In Eric Ries’ new book, he tells companies to turn every unit into a cash-strapped ‘startup’

All companies are startups until they aren’t. Many struggle to find their way back, too. It’s not the days of constrained resources or terrible pay or the heart-stopping uncertainty that they’re missing, of course. Instead, the problem is that it’s a lot harder to implement change at an “established” organization, particularly one that’s making money. Yet the smartest companies know change is crucial. As journalist Alan Deutschman wrote a dozen years ago, including in a book of the same title: “Change or die.”

Because that’s easier said than done, CEOs are always seeking out new ideas. Enter the brand-new book of engineer and entrepreneur Eric Ries, whose last tome, The Lean Startup, became an instant best-seller when it was first published in 2011.

In his latest effort, The Startup Way, Ries says the way to stay on top can be traced to two things: treating employees like customers, and treating business units like startups — replete with their own constrained budgets, and even their own boards. Ries offers fairly concrete suggestions regarding how to implement both, too. “A lot of people write manifestos and basically say, ‘Do what I say,’” says Ries. “I try to get away from that. The details matter a lot.”

We caught up with Ries earlier today to learn more about the book, which will be available to buy beginning Tuesday.

TC: You established a name for yourself with The Lean Startup, which basically told founders to get a minimally viable product into the market, then fix it. Can founders still do that in an age where big companies are getting bigger and moving faster to either copy products, or else acquire their teams?

ER:  People said that years ago about Microsoft, too, that it was going to dominate the internet with its monopoly power. Disruption still brings new power players to the fore. But today, because Facebook and Amazon and Google are so good at what they do, startups do need to up their game. There was a time when you had one innovation that you could ride for decades. That’s over. Continuous reinvention is crucial now. Otherwise, you’re toast.

TC: What about the giant financing rounds of today, even at the seed stage — do they signal the death of the so-called lean startup? 

ER: “Lean” never referred to the size of a round. It’s about lean manufacturing and using resources more effectively. Also, huge rounds are really for the privileged few. I’m in Columbus right now, and [local startups] aren’t experiencing the jumbo seed round.

I will say that one commonality that Silicon Valley has with corporate innovation is that we often overfund things, which can be just as lethal as underfunding them.

TC: How did you move from advocating for lean startups to writing this new book? 

ER: When a lot of small early founders heard about the lean startup, they were excited about minimal viable products and about pivoting and learning, but they didn’t pay close attention to more boring parts like management and the need to do continuous innovation. In some cases, as these companies passed 100 employees, or even 1,000, they’d ask me to come help teach lean startups to people who work for them. You go from the person who is making innovation decisions, to supporting entrepreneurs who work for you, and they might not be as good as you or you’d be working for them.

These were my friends and I was happy to help them. At the same time, big companies were asking how they could recapture their innovative DNA and I realized how similar these issues are and thought it was worth exploring.

TC: Obviously, the need to innovate continuously isn’t a new concept. How is your advice to companies different? Is this about pulling in opinions and ideas from a more diverse group of people, either internally or externally?

ER: I’m a big believer in that thesis — diversity. But in this book, I tend to focus on structural changes: who gets promoted, how we make product decisions, the general accountability layer of a company. [In other words] how do you figure out who is doing a good job and who isn’t? Because there’s a lot of B.S. at the higher levels otherwise that distorts the decisions that are made and consequently makes it hard to attract top talent.

TC: Give us some concrete examples. Who in Silicon Valley was doing this wrong and figured it out?

ER: I talk in the book about Twilio and Dropbox and Airbnb; they all had to go through a metamorphosis to empower their internal innovators.

Dropbox, for example, had some failures and was willing to admit that some products didn’t work. Some of its product development was happening internally and some externally, but it doesn’t matter if you plant in the wrong soil. But it has since developed a much better process that looks more closer to entrepreneurship.

TC: By doing what differently?

ER: You first have to look at whether you’re treating the people who work for you like entrepreneurs or something different; if you’re expecting your product managers to achieve instantaneous success, that’s not [the standard] to which you were held in the early stages of your company.

Along the same lines, if you aren’t [giving teams] clear, metered funding, how are they going to have that scarcity? It’s that mindset, that hunger, that let’s you say “no,” [to dawdling]. [Companies have to fight] that entitlement funding because the more money you have, the less you want to expose yourself to risk.

TC: Interesting idea. How else do you recommend that companies treat their teams like startups?

ER: We also talk about creating a growth board.

Right now, most corporate employees exist in a matrix management structure, reporting to different people and having lots of different managers who have veto power over what they do. But each time a middle manager checks in, he or she exerts a gravitation influence, and most product mangers who I meet with say they spend 50 percent of their time defending their existing budget against middle manager inquiries. That’s a massive tax on most product teams.

So we treat [these units] like a startup and create a board of [say] five execs who they report to infrequently. That way, if any middle manager has a concern, [the head of that unit] can say, “Talk to the board.”  It’s like at [ venture firm] Andreessen Horowitz. It has something like 150 employees [yet] not every person who works there gets to call a portfolio company founder. Not every limited partner who has invested in Andreessen Horowitz gets to call its founders. There are well-defined processes in place so that founders [aren’t fielding calls all day.]

TC: Of course, the downside to that is that VCs often don’t know when things go off the rails at startups. How do you convince executives that they aren’t running that risk by giving these teams so much autonomy?

ER: It only works if you do limited liability experiments. Often asking, “What’s the worst that could happen?” is like a death sentence, but you have to think through the possible downsides to mitigate them. So you only let 100 people buy the product [at the outset] and add in extra provisions and securities to ensure they have a great experience and you’re smart about the liabilities.

TC: Say that works. What happens to the already oft-maligned middle managers of the world? 

ER: There haven’t been any layoffs at the companies I’ve worked with. Companies still have to run their core business; there’s plenty for [middle managers to do] Most are horrifically overworked. Others become reborn as entrepreneurs and entrepreneurial coaches. Intuit and GE have a whole program for coaching and mentoring, and that becomes part of [managers’] job description.

This all culminates in preparing a new org chart, one that treats entrepreneurship like a corporate function that’s owned and managed. Right now, if you ask [many executives], “Who is in charge of the next big innovation,” they’ll sometimes say that everyone is in charge of it. Can you imagine if they said that everyone is in charge of marketing or finance or HR? Entrepreneurship is no different. Someone should have operational responsibility for it.

TC: Do you run into much resistance when you talk with CEOs about empowering employees in this way? It’s easy to imagine that some feel threatened, even as they know their companies need to keep innovating.

ER: What distinguishes really good CEOs is that they care about their legacy, and they’re committed to the long-term health of their organization.

But you’re right. Most CEO are not serious about change because it requires senior managers to change their behavior. You know how corporate bosses can be. This is not always a very welcome method. I’ve been kicked out of plenty of boardrooms.