Now the experimentation begins. Build, measure, learn—on that cadence. What do we need to do to push that 2 percent customer signup rate closer to 10 percent? Every basis point improvement in that metric is worth a defined amount of money five years from now. At 0 percent, this business is worth zero dollars. At 10 percent, it’s worth $100 million. This is still a hypothesis at the far end, but we are taking the first step to test it.
With the very first learning milestone, you show quantitatively that learning is worth something to the company if all the other assumptions check out. But right now, you are only concerned with testing the first assumption. You will gradually test all the assumptions in the spreadsheet. As you do, you build a more accurate model of what the business is really worth.
S+B: You said you can’t suddenly drop this approach into a large, multibillion-dollar global organization; the shock to the system is too great. What conditions are required to make this work?
RIES: First, we need a general theory of management. It would recognize that what we used to call general management and what I’ve been calling entrepreneurial management are both particular cases. A general theory would encompass both forms of management, and in fact modern companies must. I think it’s an existential imperative. If you are not an innovation factory, you will be replaced by someone who is.
I think modern management will look a lot like portfolio theory. You wouldn’t put a guy who manages equities in charge of a bond fund and vice versa. Your high-risk, high-reward entrepreneurs need to be managed differently, to a different set of metrics and a different system than the conservative operational people who are running your existing products.
The problem is that in finance, equities never become bonds. They’re separate assets. But successful entrepreneurial products grow up to become established products. Under the old system, the people who launch a product tend to migrate with it. That causes a lot of problems because the skills and at-titudes that make for effective entrepreneurs don’t necessarily make for effective managers of status quo operations.
I believe a general theory of management is emerging. It has to help people understand (1) how you take an idea, how you get it started, and how you manage the kind of people who do that well; (2) how you incorporate experiments into your core strategy; (3) how you graduate a new thing that’s been successful into your general business operations and manage it as a mature product; and (4) how you manage a product’s end-of-life, where you have to outsource and reduce costs. I think of those as the four quadrants of the portfolio.
S+B: What does this do to our traditional beliefs about corporate culture?
RIES: First, as we’ve discussed, you have to change the way you hold people accountable: Change the accounting systems and metrics. Then you need to allow teams to self-organize around this new way of launching ventures—around building and testing minimum viable products, managing pivots, and so on.
I guarantee you these teams will produce a more innovative culture, and that culture will allow you to attract and retain the best people in those teams.
The great thing about startups is that if they’re successful, they grow. You don’t have to change the whole corporate culture. You have to create a space where a new culture can be piloted and grow.
In the portfolio approach, it’s not important for every part of the company to have precisely the same culture. But certain common elements will cross the full organization.