20VC The Lean Startup's Eric Ries on The Missing Function of Entrepreneurship in Most Companies, Creating A New Accountability Paradigm & How To Structure Promotions and Compensation In The New Structure

In this episode of "20 Minutes VC," host Harry Stebbings converses with Eric Ries, author of "The Lean Startup" and "The Startup Way," and founder of the Long-Term Stock Exchange. Ries reflects on the unexpected success of his book, which sparked a global movement with concepts like MVP and pivoting. He discusses the challenges of traditional matrix management structures and the necessity for companies to incorporate entrepreneurship as a function for sustained innovation. Ries emphasizes the importance of an accountability culture that rewards smart risks and recognizes the value of 'productive failures.' He also highlights the need for a new funding paradigm within corporations to foster micro-innovation and adaptability. The conversation touches on the significance of aligning promotion and compensation policies with innovation goals, and Ries shares his vision for a future where companies maintain their innovative edge regardless of size or age.

• Harry Stebbings introduces the podcast "20 minutes VC" and invites listeners to connect with him on Snapchat.
• Eric Ries is introduced as the guest, an author and entrepreneur who is not a traditional VC.
• Eric Ries is known for the international bestseller "The Lean Startup," which introduced new business terminology and concepts.
• Eric Ries has also authored "The Lean Startup Way" and founded the Long-Term Stock Exchange.
• Thanks are given to Eric Torenberg for the introduction to Eric Ries.
• Harry Stebbings shares personal recommendations for products from Raiden and Simba, which he endorses.

"And today's guest is not really a vc. But hey, after 1200 interviews and over 10,000 hours with vcs, I think I can bend the rules slightly. And what a way to bend them today with our guest Eric Reese joining me in the hot seat today for those that have been living under a rock. Eric is the author of the international bestseller the Lean Startup, which changed the language of business, introducing terms such as a b, testing mvp, and pivoting itself."

The quote explains Eric Ries's significance in the business world, particularly his contribution to startup methodology through his book "The Lean Startup."

• Harry Stebbings describes the benefits of Raiden cases for travelers, highlighting features like a removable battery and Bluetooth location awareness.
• He also praises the Simba hybrid mattress for its advanced technology and comfort.
• Harry offers promotional codes for both Raiden and Simba and invites listeners to follow him on Snapchat.

"Now it's also location aware with built-in Bluetooth, meaning you have this incredible digital passport from your Raiden. It even has this self-weighing ability so you ensure you never go over your allowance. So awesome."

The quote emphasizes the innovative features of the Raiden case that Harry finds particularly useful for travel, such as location tracking and weight measurement to avoid excess baggage fees.

• Eric Ries shares his surprise at how "The Lean Startup" became a global movement.
• He recounts starting his blog anonymously due to skepticism from advisors.
• Eric describes a pivotal moment when he realized the impact of his work during a packed talk at the Web 2.0 Expo.

"I never imagined that lean startup would take off the way that it has and become this global movement."

This quote reflects Eric Ries's initial disbelief at the widespread adoption and success of the Lean Startup principles he introduced.

• Eric Ries explains the matrix management structure, which was perfected by Alfred Sloan at General Motors in the 1920s.
• Employees have dual reporting lines: functional responsibilities and product line responsibilities.
• The structure ensures employees adhere to standards within their function and division.

"So most organizations today are built to a blueprint that was perfected, really in the 1920s by Alfred Sloan when he was the CEO of General Motors."

The quote identifies the historical origins of the matrix management structure and its widespread adoption in modern organizations.

• Eric Ries discusses the suitability of matrix management for holding people accountable to forecasts.
• He clarifies that his critique is not of the management system itself but of its limitations in certain contexts.
• The system works well when precise forecasting is possible and accountability can be clearly defined.

"It's very good for what it's very good at."

This succinct quote captures the essence of Eric Ries's view on matrix management: it is effective within its scope of application but may not be universally applicable.## Traditional Management Systems

• Traditional management systems are based on macroeconomic conditions and forecasts.
• They are not suited for new entrepreneurial ventures with high levels of uncertainty.
• Reliance on forecasts can be problematic when dealing with innovative projects.

"And the way it works is just because imagine that we're having a macroeconomic boom and every company is selling more stuff this year than they did last year. You don't want to promote managers just because they're having an up year."

This quote highlights the issue with traditional management systems that focus on short-term results, which may not accurately reflect a manager's performance due to external economic factors.

"And yet that system really doesn't work very well if we're trying to do something new that has so much uncertainty about it that we can't make an accurate forecast."

This quote points out the limitations of traditional management when applied to entrepreneurial ventures, where uncertainty makes forecasting difficult or impossible.

• Entrepreneurship is chaotic and unpredictable but can be managed as a portfolio.
• Silicon Valley has developed management systems for entrepreneurial activities.
• Startups have consistent practices like board reporting and metered funding rounds.
• Established companies often revert to traditional management instead of maintaining entrepreneurial practices.

"Entrepreneurship itself is very chaotic and unpredictable and confusing. But entrepreneurship as a portfolio know, like, what vcs do is totally manageable."

Eric Ries suggests that while individual entrepreneurship is unpredictable, managing a portfolio of entrepreneurial ventures, like venture capitalists do, is manageable and has systems in place.

"So what happens is we don't have anybody on the organization who's responsible for thinking like an entrepreneur."

This quote emphasizes the lack of a dedicated entrepreneurial function within many companies, which could be responsible for managing high-uncertainty activities.

• Companies often lack a formal function for entrepreneurship.
• Entrepreneurship should be managed with the same rigor as other business functions like finance or marketing.
• Internal startups within a company should adopt entrepreneurial management practices to deal with uncertainty.

"Most companies don't have entrepreneurship as a function, and they're in trouble."

Eric Ries identifies a gap in many companies' management structures, where there is no function responsible for entrepreneurial thinking and activities.

• The need for an entrepreneurial function arises during company scaling.
• Founders should plan for continuous innovation and multiple market entries.
• The transition to formal departments is a good time to consider entrepreneurship as a function.

"When you go through the inflection point of product market fit, when you start to set up different functional departments, I think that's the time to start formally addressing the question of who's the next generation of entrepreneurs in your company?"

Eric Ries suggests that as a company scales and establishes departments, it should also begin to formalize the function of entrepreneurship to ensure continuous innovation.

• Organizations often develop a fear of failure, leading to conservative behavior.
• Career equity, or the future prospects for promotion, can be more valuable than current compensation.
• Encouraging a culture of accountability without fear is crucial for innovation.

"Yeah, this is a really important issue because on the one hand, most organizations develop a really pathological fear of failure that drives a lot of conservatism."

Eric Ries acknowledges the common issue of fear of failure in organizations, which can stifle innovation and risk-taking.

"The financial compensation that you pay a person in the current period, like this year's bonus, this year's salary, even this year's stock option, tends to pale in comparison to what I call their career equity."

This quote introduces the concept of career equity, suggesting that the potential for future advancement is a significant motivator for employees, often more so than immediate financial rewards.## Equity Compensation and Career Prospects

• As a company grows beyond 50 to 100 employees, equity compensation becomes less significant compared to future career prospects.
• Career equity is determined by the perception of peers and superiors, which influences promotion opportunities and authority within the company.
• The political nature of career advancement creates a disincentive for risk-taking due to fear of failure and its impact on career progression.
• To encourage risk-taking, a new accountability paradigm is needed that distinguishes productive failures from incompetence.

"At 1050 employees, equity compensation is going to dominate. But once you get past 50 to 100 employees, the fractional ownership that people have, certainly once you get to 1000 employees, the fractional ownership people have is going to be dwarfed by their future career prospects."

This quote emphasizes the shift in importance from equity compensation to career prospects as a company scales up and the number of employees increases.

"What determines your career equity? What determines whether it's likely that you're going to get promoted to a VP job one day?"

The quote points out that career progression, such as being promoted to a VP position, is a significant aspect of an employee's career equity within an organization.

"It drives a lot of conservatism because it makes people very reluctant to take a risk, because if you take a risk, you might be perceived as having failed."

This quote highlights the conservative culture in many organizations that discourages risk-taking due to the fear of failure and its potential negative impact on one's career.

• Organizations often fail to differentiate between productive failures and those due to incompetence.
• Celebrating smart, liability-constrained risks and cultural misfits who identify and correct flawed processes can drive innovation.
• Most companies do not have a systemic process for commercializing new ideas, leading to a disconnect between the stated meritocracy and the actual practice.

"We have to create a new accountability paradigm. We can't just say we're going to celebrate or embrace failure."

The quote suggests the need for a new way of evaluating success and failure within a company, moving beyond simply embracing failure.

"How do we reward people for taking smart, liability constrained risk?"

This quote raises the question of how to incentivize employees to take calculated risks that could benefit the organization without exposing it to undue harm.

"We celebrate that they realized that the company process was wrong and got it changed."

The quote emphasizes the importance of recognizing and rewarding employees who identify and help to correct ineffective company processes.

• The contrast between venture funding and corporate entitlement funding affects the ability to run experiments and innovate.
• Entitlement funding creates an environment where projects are expected to continue indefinitely, which discourages small-scale experiments and promotes conservatism.
• The incentives within corporate budgeting often lead to project delays and scope inflation as managers seek to avoid accountability.

"Most corporate managers call it the spigot...it's never going to go to zero."

This quote describes the ongoing nature of corporate funding, where projects are expected to continue receiving funds rather than being subject to the success-based funding seen in venture capital.

"The problem with entitlement funding is it means that it's very difficult to run an expensive experiment."

The quote identifies a key issue with corporate funding structures, which make it challenging to justify and conduct experiments that could potentially fail.

"It's just a natural, logical, rational incentive to always choose delay when given the opportunity."

This quote explains the rationale behind the tendency for managers to delay projects, as doing so preserves their budgets and avoids the risk of failure.

• Promotion practices within large organizations can be opaque and politically driven, with senior executives often avoiding market-driven accountability.
• The process of evaluating promotions at senior levels may be conducted in secretive meetings, making it difficult for most managers to understand how decisions are made.

"I can become a senior executive without ever having been subject to external, market-driven accountability. It's pretty gross."

The quote criticizes the lack of accountability in the promotion process, where individuals can climb the corporate ladder without their work being tested in the market.

"They had kind of a star chamber secret meeting every month or every other month, where a group from HR, with some of the senior leaders in the company, would huddle and evaluate the promotion pipeline for the most senior executive level in the company."

This anecdote reveals the secretive nature of promotion evaluations at high corporate levels, which can contribute to a lack of transparency and fairness in the process.## Executive Promotion Criteria

• Executive vice presidents are a significant career milestone.
• Senior management often lacks time for innovation due to current business demands.
• A new promotion criterion was added privately, valuing lean startup techniques.
• This change in evaluation criteria shifted the organization's focus towards innovation.

"We've just added an evaluation criteria to the promotion. How? Well, the manager in question embraces this new way of working using lean startup techniques."

This quote reveals that embracing lean startup techniques became a new, quietly introduced factor for managerial promotion, indicating a shift in company values towards innovation.

• Companies often claim to value innovation.
• True commitment is shown through changes in promotion and compensation policies.
• Without policy changes, the company's commitment to innovation is not genuine.

"Companies say they're serious about innovation, but if they have not changed the promotion and compensation policies to match, then they're not serious about it."

Eric Ries emphasizes that a company's real dedication to innovation is reflected in its structural policies, not just in its rhetoric.

• Eric Ries shares his thoughts on various topics in a rapid format.
• Discusses favorite book, personal beliefs, qualities of good CEOs, preferred reading material, writing process, and cultural significance.

• Eric Ries enjoys the sci-fi novel "Ancillary Justice" for its mind-bending qualities.

"I'll just tell you one that I really, really enjoyed recently, which is ancillary justice. The Sci-Fi novel. Really mind bending and in a good way."

The quote indicates that "Ancillary Justice" left a strong impression on Eric due to its thought-provoking content.

• Believes that companies can remain innovative regardless of size or age.

"I believe that companies can stay innovative no matter how old they are, how big they get."

Eric counters a common skepticism by asserting that innovation is not confined to new or small companies.

• Good CEOs balance long-term focus with short-term experimentation.

"They have a long term focus and willing to drive. Short term, rapid experiment at the same time."

The quote highlights the dual priorities that effective CEOs must manage to succeed.

• Enjoys Kickstarter's newsletter for its unique and eclectic content.

"If I really have time, I will read. Kickstarter's totally funky. Like, what's happening newsletter."

Eric expresses his preference for Kickstarter's newsletter, which he finds engaging and entertaining.

• Writing is sporadic and often involves long periods of procrastination followed by bursts of productivity.

"I'll spend, like, 10 hours working on the book, of which the first 8 hours will be kind of staring at a wall, reading my email, watching tv, complaining about how I can't think of anything to write. And then at 06:00 p.m. I'll be like, oh, that's a good idea. And boom, crank out a whole day's worth of work."

This quote describes Eric's unconventional and erratic writing process that nonetheless results in productive work.

• Culture is defined by unwritten practices and past decisions.
• Prefers not to write manifestos; views culture as organic and evolving.

"I think culture is the way that we work when no one tells us how to work, it's the artifact and kind of the learned muscle memory of the past process and accountability decisions the company made."

Eric Ries explains culture as the collective habits and norms that develop over time within a company.

• Uncertain about the future but focuses on managerial culture and financial incentives.
• As CEO of the Long-Term Stock Exchange, he aims to influence company-building practices.
• Organizes the Lean Startup conference to educate about innovation.

"I'm working in parallel, obviously, on this kind of greater problem of how do we build a modern managerial culture."

Eric Ries discusses his ongoing efforts to shape the future of business management and innovation.

• Eric Ries is thanked for his contribution to the interview.
• The book "The Startup Way" is recommended for listeners.
• Personal anecdotes about travel and sleep products are shared, along with recommendations.

"I really did so enjoy that interview. And if you haven't bought the book the startup way, it really is a must for longtime listeners of the show."

Harry Stebbings expresses his enjoyment of the interview and recommends Eric Ries' book to his audience, highlighting its significance.