Yes. Great question. We recently wrote a book called “The Lean Enterprise” and I have been working with corporations now for a few years, helping them bring Lean Startup internally and I wrote this book which combines my frustrations and my research and a little bit of a manifesto for what I hope corporations can do and what they should do in their best interest to unlock greater innovation. Really, the idea of the Lean enterprise is the idea of a company that can outlive itself by reinventing, by reinvention and inventing new businesses.
Todd's full question: So now, when you got started with Lean Startup Machine, that was not the case. I mean, at least the focus of the Lean Startup machine is different. So, how did you get from doing Lean Startup Machine events - maybe you will tell us a little bit about how those work - and then how does that evolve into the enterprise?
Sure. My original goal with Lean Startup Machine was to just better myself as an entrepreneur. Before the Lean Startup movement came about, I had started companies that had failed - now famous because I talked about it so much is the Scooter Company. I kind of got sucked into it. I guess I found my guiding light in life has been about transformation – when I was an athlete I used to suck and I trained really hard to become good and I think that I have been able to do that in athletics and academics and then in entrepreneurship and I think entrepreneurship is the ultimate form of individual transformation. We started getting a lot of interest from corporations after growing LSM. The original direction of it was to build a business, that's what I wanted to do.
I wanted to help a lot of people and I had reached a point where I considered ”Hey, this thing is growing and where is it going to go? Maybe we should sell this. I can move on to the next venture” but I got a lot of interest from corporations and I found that companies really really needed this. So, naturally, I think that the biggest opportunity and probably the biggest opportunity in the next decade in business is going to be corporate reinvention and innovation. So, that was kind of my inspiration for taking these entrepreneurial lessons and bringing them inside big companies. I think that it may seem illogical, but I think it is perfectly logical where companies are today, that they want to understand how to apply these principles that Startups have been successful at.
4. [...] What do you think actually prohibits them from doing that?
Todd's full question: One of the things you talked about in your talk here at the conference is that we see that at LSM you see a lot of entrepreneurs come out and they validate and validate ideas. They make progress. They can't seem to replicate this inside the enterprise. What do you think actually prohibits them from doing that?
There are so many problems and one of the biggest ones I try to focus on is just the idea of giving entrepreneurial-minded employees, the independence, autonomy and upside to innovate because innovators and entrepreneurs are not motivated by the typical rewards that are given to employees. Entrepreneurs are really motivated by a sense of ownership, a sense of equity and the opportunity to build something extremely big and profit from it immensely. So, employees are definitely motivated by financial gain, probably more so in the short term than entrepreneurs are, but entrepreneurs want to build an incredible amount of wealth for themselves and corporations are not comfortable with that. They think that they have all the resources and have all the scale and so they think that they are in a position of power, but the truth is that in the early stage of venture creation corporations offer very little value because learning is the most valuable resource when it comes to early stage innovation and that is something that it takes an individual to persist through and to figure out. A very small team can get to product market fit and build a business that can be very scalable and once that happens, that is when the corporation comes in.
5. If somebody were, say, of the entrepreneurial mind inside a corporation, what typically happens?
I think they waste a lot of time trying to convince people that they should be given an opportunity and generally, they are forced to think incrementally. Companies have a tremendous amount of inertia and so, executives are always thinking one step ahead when the company that is going to disrupt them is really ten steps ahead. So, there is a fundamental issue of bureaucracy that slows entrepreneurs down. There is politics that prevent them from building anything meaningful because no business unit wants to cannibalize its own sales. So, any innovative project that could potentially threaten them, they are going to want to have killed. So, it is a very hostile environment for someone who tries to introduce disruptive products, if you're trying to do it in the context of corporation.
Todd: Now you took the LSM Workshop and maybe you describe to us a bit how that works. You started off taking that and bringing them into corporations. Describe how the workshop works and then I am really curious to find out what happened when it set foot in the corporation.
It is a little bit different then the LSM public workshops. People are coming to this training because their boss told them to. They might have an idea - actually a lot of them are very very creative people - and they go out and do customer development and usually, when an entrepreneur goes into customer development they come back and the they are very sad because they realize that nobody wants their idea. So, it creates a sense of depression, but when an employee goes out and they have an idea that maybe their boss gave them and they come back and say there is no use for this, they actually get really pissed and so what I do when I work inside corporations is at the end of the first day or at the end of the Saturday portion of it, entrepreneurs were very down in the dumps, they'll be depressed and you would have to pat them on the back and say it is going to be OK and say we can come back tomorrow and figure this out.
Corporations and employees, they get heated and they have a ton of cognitive dissonance and I have almost been thrown out of corporations because they are trying to make sense of what is happening and how is it that I could get this invalidated in the first try we put so much effort in and had so many meetings around this project and yet nobody cares about this. So, it creates a lot of cognitive dissonance but people end up making the same connection in their mind about why this is important and so we have had a lot of success. It is a very disruptive training inside corporations, but it is what – you know, when people are learning Lean Startup you just can’t read the book and understand it. There is something about going through the experience that adds context to it that makes it so that you could understand it. No matter how many times I have tried to explain Lean Startup to people, it does not work. People are going to either say “Oh, that is obvious” or they just don’t quite understand what is means to have something you are very passionate about and then have to pivot, right?
The biggest frustration with me and with working in corporations has been these incremental innovations and corporations are very – I guess they are just like entrepreneurs. They tend to be solution-focused early on. I worked with companies and they said: “Oh, I want to build this thing and help us validate it”. I always say “Well, what problem are you solving?” and just like entrepreneurs, they have a hard time coming up with the problem. The issue with corporations is that they do not have – these intrepreneurs – they do not have the autonomy to then change direction.
When I work with corporations, it takes a very long time to get anything done and it is just something as someone who is an entrepreneur and wants and my ultimate aspiration is to help corporations build really successful products. It is something I just can’t put up with and we worked with corporations where – you know, at the LSM, the first experiment is done in two hours and when we work with a corporation and we are working with them on an actual project, it will take them three weeks to run that first experiment. So, the pace at which things happen is just so much slower and when you are trying to launch a new product in an environment of uncertainty it is too slow for there to be any chance of success.
7. Then, what were some of the discoveries that you made and where are you now with working with them?
It was a very conscious decision of mine not to be complacent with what corporations want to do and if you read my book, it is very, almost anti-corporations. I really try to make them realize that the way they want to do things, it will not work. And so, I could of said “Hey, this is fine. I will just collect, keep billing them and I am happy to wait three weeks because I will get billed for three weeks” But knowing that this will never lead to anything meaningful, I could not reconcile with myself.
That is part of the genesis of the book and today, we are trying to focus on helping companies to establish what we call an innovation colony. There are really two parts, two ideas to how companies can innovate in a way that is repeatable. So, anyone who moves to the Startup world knows that large sample sizes are needed to have the success so, in venture capital, there is one company out of ten that delivers all the returns. It is also called the the power law of returns Ycombinator and when you go to early stages actually the numbers increase, so Ycombinator has close to 1,000 companies they invested in and Drop Box is really the only breakthrough success and it is worth more than all the other companies combined.
So, that is the first element, it is what we call innovation flow. So if you are a big company really you need to have enough ideas flowing that you can have enough deal flow, like a venture capitalist needs deal flow, to have some of the better ideas rise up and invest in and develop. Too many companies select from a small sample size of ideas and it is just that you need a large sample size to ever have a hit. The other thing is called an innovation colony. An innovation colony is once we have enough innovation flow, how do we take these ideas and actually develop them, after the initial validation, because companies have very effective ways of getting people to come up with new ideas through unstructured time, hackathons, 20% time. These are incredible tools used by Intuit and Google and tons of companies Atlassian and to come up with breakthrough ideas.
The problem is how do we develop them while avoiding the bureaucracy and the politics and give our employees the incentive they need to do it inside the company as opposed to just waiting until they are going to quit and do it on their own. So, the innovation colony is the idea that we are creating an early stage fund where the employees are allowed to take that idea, form their own separate company and we are the first investor and so they are going to have majority of the equity and we are going to take a piece of that. Now, the entrepreneurs, the employees who are now entrepreneurs, literally they are now entrepreneurs, are allowed to allocate the funding however they want, just like any entrepreneur would.
If they want to run it with money, that would hurt their reputation significantly and probably prevent them from ever getting a job or raising funding from someone else. They are also allowed to raise money from outside investors because as someone who is going to start something, if I am Evan Spiegel, the founder of Snapchat and I am working on an SMS network at Intuit, which is actually what he did before he started Snapchat. I can leave and I have plenty of angel investors outside of Intuit which will fund my business or I could stay. In order for me to stay, those terms had better be very entrepreneurial friendly so what I want as an entrepreneur is not to be at the mercy of any type of politics. So, if I run out of runway and I have a lot of traction and I deserve from a market prospective to be able to raise more capital, if you are my only source of capital and I am competitive with an internal business unit, I do not want to be screwed over.
So, that is why we allow the employees who are now entrepreneurs to raise money from outside investors. The side benefit of that is what happened in Microsoft’s innovation colony where the team got a 5 million dollar term sheet and Microsoft said “Hey, I can’t believe this is worth 5 million dollars. We would have never known that and we want this so we are going to buy it out with 5 million dollars”. So, corporations do not have these structures internally to value these projects or employees appropriately whereas the external market is efficient in that sense and so it creates a synergy between internal innovation by pairing it with the outside entrepreneurial ecosystem.
Yes. There are about 50 companies that have gone through innovation colonies that we know about today and 75% of them either are acquired back or raised additional capital. So, the fact that you give these teams much more autonomy gives them the ability to be more successful and successful in their own terms.
First of all, we go over Lean Startup on a very tactical level from our experience with Lean Startup Machine. I think that we do this better than anybody else and we try to expand upon the process of Lean by also going to the strategies that companies need to think about and the structures. Innovation colonies fall in the category of structures. Under the strategies, we talk about some of the patterns that we see in the Startup community, about how Startups are smaller than ever before. Instagram had only 12 people and was bought by Facebook for 12 million dollars, Snapchat had 35 people, WhatsApp had 55 people and was valued at 19 billion dollars. So we are seeing that small teams can get a lot more done than ever before.
We are seeing that a lot of these markets are winner–take-all because of network effects of the Internet and we are also seeing that speed is really the key advantage because whenever a company like Facebook has tried to copy a company like say Four Square, remember they tried to introduce places, they also tried to kill Snapchat by introducing Poke. Facebook has immense scale, they have more scale than any big company thinks that they have some advantage and Facebook could not beat these companies because they already had product market fit and they were there first and they got those incredibly valuable early adopters that connected them to the mass market. So, if you are not first in this kind of world and you do not maintain product market fit, it is very difficult to compete. So, the book goes over all those things and I also interviewed some of the leading corporate innovators today, like George Kliavkoff from Hearst, Stephen Liguori from General Electric and Hugh Molotsi from Intuit. I have knocked down doors to find the best innovators today and get their thoughts on innovation and put that in the book for people.
We are developing software and you may have heard that we have raised a round of funding recently and so our vision is really to create the Lean Startup project management tool of the next decade. We have a good start with the traction of the experiment board. It is a really hard process to build software, it takes a long time to build an enterprise company and so this book is hopefully going to pave the way because, for us, the biggest obstacle to our success is the competency of corporations and their ability to innovate. So, if corporations do not understand these things on the philosophical level, we will never be able to be successful for years.
12. What do you see as your biggest challenge in that right now?
No, I think that is the challenge. That was really the genesis for writing the book: if we cannot get corporations to realize how to think like Startups – actually, some of these Silicon Valley – people believe there are two types of companies right now: there are the Silicon Valley companies, they are software at the heart, there are these old world companies in New York which are all my friends and I have had executives that still did not, their companies would be like “Don’t work with a company that is going to go out of business” and I really hope that these companies are able to reinvent themselves. We could play it multiple ways. We could see this constant creative destruction where – and actually almost every company dies. There is very few companies – General Electric is one of the oldest companies and the average age of companies at S&P500 has dropped dramatically, off a cliff almost. So the question really is: “Is the future going to be this constant cycle of creative destruction or will we be able to create a company that can last, that can withstand time, essentially”
Great. Thank you very much for this.
Thanks Todd.
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