Eric Ries has watched promising companies burn, accidental ideas succeed and bad products turn good. Working out why has led him to his own methodology, the Lean Startup. It’s all about shipping early, observing the response, learning and being ready to change quickly (the ‘pivot’). If it doesn’t work, at least you’ll fail faster—and cheaper. But will Silicon Valley’s rules work in Enzed?
Welcome to the true home of the lean startup—usually very lean.
Thanks! Plenty of people have been telling me my ideas resonate here in New Zealand. And I’ve become a bit suspicious of the reports I get from Kiwis, because I’ve learned there’s a pathological humility in the culture. So plenty of people say they’ve always wanted to be an entrepreneur and when I ask what they do now, they say “I run my own business.” Is that not an entrepreneur? And they say “Well it doesn’t really count—it’s not a very good business.”
I’m told New Zealand doesn’t have much of an entrepreneurship culture, and then everyone I meet is running their own business, or wants to. People tell me they’re doing three different projects, but they’re not a ‘real’ entrepreneur.
We’ve got a lot of lifestyle businesses.
That’s true, and my background in tech startups is trying to build high-growth companies so it’s different than so-called lifestyle business. But people forget that a lot of high-growth startups didn't start with a very dramatic beginning, it’s just that the entrepreneur was onto something and was very methodical about figuring out just how big a thing it could be. They were adjacent to something really big while they were doing something small.
Who are you thinking of?
The best example right now is Facebook. People forget that Facebook was basically a toy app on one college campus. Everyone will say they knew from day one that that they were going to build a glorious empire, but it’s more likely that they were as surprised as anybody about their success and were very savvy about leveraging each success into the next success. I know a few of the Facebook folks, but I only met them after they were successful. So the real stories of these companies tends to get obscured with a lot of pressure for PR purposes to make up a more interesting and more heroic story about what really happened.
Facebook was created at Harvard; if it had been in Idaho or Auckland, people probably wouldn’t have seen the potential.
The most interesting part of the Facebook story is that when they were only on a few college campuses, customers were already highly addicted to the product. So they were able to just hop on a plane, go to Silicon Valley, meet some of the Valley’s best investors and say look at the data of this crazy product. And people said “We’ll write a cheque for that,” relocated them promptly to Silicon Valley and the rest is history. I think that’s a uniquely American asset we have.
It is—but perhaps the VC culture in Silicon Valley distorts everyone else’s way of thinking. We’re familiar with the Valley’s success stories, but most places aren’t like that.
Silicon Valley is an insular bubble. I think we’re parody-prone all the time; we operate in a sheep-like herd and so we’ve wasted a lot of money on really dumb ideas. Yet that’s a very minor effect compared to the real value those investors bring to the ecosystem.
But what’s really interesting is that the traditional venture models were really pioneered and built in the 70s and 80s, and they’re not perfectly adapted to the new reality in a number of industries. In particular, in software and software services and consumer internet businesses where the capital required to start a new company and discover if it’s successful is extremely low.
That’s had the effect that a lot more people could, if they wanted to, get into the risk capital business, even if they can't write $10 million cheques. And that is unlocking a lot of really interesting entrepreneurship potential. Quite a few people in New Zealand talk to me about how they can leverage that trend to New Zealand’s benefit.
The thing about entrepreneurship is that every weakness is actually a strength and vice versa. There’s no objectively best place to do anything. For example, New Zealand is a relatively small country; a lot of people talk about that as a liability. It’s a weakness because you can’t achieve mass scale with a new product in New Zealand. On the other hand, it seems to me that New Zealand is an ideal test market, where you have kind of just critical mass of English-speaking first-world people, whose behaviour is not so different than you can see in the US, the UK and other first-world countries.
One of the liabilities in Silicon Valley is if you’re in the scene and you do something innovative, ten thousand people want to comment on it the next day, and tear it down and steal your idea.
I was joking before about the kind of massive Kiwi humility complex, which I find baffling. But humility is a very valuable entrepreneurial trait, and so if you actually harness humility for good, what it means is that when you're confronted with difficult facts that contradict your vision, you'll have the kind of strength of self to see the reality for what it is, which could be very valuable.
That’s cool, but nobody’s impressed by humility—it’s not something you can take to investors and say, ‘Hey, I'm meek!’
It’s a fine line. Certainly in Silicon Valley there is a new class of investors who are embracing lean startup-type thinking. And I wouldn't say that they are so humble themselves, or value humility, but they really value people who can talk frankly about failure. And so entrepreneurs have to have this combination of irrational confidence and clear-eyed realism.
And most human beings, when they experience cognitive dissonance, get a headache. The cognitive dissonance in entrepreneurship is that I’m 100-percent confident that my idea is going to change the world, and also it’s probably completely wrong. So how can you hold those two ideas at the same time? It’s actually kind of painful.
At Webstock you talked about the importance of shipping a product, even if the first version isn’t good, and charging for it immediately. That takes a certain kind of cheek.
That’s true—especially in Silicon Valley. I felt a lot of pressure not to do it and was really afraid. One of the things that we have to get good at, as part of the global entrepreneurship culture, is talking frankly about what we’re afraid of. Because in retrospect I was afraid of stuff that had nothing to do with the business. I cloaked my fears in talking about the brand equity of the company, and the PR impact, and the customer. The reality was that it was my professional pride that was at risk of being wounded, and I was afraid of that. But we have to be more afraid of building something that nobody wants. That’s the worst thing that can happen.
A beautiful thing that nobody wants.
Right—it’s perfect to me, but not necessarily in the eyes of others. The stuff we put out there has to be designed as an experiment to answer a key question—that’s what’s called minimum viable product.
The irony is that minimum viable product is a technique, but not for building minimum products. If you're just trying to do something small, just put it out there and see what happens. If you want to do something big, you need to be systematic about breaking that big thing down into a series of related hypotheses if you're going to test in a systematic way.
If you're testing something that doesn’t work well, with a bad user experience, the data you get back may not be that valuable. And you run the risk of screwing the pooch.
True, but it’s unusual for a product to be used by a lot of people and to be really bad. In order to have something really damage you a lot of people have to see it, but actually getting a lot of people to see your product is one of the key assumptions we’re trying to test in the first-place.
When you put out a product and customers complain that it’s not useable, that’s actually very good news. It means they believe in the value proposition you offer them. They tried to use it and failed, which means you're on to something, and so you want to iterate.
A lot of the real bad products I’ve put out, I couldn't even get anybody to use them. I didn't ruin the brand, because nobody found out the stuff was buggy.
Do you find one of the reasons why they couldn't use your app was because what they see is not what you thought you built?
That’s almost always the issue. If you get the use case right and your execution is poor, then people will complain to you about bugs and performance. If you're not building for the right use case, or the right kind of customer problem, then what happens is that you can’t get any feedback at all, because no one cared.
And then it’s time to pivot?
Exactly right, yeah.
The pivot can sound like you’re asking for a change of fortune. Some companies fall into the right business by accident.
Luck is a big part of any venture. If you make a list of all the things that have to go right for a startup to be successful, let’s say there are ten things. Basically all ten have to go right.
Let’s say that because you're a brilliant entrepreneur, you get five right. You get lucky on another two, you get one more because you have good timing, but you get two wrong. That’s still going to fail—eight out of ten is still a swing and a miss.
What role does governance play in a lean startup?
A lot of entrepreneurs have a tense relationship with their investors. Their interests are not always aligned, and that can cause a lot of tension. But I found it really helpful to have outside people who I trusted to give feedback on a periodic basis, and to help hold the team accountable. Now that really required us to develop disciplines early on, otherwise we would have been really sloppy about it.
In the early days, we would hold board meetings where we would try and show progress. The night before, we’d decide we need metrics to show off how great the product is, and we’d look at the numbers and see they’re terrible. And we’d have these moments where we’re like ‘Hold on—we were working on this product for six weeks, we’d made it better in these 92 ways. How can the numbers be going down?’
At first we would assume the metrics are wrong. But really what was happening was that we were making the product worse, not better, and didn't realise it. And by being forced to show that progress to outsiders on a regular basis, we started to get a little bit smarter and say ‘Wouldn't it make sense to check halfway through if the numbers are going up or down? Hey, why don't we check once a week? Why don't we check every day to make sure that we’re on track.’
I started out really thinking that analytics was a waste of time. I always felt that customers don't care if you have great reports, they only care if you have a great product, so you've got to spend, you know all your time on the product. Now I liken that to saying I could drive faster if I had my eyes closed—it’s a true statement, it’s just tragically flawed.
We don't want to measure everything with as much data as possible. We want to have the minimum amount of data, but still learn from our actions, learn from our mistakes, and figure out whether we’re making the product better or worse.
You say this is the best time in history to be an entrepreneur, and yet I would say that probably a higher percentage of businesses fail today they ever.
Yes that’s also true.
Can you reconcile those …
In an entrepreneurial context, failure is excellent, because without failure you can’t learn.
That’s a very Silicon Valley perspective. Most of the world is not so forgiving.
That’s right, so there’s a cultural question about how to embrace failure as a culture. But failure is only useful where you learn. There’s some interesting research about the role of failure in business. Last time I looked at one of these studies, it wasn’t true that an entrepreneur who has failed is more likely to be successful in their next venture that one that has succeeded. There are a lot of people who fail and don't learn anything, and therefore they just make the same mistake over again. And they’re really skewing the numbers for those of us who fail but learn something.
Yes—and as someone who has had several failures in a row, I often wonder to myself am I actually learning anything. When we have a culture that tolerates and expects failure, we can start to be much more open about what’s working and what’s not.
We can also change the process of building companies, so that idea failure doesn’t have to equal company failure. Going back to this concept of the pivot—successful companies didn't get all ten things right on day one. In fact, some of them got close to zero things right. They didn't have the vaguest idea of where they were going to wind up, and it took quite a few failures before they figured out what the model was going to be.
What we want to do is make those failures less costly, and less embarrassing. And also do them faster. Our goal is to succeed in the end, but let’s get those failures out of the way.
When we talk about the lean startup, given our issues with scale and the size of New Zealand businesses, is there something we can be tapping into?
I think so. I came away from my travels in New Zealand very optimistic. It’s easy enough for an outsider to be optimistic, because I don't actually have to do the work, but I feel like the raw materials of really interesting entrepreneurship culture exist here. And the most interesting thing—and this is something that I’ve been thinking a lot in the last few weeks—is that I have to push hard in the United States to get people to consider proving their business idea in micro scale before trying to make it big.
We’re Americans, bigger is better, and so we often have startups prematurely scaled. It’s a common failure mode for us, and it has to do with ready access to capital, but it also has to do with the cultural attitude that you should go as fast as you can and get as big as you can as soon as you can. That’s killed a lot of companies, because if you only have the model half-right and you make it bigger, we see this in dot-com collapses all the time. “We’re losing ten cents per customer, so let’s get as many of them as possible.” That just magnifies the scope of the failure. In contrast, with Kiwis almost everyone I’ve talked to has an intuitive understanding of what it would mean to first prove the model in micro scale, and then take it to a larger market. I think that’s a very natural advantage.
Have you had experience of a project that’s been canned when, in retrospect, maybe there was an opportunity?
Totally. In 1999 I started a business at the tail end of the dot-com boom to do recruiting on college campuses in the United States. The idea was that we would take students at top colleges and build a résumé database so employers could find them. It was reversing the pattern of job sites at that time, because our feeling was that top college students didn't actually know what they want to do for a living, so searching through job postings is not very helpful. Companies spend a lot of money to interview students, so we’ll create algorithms for searching through the resumes.
It was a dot-com disaster—a complete and total flop. The euphemism we use is. But only a few years before Facebook we were getting the very same top college students to build profiles online, for the purpose of sharing. And it never occurred to us for even a minute that they might want to share those profiles with each other, rather than with employers. We took one swing, missed, failed, and exploded. That was the dot-com way. If we had kept at it, would we have come up with Facebook and would we be doing what they are now?
But it’s Silicon Valley’s specialty. I can name story after story of people who did what they thought was the right thing at the time and missed out on a huge opportunity.
You mentioned in your speech that too many startups fail. But don’t we need to have a lot of failures in order to have the huge successes?
It’s tricky. High risk implies high failure rate—that’s part of entrepreneurship. The problem is that we’ve gotten complacent about what’s a reasonable failure rate, and so we’re having more failures than necessary, and using the fact that we’re in a risky business to justify that.
I think there’s a difference between risk and uncertainty, and startup practices can be designed to mitigate uncertainty, and therefore can change the failure rate without necessarily affecting the underlying rate of risk. I’ve been in rooms with startup investors, pretty smart guys, who as soon as I start talking about reducing the failure rate dismiss me out of hand. Their point of view is that the easiest way to reduce the failure rate is to reduce the rate of risk, but that’s a bad thing.
It’s actually a logical fallacy. I see their point of view: we have to continue to make good and interesting bets. But if you look at the actual failures, how many of these startups failed because they took too much risk? If you're really honest about it, they weren’t too risky—they were badly managed. They were managed according to practices drawn from general management, rather than from entrepreneurial management. If we can change that behaviour, we can have the best of both worlds. We can reduce the failure rate and we can stop wasting people’s time and energy on building products that basically nobody wants.
Silicon Valley investors’ failure rate should be a source of pride, because that means they've been ruthless and stopped a failing company. They expect to have nine failures out of ten, don't they?
The problem with nine failures out of ten is when you're nine failures in you don't know if you're a great investor or a terrible investor. The feedback loop in that business is brutal, and I sympathise totally with my colleagues who are in venture capital. I think the ones who are great at it, have really earned it, because it’s a very hard business to know whether you're doing a good job.
But on the other hand, speaking as an entrepreneur, VCs have a portfolio of many companies, entrepreneurs have a portfolio generally of one company at a time. So the strategies that actually make sense for VCs may not necessarily make sense for entrepreneurs. As entrepreneurs, we need to be talking about what can we do to maximise our own chances of success.
Which means meeting and sharing, rather than always competing.
That is a core part of the DNA of Silicon Valley. What’s cool is that thanks to the internet, people are talking about failure and startup techniques much more widely internationally than ever before.
So a thing that has surprised me most of all the things that have happened as a result of this whole lean startup movement, is the number of lean startup meetups that are being created. I was very pleased that this happened in San Francisco; I was completely blown away to see it happen in 25 more cities around the world. I see a lot of momentum there, creating space for people to get together for the exclusive purpose of getting better at what we do. Most professions have that, but we’re not used to thinking about entrepreneurship as a profession, as an industry unto itself.
We think of a startup as a little baby entrant into its new industry, but the people in those industries don't consider the startups to be in their industry—they've never heard of them, they don't care. So I think we have to start thinking about entrepreneurship as an industry, with its own set of best practices.
Idealog has been covering the most interesting people, businesses and issues from the fields of innovation, design, technology and urban development for over 12 years. And we're asking for your support so we can keep telling those stories, inspire more entrepreneurs to start their own businesses and keep pushing New Zealand forward. Give over $5 a month and you will not only be supporting New Zealand innovation, but you’ll also receive a print subscription, an Idealog t-shirt and a copy of the new book by David Downs and Dr. Michelle Dickinson, No. 8 Recharged (while stocks last).