggests that most companies do value a small-to-moderate degree of entrepreneurial initiative, Ries’s point, when taken with a pinch of salt, is a powerful one. Namely, act like an entrepreneur — take a learning approach, experiment, (potentially) miss your targets, eschew bureaucracy, accept failure, and so on — and you’re eventually going to find yourself clearing your personal effects into a cardboard box. Thing is, if we accept that these behaviours are essential for corporate innovation, then by punishing those who exhibit them, the business world is making a gargantuan mistake — to the sum of what is surely billions of dollars a year. Businesses are expunging the very people who have the drive, grit, creativity and mule-headed stubbornness to make change a reality. They’re sending a clear message to their other employees to not try the same thing. And they’re dissuading many of those ejected, dejected, employees from trying again in another organisation — effectively stunting the entrepreneurial spirit of our society as a whole.

Ries is convincing in the solutions he identifies. Imagine how different it would be if instead businesses set themselves up to encourage such behaviour, recognising entrepreneurship as a “missing function”. Imagine if entrepreneurs were offered “training, mentorship, support, coaching, and best practices designed to foster excellence in entrepreneurship across the organization.” And imagine what would happen if the organisation were to build “a career path and specialized performance development process for entrepreneurial talent”. In other words, recognising entrepreneurship as a fundamental necessity for corporate success, and providing the requisite support infrastructure.

Another valuable perspective Ries offers is around how:

“Many failures are caused not by incompetent execution, but by reality failing to live up to the assumptions built into the plan”.

I suggest you read that sentence again — it’s that important. It’s not an uncommon refrain. Alex Osterwalder puts nicely, when he says “Turning an idea into a business is a “search” problem, not an “execution” problem”, which he brings to life in the image below.

Incidentally, there’s a good recent HBR piece arguing that the same ethos should be applied to corporate strategy. But back to corporate startups. The solution is to follow the steps that were first introduced to many of us in Ries’s The Lean Startup. We need to test ‘leap-of-faith assumptions’, and there are two that any startup has: the value hypothesis, which tests whether a product or service really delights customers once they begin using it; and the growth hypothesis, which tests how to get more customers. We create a Minimum Viable Product as an experiment to test these assumptions; we use validated learning as the “unit of progress” to learn what’s working and what’s not; we go through multiple build-measure-learn feedback loops; and we make decisions about whether to change our strategy (pivot) or stay the course (persevere).

Ries includes a useful chapter that addresses a common challenge experienced by those that try to put all of this into practice, that of securing budget. We’re introduced to the concept of ‘Innovation Accounting’, a way in which corporate entrepreneurs can work with enlightened finance departments. This says that the focus, until the corporate startup reaches a certain stage of maturity, needs to be on non-financial KPIs that are indicators of future success, such as conversion rate and orders per customer, rather than financial KPIs. Think about it — when startups are not expected by VCs to deliver profits year-after-year, then why does it make sense for a corporate startup to have to? To the contrary, what a great way to slowly starve the company of its ability to compete against all the hungry new market entrants. Instead, allow the corporate startup time to learn — encourage it and give it a chance to find its feet, before starting to insist it pays its way in the big bad world.

This reminds me of an experience during one of my consultancy engagements. We decided that our initial business case needed to focus on funding a series of ‘Quick Wins’. Despite pressure from the finance department, I politely refused to commit to delivering any financial benefits as an outcome of this work. Why? Because that wasn’t why we were doing this work — we were doing it to demonstrate that change was possible, to create the interpersonal connections necessary for ‘shared consciousness’, build up credibility and momentum and, most importantly, to learn. This, in turn, would provide a solid foundation for achieving our ultimate goal, which in this instance was a customer experience step-change, a major technical re-platforming, and the introduction of a best-in-class operating model.

I recently listened to an excellent Farnam Street podcast, in which host Shane Parrish talks with orchestra conductor Alexander Shelley, in particular about the architecture of classical music. Architecture here means the way the music has been structured by its composers, based on forms, structures and patterns. These in themselves have evolved and emerged over the course of the past 500 years of rich musical history. One of the most prevalent forms of architecture for classical music (and for other forms such as jazz, pop and gospel) is “the idea of themes recurring, and then changing, developing.” There are psychological bases for these patterns, for example the method of returning to the starting point, and more broadly, recognising elements heard earlier in the piece. These are proven to be pleasurable for the listener, something that will not come as a surprise to many of us, if we start humming one of our favourite tunes. What is surely less appreciated, is that way in which such elements are deliberately used by the composer to architect their piece.

How did the composers develop this ability? Did they figure it out on their own? No, they were taught the discipline, they took time to learn, and they benefitted from a support infrastructure that gave them the space and the guide ropes, to improvise on these foundations — and to create great works of art as a result. Ries’s main points are these: we lack an architecture of corporate entrepreneurship, and it figures we therefore also lack the support infrastructure for the education of and delivery against that architecture. Entrepreneurship really is the “missing function”; organisations have to instead rely on dogged visionaries (or mavericks, depending on how you feel about them) fighting against the system, and innovation remains largely the purview of startups instead of established organisations. This is wasted opportunity on a gargantuan scale, and with The Startup Way Ries has issued a clarion call that provides us with a compelling vision of the alternative.

I hope you enjoyed the read. Please add your thoughts below — it would be great to hear what you think. Do share with your friends and colleagues, if you think they might enjoy. And don’t forget to follow me on Medium, so you’ll know when my next post is up.