Watch Eric Ries Discuss "The Lean Startup"

so for those of you don't know me I'm Daniel Defoe I'm the co CEO of ripple I did my MBA in a JD JD here at the University of Toronto and at the Robbins school I'm a friend of the Dean of the school and I'm happy to have him actually on our board a ripple and I suggested that we invite Eric Ruiz to come speak here and I've been reading Eric stuff for years he's got a fantastic blog and been lucky to sort of know a few people in common actually our designer who he introduced us to helped to design that book cover and I'm really excited that we've got someone of this caliber to come to speak about entrepreneurship here so thanks for coming you're all in for a real treat please take a moment to turn off all your wireless devices they interfere with the technology that's installed in this room ok I didn't know that turn this off here I was really thrilled when Eric accepted our invitation to fly up here from San Francisco to to come and so that we have as much time as possible to hear Eric I'll keep this really brief Eric is an entrepreneur and the author of a popular blog called startup lessons learned he co-founded and served as the CTO of in view his third startup he is a frequent guest speaker at business events has advised a number of startups large companies and venture capital firms on business and product strategy and he is the entrepreneur in residence at Harvard Business School his Lean Startup methodology has been written about in the New York Times Wall Street Journal HBR and many blogs and talked about constantly in the valley I'd say and last week's Random House published his book which is fantastic the Lean Startup how today's entrepreneurs use continuous innovation to create radically successful businesses please join me in welcoming Eric Ruiz to the Robin School Wow there's so many of you thank you for being here I appreciate it I wanted to try an experiment tonight which as a professional expert is kind of risky which is to say to hell with the slides because I'm kind of getting tired of the stump speech and I thought you know let's have a conversation because I don't know anything about Toronto this is my first time here very excited to be in such a mixed audience of students and faculty great entrepreneurs like Daniel and investors I was showing me two lists really from a diverse set of backgrounds I said boy I have an opportunity to learn something tonight if I spend a little bit less time talking a little bit more time listening so I want to invite you to interrupt me with questions at any time obviously we'll do Q&A at the end too and I thought I would just make some remarks and see how it goes so it's like walking without a net you guys okay with that thank you for being beta testers much appreciate it you'll see that's actually what I'm all about let's do some quick round rules I know that it interferes with the technology in the room or whatever but I don't care so if you wouldn't do me do me a favor and take your phones back out again and all mobiles on not off because if you're not connected to the internet I don't understand is that even living I don't really understand why you won't do that yeah nobody can get on the internet but there's there students can get on the internet for sure so if you're sitting next to a Trotman student Rotman students hold your hand up they'll help you look look around look here's the thing you should tweet amongst yourselves even as I'm talking because I don't want your undivided attention because we live in the age of continuous partial attention we should celebrate it so please all I ask is if you're gonna tweet while I'm talking please do that just use the lean startup hashtag and the reason we use at least our hashtag is that there is a global conversation about these ideas happening right now and 24 hours a day seven days a week and I'd like to invite you to be part of it because this is not just me in my book tour it's not just a book that I wrote published by Crown and you know I'm very grateful to the two what that's meant for me the stakes here are a lot higher and a lot more interesting this is a worldwide movement that is trying to change the way new products are built and launched and here's the thing an increasing proportion of our energy as a society is being devoted to the creation of new products and how's that working out how do people feel like it's going anyone feel like it's going extremely well that our new product launches are extremely likely to be successful the customers are always delighted when they get to see a new version of the product how you look excited when their smartphone tells them there's a new version of their operating system or a new version of their favorite app versus how many people have a sense of dread and say oh god what's gonna go wrong this time you know what I'm talking about almost everywhere I go I meet people who work in a company who work on new projects and they know deep down in their heart that the work that they do every day doesn't matter to anybody and I think that is unacceptably unacceptable waste of people's time and energy so that's what the stakes are we think we have an opportunity to do something about that but in order to do that we have to take the practice of entrepreneurship and innovation and try to put it on a more rigorous a more scientific foundation that's our goal and what is known today about entrepreneurship I think is just the tiniest tip of the iceberg such that when people look back on our time decades from now they're gonna laugh at what we consider to be the management of innovation the way we laugh at the fact that early 20th century managers didn't even know how to operate a factory or a global supply chain or a multi division company today we take those things so for granted we can't imagine that those ideas had to be invented but they did so that's what I want to talk about that's why I invite you to be tweeting as much as much as you like plus if I get boring you'll have something to do so my background is in tech entrepreneurship I grew up in programming computers so I thought I would be a computer programmer my whole life one of the happiest days I can remember was when I found out that you could get paid for programming it's like I was thrilled it was like getting paid to play video games because I thought program was something you did simply because it was the most intrinsically enjoyable activity in the world and as I grew up in my professional career I kept having the really exciting experience some of you may be familiar with of building an amazing new technology that nobody's using and so it's sitting on a shelf but it really is technically as excellent as we could make it and I kept trying to find better and better and better technical solutions to that problem I was always convinced if I could just find a better product development methodology a better engineering methodology a more visionary person to follow that would solve my problem and it never did so for example I did a dorm room startup back when I was in college during the dot-com bubble that was my first introduction to entrepreneurship was the social network a big movie here yes do people see it everyone who saw the social network just quick show of hands okay pretty much everybody so I had the first half of the social network experience we got to have we got to work just as hard as those guys we built a product justice revolutionary as those guys in fact we were building a way for college students to build online profiles for the purpose of sharing with employers for the sake of getting a job so so close and yet so far away we work just as hard and our understanding of what entrepreneurship was was just what you see in the movies if you've seen the social network you know that you know the story really well it's Act one the plucky protagonists their character strengths and defects that will be interesting later how they came to be in the right place at the right time how they came up with their brilliant idea and most importantly how they you know inspired their co-workers Envy with their incredible vision their ability to see the future act to which I also got to experience is really short it's what I call the photo montage it's usually like two minutes long it's you know and they social networks I've got pounding on some keyboards and then they're writing on those cool markers on the window remember that scene I really like that effect we just did that too that's what it's like when you're in a dorm obviously fancy markers and then you know you just drink some beer you get your first customer and whatever we move over that part there's no dialogue in the photo montage we get right to act three which is the only thing people really care about which is how rich are we going to get how do we divide up the spoil to Sue's who etc like I said I got to experience acts 1 and 2 but we never never quite got to act 3 so what was our understanding of what entrepreneurship is it's step one great product great team step two dot dot dot step three cover of magazines and we really believed that was gonna happen and when it didn't I felt really betrayed I was like well how come we worked so hard and in the movies the plucky protagonists right when they get down to their last dollar and things seem most grim is when the customers finally arrived to save the day you don't talking about my all-time favorite entrepreneurship movie is actually not the social network but Ghostbusters who's seen Ghostbusters so you'll remember that Ghostbusters is not a movie primarily about ghosts it's mostly about business you got these guys in a university setting they come up with this radical new technology so advanced and visionary that they get kicked out they have to go start a business so they mortgage their houses they build this cool building they get the car they do the TV ad they get a technology working they basically do everything relating to the technology they get it working and then there they're literally down to their last dollar when just like it always happens in the movies boom incomes their first customer who remembers why the customer came in on that that very fateful day luckily it's because that happens to be the day that Zul is invading Manhattan with his army of ghosts secret kazoo all had such a good timing think about it if Zul invades Manhattan a year earlier or a year later no Ghostbusters no Manhattan most of the entrepreneurs I know incidentally are busy waiting for Zul that was me I figured it was things get difficult we get down to our last dollar that's when everything will start to work out and our customers will appear and you can imagine how disappointed I was that it doesn't happen like that in real life in real life when you get down to your last dollar what follows is your zero with dollar and that's the end but we never make movies about those people so we don't see their stories so that was my introduction my very rough introduction to entrepreneurship and that was the fate of most of the companies that I have been involved with so I know when you're a professional expert you're not supposed to get up in front of a big audience and say hi everybody most of my startups have failed and if you follow me you too can have your startups fail wooden that'd be great but anybody who is telling you the truth about entrepreneurship and not trying to sell you something will admit that there is incredible failure that precedes every entrepreneurial success and that was that was my experience too and the reason I believe is that we are following this three act play as if it was a business plan rather than a myth designed to sell movies and magazines why is it that the photo montage has no dialogue in it everyone ever thought about this the photo montage is over it before it even begins and I believe the reason has no dialogue because it's way too boring think about what's actually happening in the photo montage it's things like product prioritization meetings does that make a good movie think about the last product prioritization meeting you were in would you like to have cameras there well you know would you be able to sell tickets and go on for hours and reach no definitive conclusion that's not very good not very entertaining right deciding which customers to listen to and which ones to ignore one of my favorite activities arguing with your co-founders about which features absolutely have to be in v1 and which you could live without which bugs absolutely have to be fixed in which ones you can live with deciding fundamentally whether it's time to pivot to a new strategy or whether we should persevere and keep going those are probably the most boring the most tedious conversations known to man so they can't make it into the movie they're too boring but my discovery in working on this thing called a Lean Startup is that every decision of consequence that impacts the success of startups happens during the photo montage and it's boring okay right now we're living in this moment especially in the states where entrepreneurship is cool all of a sudden and you know everyone wants to do it and it's in the popular media all the time and listen that's great for me because I sell a lot more books that way because everyone wants to be cool be an entrepreneur I'm all for that but those of you who've been in startups know the truth which is entrepreneurship is not cool and it never should be considered cool it is hard boring tedious and excruciatingly ly difficult Plus humiliatingly embarrassing because you're constantly failing in public whereas that's not how it's supposed to be so we need to make entrepreneurship more boring and less cool so if that is disappointing to anybody you know you feel free to leave or cuz I'd be on your device that's no problem but that's what I want to talk about I want to talk about two ideas about entrepreneurship that I hope will put you to sleep when you hear what the topics are already topic number one management topic number two accounting what could be more boring than that so get ready here we go what is a start-up really when I first started working on this thing called the Lean Startup I wanted to have a definition of a startup that we could use as a platform for building this new science of entrepreneurship and so here's the definition I came up with a startup is a human institution designed to create something new under conditions of extreme uncertain and the first time I said that out loud I was a little bit nervous because I added a little PostScript I said you know there's something funny about that definition it doesn't really say anything about how big your company is or what industry you work in or what sector of the economy it just says you're trying to do organization building under conditions of uncertainty so in theory these principles these Lean Startup principle should be applicable even to entrepreneurs who work inside big companies or government or nonprofits and I was nervous because I had no idea what I was talking about I had no idea if that was true it was just a consequence of the theory and yet from that very first time talking from the very first audience people have come up to me afterwards who you wouldn't normally recognize as an entrepreneur they don't live in a garage they don't eat ramen noodles they have a real office they have decent benefits in America they even have health care it's very exciting but they're still entrepreneurs it's just they happen to work for a big company they have all the hallmarks of a great entrepreneur industry has to change they have the mandate to make a new product that will help their company adapt or die it's just they happen to work in a regular building and they used to come up to me and say okay I've got all the entrepreneurial prerequisites nailed if you read a book like the innovators dilemma or the innovators solution by clay Christensen one of my heroes it will tell you all of the prerequisites structures you need to support innovation an independent P&L statement the correct divisional Authority the right kinds of people you know they'll get the right people on the bus and everybody else off it's like you create this black box around the innovation and then you say okay now go to it and I kept meeting managers who lived inside the black box they'd be like okay I'm in the black box what the heck do I actually do every day my team all who have been trained in regular general management they don't know what to do so can you give me some guidance and that's what we started to do with Lean Startup is recognize that these tools are important for anyone who is engaged in what I call entrepreneurial management the management discipline that deals specifically with situations of high uncertainty the idea of management is exactly 100 years old this so happy birthday management it is your 100th anniversary in 1911 a guy named Frederick Winslow Taylor published a book called the principles of scientific management which is really the first book of its kind to attempt to address the process of work in a scientific way and if you've ever read a book from that time to us they're actually hilarious the things that Taylor invented are to us so obvious we absolutely cannot believe they had to be invented I mean try to imagine a polemic arguing for the proposition that work should be done as efficiently as possible stunning my favorite he has a whole long section advocating for what he called the task plus bonus system and get this this is crazy if you have a big project to be done the right way to go about it is to have a manager decompose it into a series of tasks hand those tasks off to functional specialists who do that tasks over and over again and then here's the best part I love this if the person finds a way to do their task better than expected they should be paid a bonus rather than being penalized can you imagine such a crazy system think to yourself who is he arguing against that doesn't think that's the right way work should be done well if you read and he will then take the counter arguments one by one in the most prevailing counter argument from the 19th century was if somebody found a way to do work better what do you know about that person you know that they're a person of low moral character why because why weren't they doing it better yesterday all this time they've been doing it the old ways obviously shirking their duty when they could have been doing it faster it gets even better what do we know about their co-workers who are still doing it the old way every single one of them is of low moral character they should all be penalized you imagine that collective punishment for productivity improvements imagine that kind of workforce those of you who do not have to do much imagining we still manage knowledge workers the exact same way using a very 19th century theory of work which is all about finding the great men and just turning them loose to do whatever we don't really believe in our hearts that innovation can be managed scientifically I want to try to convince you otherwise I think if fred taylor was alive today he would laugh and what constitutes our management of innovators and entrepreneurs so that's my claim entrepreneurship is management just not the general management of fred taylor the unit of progress of that new entrepreneurial management is something I call validated learning this is really at the crux of what the Lean Startup is all about we have been trained in the 20th century to focus our energy hyper acutely on trying to get our workplace to run as efficiently as possible and the definition of that efficiency is making the most high-quality stuff as efficiently as possible so any of us who are trained as engineers we've been trained to look at a specification document and figure out how do I achieve this specification at minimum effort does that sound right and if I'm an engineer who comes to you and says listen I found a way to achieve that same spec at you know 80% of the cost you're gonna give me a huge promotion if you be so excited I save you 20% of the time here's my question for this definition of progress if we as entrepreneurs are building something that nobody wants why are we proud of having done it on time and on budget that's fundamentally the problem that we face as entrepreneurs more often than not we are simply building the wrong things extremely efficiently so I have this image of us driving a car off a cliff but we're bragging about the gas mileage it's like we're very efficient efficient efficient as we go right off the cliff and crash that's the fundamental problem daniel mentioned that i started a company called in view and in few was a 3d avatar social networking company but we didn't know it at the time we thought it was a 3d avatar instant messaging company because it was 2004 in our aspiration was trying to become the next AOL back when that was still cool and so we built this 3d avatar instant messaging program now where does a business school so let's talk corporate strategy for a second you're building a new instant messaging program what do we know strategically about instant messaging first thing we know is that instant messaging is a network effects business you get been taught that already network effects not along Network effects means the value of the whole now work increases with the square of the number of participants so if you're the only person in the world with a telephone not very useful if everybody has a telephone super useful makes sense everyone in 2004 already had an instant messaging client they were already locked into some platform so what else do you know we know that instant messaging has high switching costs because if you want to bring a new eye on network to market you have to get people to switch away and bring all their friends with them to your new network does that make sense therefore and like proper MBAs we said instant messaging is a business with high barriers to entry therefore we cannot build an instant messaging client making sense so far so we had a strategic brilliance check this out here is our idea we would make an instant messaging add-on that would interoperate with all of the existing clients so that you wouldn't have to switch to a new program that make sense does that seem like a good idea and here's the best part it would cause our product to spread virally through the existing networks like an epidemic because in order to use the product you would click a button to say go 3d of my conversation and we would send a link directly to your partner inviting them to download in view - and so every time you want to use the product it's inherently viral who thinks that's a good idea it sounds good right we've got some students of business strategy I can see cuz they're nodding along like yeah makes sense I find out in michael Porter's textbook somewhere it says do exactly this there's a tiny flaw with the strategy in reality which is that every single thing I just said isn't true it sounds good sounds good by the way are the two most dangerous words in entrepreneurship sounds good seems like it should work let me tell you a little anecdote though I found out the hard way we shipped this product in about six months took us to build it and I guess I should explain those of you who are engineers will know the saying time quality money pick two people familiar with that that's engineering speak for if you rush me I'm gonna produce a crappy product and so we only had six months and not very much money and we said we were gonna put this product out in the market so help us God we're gonna do it and so we shipped a product after six months that was frankly terrible and I'm not trying to I'm not trying to do any kind of sugarcoating of this this is a product that would be more likely to crash your computer then it would be to give you a delightful fruity avatar experience so I was very nervous I was the chief technology officer after all so what's my job to make sure we put out high quality technology so I wasn't exactly thrilled with the prospect of putting out something that would crash people's computer I had this image in my mind you know some enterprising reporter would see our thing after we shipped it they'd write an article idiot said I envy you don't know what quality software means and that would be the end of my career I had this picture of like a mug shot you know in the engineer's Hall of infamy but we did it anyway and at first I was actually relieved because nobody would even try the product so at least nobody found out how bad it was right I was like well dodged a bullet there and that was like wait a minute what did I just spend the last six months of my life doing and to make a long story short we tried and tried and tried to get customers to download this product and after running out of trying everything we can think of we finally resorted to that absolute last resort which is talking to customers we said all right let's find out what's going on here and I want you to imagine this for a second here is a you know young person excited about our new 3d avatar thing we bring them into our office have a focus group and we would say okay customer try this new instant messaging add-on and they would say what is that it's an instant messaging add-on interoperates with all your thing and they're like what is that I don't know what an instant messaging add-on is that's not a category that means anything to me is it an IM client or not it would be like sort of but it interoperates to avoid the network effects and the switching cost you got a picture like a 17 year old being like what are you talking about and basically like well you've had this argument constant we'd be like listen we're paying you to be here in this usability test so you will download this thing and they do it fine that's never a good sign to begin with we'd force him to do it and they download and they love the 3d avatar and they love customizing their avatar and they would check it out ooh this is so fun and then we would say okay time for the strategic brilliance time to invite one of your friends they were like no thanks I decline why I don't know if this thing is cool yet and so I'm not going to invite one of my friends just something that might be lame because I'm not gonna think I'm lame and we're like no but it'll be so fun once you invite one of your friends and then she's like looking at us total deal-breaker and we tried that trick again me like no we're paying you to be here so you're gonna do it and I kid you not most customers were like I'll give you your money back because like in the definition of mission-critical product for a teenager is right there in the dictionary it says do not make me look stupid in front of my friends so those of you who work in enterprise software I think only you have mission-critical products Oh contraire our customers cared a lot about that it was a complete deal-breaker we could not convince them to do this behavior they kept saying let me just try it myself first to see if it's cool and then I'll invite one of my friends and we were from the video game industry and we knew exactly what that meant it meant single player mode so yes we then proceeded to build single player mode version of a social communication product it seemed like a really good idea at the time see here's the thing we thought we should get a gold star bonus points because we were listening to customers and aren't you supposed to listen to customers right Rob here's what happened bring the customer in pay them to download the damn thing again have them install the software they love the avatar be they okay they would try it by themselves they'd see all the cool things our avatar could do and we would say okay now invite one of your friends they'd be like no thanks why not this thing isn't cool and we're like what we told you it wasn't gonna be cool you made us build this feature and the whole thing because remember we're like you told us what to do what we did it so shouldn't we where's our gold star but guess what an entrepreneurship there's no gold stars you'd never get an award and you never get promoted all you do is survive to face the next challenge that's the highest praise you can get others like survive or die that's it so to make this long story short we had to pivot and a pivot just for those who are not familiar with the most overused buzzword of 2011 a pivot is a change in strategy without a change in vision and it was pretty painful and I want you to sympathize with me personally for a second if you would guess who wrote the software that had to get thrown away as a result of the pivot now that would be me I wrote thousands and thousands of lines of the most elegant the best architected the most well factored and just frankly beautiful software that has ever been written in all time and I did it using all the latest product development techniques agile what they call Extreme Pro gramming so it was well factored and continuous integration and unit test for all that people who understand what I'm talking about we really did it to the T and it still got thrown out and I was pretty upset because agile development is supposed to help us eliminate waste in product development and here I was committing the biggest waste of all building something that nobody wants and I kind of felt like gee did I even have to be here the last six months if all my work got thrown away couldn't I have been on a beach somewhere you know how a vacation while my co-founders found out this horrible thing and then they bring me in later and those of you who have been managers or entrepreneurs will know the excuse that I used to feel better which was well know I had to be there it was important people see where I'm going if I hadn't been there we wouldn't have learned this important thing that namely what customers don't want their Ford executed this excuse me this pivot incidentally managers who claim to have learned something are generally on the brink of being fired so this is actually not that fun an excuse to use let me explain if you're a general manager some of you've worked in big companies well no I'm talking about you come to your boss you're like I have really good news I learned something important about what customers don't want because I built this plan I successfully executed it and now I have missed all my targets and but the good news is if you just give me another year and another million dollars it's totally gonna work this time that usually is the last report you will ever give in your company because either it means you didn't make a very good plan in which case you should be fired or even worse it means that you made a good plan and failed to execute it in which case you should be like double fired if that's even possible fire with extreme prejudice and yet in entrepreneurship since we have this extreme uncertainty we always fail our plans never turn out the way that they they're supposed to so what do we do about that I want us to rehabilitate the concept of learning because here's the here's the way my thought process worked it was like wait a minute why am I using learning only now as an excuse to make myself feel better how come the word learning didn't come up even one time during the past six months what did my co-founders and I talk to each other about you can guess we talked about what features do we absolutely have to build and not build what bugs do we have to fix I mention before what customers do we listen who do we ignore the word learning never crossed our lips one time until we had to justify a failure and I said if our goal the last six months was to learn this important thing about customers why did it take six months for example we supported I think 12 different IM networks for interoperability out of the gate what our learning have been the same if we support it only six yeah what if we'd support only three yeah what about only one network we support only one client would we still have been able to learn that customers do not want to do this activity sure now that's easy to say you're like oh that's great but wait a minute that's ten times less work for the same value that was very upsetting but that ain't nothing compared to this thought that was really disturbing just get this what if we had just created a single web page with nothing more on it than a screenshot of the product we intended to build and a giant download button would we even have had to build page number two where we apologized that the products not available yet or what a 404 have been sufficient what did I say before I said they wouldn't download the product that means they literally wouldn't click the button so who cares what's on page 2 now you can see why this is disturbing to me because I had to pull up my business card and what does it say on my business card chief technology officer it does not say chief crappy one-day landing page experiment officer so then I was like what am I supposed to do with my time how is it possible that my six months of dedicated work could have the same value as a crappy one page you know experiment that some designer could have worked together in an hour that was really disturbing and that is at the heart of what I'm trying to get at that the value in an entrepreneur situation is learning whether we're on the path to a sustainable business everything else that we do is waste and that's really different than the 20th century management we're trying to escape because fundamentally we have is a built in assumption in 20th century management that we can forecast what people will want and therefore we can build plans to anticipate what's gonna happen and you get promoted if you beat plan that sound familiar to anybody beating the numbers is like the fetish of modern managers and I was pretty surprised doing the research for the book one of things I learned that really surprised me was that in the 1920s though like rudiments of today's modern multi-divisional company was worked out at places like General Motors and luminaries like Alfred Sloan and at the heart of that technique of managing a multi division company is something called accounting I told you I was gonna talk about accounting I told you it was gonna be really boring so hang in there here's how accounting became the basis of modern management today we think of accounting is just the thing you do to keep track of where the money went but that's not what it was for originally General Motors they were able to predict with such accuracy how many cars they ought to sell and what they called an ideal year that they had a concept called the standard volume how many cars division by division are we supposed to sell in a typical year and they had the math and data analytic skills remember in a pre digital age to do the math to look at all the macroeconomic indicators of how the economy was doing right now and make predictions how many cars should we sell quarter by quarter division by division in the actual coming year and so if you're a manager of a division in a recession and you sell less cars than you did last year that's to be expected but if you beat the plan you can still be promoted and similarly if it's a boom year and you sell more cars than last year you don't get to take credit for that does that sound familiar to anyone who's worked in a big company that's the basis of modern management this accounting when I read that for the first time I almost fell out of my chair and here's why I was like wait a minute you're telling me there was a time in history when people could forecast things and they came true I've never seen that in my whole career I thought plans and forecasts were a ritual that we went through like a kabuki dance to show to investors to be like see we can do this kabuki dance for some reason I never totally understood but I understood that you do not get funded without doing the dance I was like oh God do the dance any entrepreneur I'll jump through whatever hoops you want I had no understanding of what they were for because I thought these I'd never seen a plan come with an order of magnitude of reality and yet there was a time when people could use those plans so effectively they could be used as the basis for promotions and who got fired so if you think about it modern management at its root a reliance on planning and forecasting which means it only works when we have a long and stable operating history from which to extrapolate show of hands who feels like the world is getting more and more stable every day nobody I can't believe it it's just really shocking to me I've never had one person raise their hand for that what is happening is the world is moving from a world where most work happens in an environment that is amenable to general management to a world where more and more and more work every day is happening an environment that requires a different management paradigm one that requires its own accounting and management principles that are designed specifically for the situation of high uncertainty so even if you didn't sign up to become an entrepreneur even if you on your business card it says you know general manager in super-safe industry it's time to suit up because disruption is coming and for those of us who actually are entrepreneurs we're pretty excited about it because your losses are gain the more uncertainty and the more chaos the more disruption the better for us so we're pretty psyched in the book I lay out something called innovation accounting which is an alternate accounting method for trying to figure out whether we're making progress in situations of high uncertainty and I'm just gonna close with a little flavor of it to get the details obviously you'll have to buy the book or I see many of you actually already have it so thank you but we're gonna do with only one copy how you gonna loan it out to other people that seems like I'm probably an oversight I'm sure somebody here will sell you more copies I'm just I'm just guessing yeah okay if I'm the CFO of a major company and I fund to some entrepreneur and they come back to me a year later and they give me that report that says just give me one more year I know I promised you the Sun the moon and the stars when you gave me this money but trust me we learned all this important stuff and we just need one more year to be fine we like to heap scorn on those CFOs for firing those managers like they're so conservative and they don't believe in innovation it's all their fault and it is all their fault that's true but I'm sympathetic because our current system of accounting cannot fundamentally cannot tell the difference between a team that spent a year learning really valuable lessons and a team that spent the year goofing off because both of them will have a pathetically small number of customers both of them will have minimal revenue they will be doing terrible on what I call the vanity metrics that are the underpinnings of modern accounting so think about what a breakdown in the paradigm that is we literally saw like we're talking about the difference in a slightly high-performing team and a slightly less no we can't tell the difference between team on the brink of a major breakthrough and team that has accomplished absolutely nothing and wasted their time that is a fundamental breakdown so what we need to do is say let's stop looking at the vanity metrics I stopped looking at the gross numbers let's actually look at the inputs to the spreadsheet to see which teams are actually being successful in running experiments that change customer behavior for the better and by doing so we can put the concept of product market fit on a more rigorous footing a quantitative footing so we can say this team is getting closer to product market fit and this one isn't that is fundamentally our goal and when we make that transition I fundamentally believe we will make the process of innovation more scientific more likely to succeed and just frankly a lot more fun so I really want to get to some Q&A I really want to add some questions so I'll stop here and just say thank you all very much for coming thank you so we have two mics in the audience if you could raise your hand to tell us who you are and we'll bring the mic - hi my name is max from big bank technology and I'm here with a big old crew of the lean coffee tio group what can we do to help each other more in our community of startups in Toronto oh thank you for that question I first of all you gotta understand when I talk to the media you know I'm on a book tour so I'm on TV and doing all this crazy stuff and people always ask me how do you know that the Lean Startup is is working that it's a good idea and one of my things I have vowed to myself when I became a professional expert was that I would do my best to only say things that are actually true not just things that sound good even though it's a professional expert people only care if what you're saying sounds good no not one person has asked me is it actually true no one cares but I care and to me the number one indicator that this is something real and not just you know a flight of fancy is the fact that so many entrepreneurs in so many cities around the world are doing what you're doing which is coming together on a regular basis to explore how to use these ideas and put them into practice and it is in those local communities that the real work of pushing the envelope is happening my job is a very strange job my job is to make people like you famous what I have to do is tell the world here's a breakthrough that we have made here's something we have figured out about what works and what doesn't work and the only people who are actually finding that out it's not me I'm doing this people were finding it out are the entrepreneurs who are putting these ideas into practice every day so I think the most important thing you could do as a community is to come together on a regular basis and hold each other accountable for making real progress and it's hard sharing what's really going on with your startup is probably the most counterintuitive and painful thing any founder is asked to do because we've all we all intuitively understand that what you're supposed to be doing is telling everybody how great it's going right everything is always up into the right I never talked to an entrepreneur who's doing badly everything is just is roses and there's a real reason we do that it's not just because we're pathological liars it's also because it's also because we know if we admit that we don't know where we're going that people will have loss of confidence and that can cause loss of morale it's the same reason we try to keep our products hidden and not put them out in the world because there's this thing called the audacity of zero having no results inspires confidence ironically that big results might come but having small results inspires questions about why haven't those big results shown up already so what we need to do is create safe spaces where entrepreneurs can share with each other what really is really going on and then be held accountable for having that same story the next time so that's what I would be focused on is ask each other what are the metrics that really matter for your business and where are they going to be a month from now and then report back a month later hey I know you tell your investors you got this new more important metric that's all up into the right thanks to Eric's law of Google Analytics at all times no matter how badly you're screwing up at least one graph and Google Analytics is up in to the right so you could always find something that's up until there are no problem that's the problem with shipping it and seeing what happens incidentally you are guaranteed to succeed at seeing what happens something is guaranteed to happen so you can always find something to be excited about but only a true friend only a fellow entrepreneur who understands what you're doing will be able to call you on that BS and say your investors might fall for that but you said customer engagement was the number one most important thing you've been working on this product for a month and your customer engagement is exactly the same as it was last month so buy what in what world can you say that you've made progress on this product I challenge you to say everything you did the last month was a complete waste of time your investors are never gonna say that to you your spouses are never gonna say that to you you're just like what you need is someone who can call you on that I think that is the single most important thing so thank you very much for doing that really means a lot to me okay we have a question at the back and then one here give it to a different microphone oh thank you yeah could Lean Startup have saved Manhattan in ghostbusters I'll repeat the question the question is do I believe that Lean Startup is the be-all end-all of managing innovation or what about things like blue ocean strategy if ghostbusters are done customer development by which I think the questioner means if they had asked customers what they want they would not have gotten anywhere because of course there was no need for them you know before Zul shows up and therefore you know wouldn't Lean Startup have destroyed Manhattan which that's pretty cool that's a powerful concept we could destroy Manhattan so thank you I think that is a compliment and I appreciate the question actually not just because a Ghostbusters reference which warms my heart but because there's a really deep and important question which is well what is the role of strategies see I've avoid I've tried to avoid the entire time I've been speaking saying one word about strategy what's a good strategy versus what's a bad strategy how do you model your strategy how do you put it on a canvas or all these other you know do you have a blue ocean strategy or this kind of and there's a reason I'm talking I'm not talking about it it's not because it's not important it's actually critically important it's just the only topic that I think it's actually well covered in general management theory for entrepreneurs it's so well covered there's a million excellent books on strategy and the reason I don't bother with it is that I have not even one time in my whole career of talking to startups and I've talked to hundreds probably thousands at this point trying to help them I have never been able to talk an entrepreneur out of their idea or their plan on the basis of it's not a good strategy I've tried everything and I've had people pitch me the dumbest plans I've ever seen in my life the problem is I've also had people pitch me things like Facebook which I also thought was the dumbest thing I ever heard of in my life and turned out to be pretty good idea here's the problem startups don't fail because their strategy is incoherent they fail because their strategy is based on wrong facts and so my goal is to help startups figure that out as quickly as possible and those of you who have studied business strategy have an advantage the goal of strategy in a startup is not to give you answers is to help you figure out what are the questions you need to ask so by doing things like analogs and anta logs looking at what other business patterns our business models business model canvas all that stuff is useful if you're confused about for example what channel distribution is going to be useful for you whether you should pursue a blue ocean strategy or try to go face off against competitors and what the issues are that stuff's still important but the questioner snuck a second question in well this is actually just a red herring so strategy important but well covered the other question is but what about the fact that in a blue ocean strategy customers can't tell you what they want and I think that's so true I want to just repeat it a couple times customers do not know what they want it is a fact we are psychologically unable to answer as human beings hypothetical questions about well how we would behave in the future it's one of things we just can't do like not even how will you feel about lunch tomorrow forget do you think you would want to pay for this hypothetical product that I'm kind of vaguely describing to you and that may or may not exist in the future it's garbage in garbage out people have no idea but imagine I was a physicist and I'm looking on the structure of the atom and I come up here and say my job is impossible because electrons don't know what they want I can't ask them what they're going to do so I give up you'd laugh that's absurd your job is not to ask electrons what they're going to do your job is to run experiments that reveal the behavior of electrons or whatever else your subject is so that you can learn whether your hypothesis your vision is true or untrue and so that's the the essence of the book is you know trying to get people to see their interactions with customers not as asking what they want remember how bad that will turn out for us and in view right remember single player mode absurd it's to run experiments that reveal what customer behavior is and that I think is what we're trying to do with Whitney startup it's marquel but I've been on entrepreneur for 23 years and I think I represent some of the folks here so I'm developing a line extension product a web-based product I think we can launch for about $30,000 the question though is well we're gonna be able to handle growth everyone's concerned about growth yeah you hear about startups with first phase financing and second phase they just got a million dollars to lay on can you do it for a small amount of money and grow or is there a risk in not being ready for the growth that we all hope will come thank you I love that question first of all I want to be super clear the Lean Startup does not mean cheap startup so I'm not trying to get you to raise more or less see how much money you raise is really an orthogonal question to this it has to do with your strategy and what you're trying to accomplish some businesses to build the Minimum Viable Product eating millions of dollars and some you need hundreds of dollars and I'm I couldn't possibly tell you which is which you are need startup is about using capital more efficiently by not wasting it building the wrong things but although we focus a lot on the very beginning phase things like how do you pick the Minimum Viable Product how do you get that early signal if you read the book almost a third of the book is concerned not with that question but the question of how do we scale given that we're doing things in this just-in-time passion it's a concept I called just-in-time scalability because I'm cognizant of the fact that there are a lot of high-profile companies that have failed because they couldn't keep up with demand and we'd like to joke well isn't that wouldn't that be a nice problem to have but if you're the CTO of a company like I was there's not a nice problem to have when the company fails because the technology doesn't scale not only does it fail not only do you lose all your money but guess whose fault it is it's one identifiable person's fault namely yours the worst kind of failure in the world so I was very worried about that especially at in view because we are practicing these highly iterative development techniques including one called continuous deployment where we're putting software into production you know 50 times a day on average so when I talk about rapid iteration I am not kidding around don't come to me and tell me all we ship once a week and we're so proud of it Fedak fifty times a day on average and people told me for every size X that in view was that sure that'll work at size X but I'll never work at size 2x I keep hearing that people still say that to me it's like sure it'll work for five people would never for ten Cheryl for ten but after 20 Orion you have five million customers it will work but never when you have ten million because people can't understand this technique because it it so flies in the face of our conventional thinking about anticipating problems and preventing them I call it the curse of prevention and here's the problem let's say that I was to convince you just I would say I was a very charismatic speaker and I convinced you that an asteroid was about to hit our building and kill us all and you were really worried about it and then I said but there's a fix all we have to do is run upstairs onto the roof and cover this skylight here with tinfoil and with a nice tin foil that will reflect the cosmic rays and cause the asteroid not to not to hit us and let's say that you believe me and we all ran up there and we did that and we're like - okay and I was like the asteroid would have hit us in ten and a321 we did it congratulations it didn't hit us now that's pretty stupid right you'd be like wait a minute how do we even know that an asteroid would have hit us but an engineering and in fact in most functional disciplines we promote people for their good job at anticipating and preventing problems if the project they do intervention and then the problem doesn't happen does that sound familiar anybody and scalability is the worst at this if you want to kill somebody's project those of you have worked in big companies know exactly this technique you can do death by corner case really useful political strategy you might want to try this all you have to do is during the product planning meeting for that project just be like great what would happen if and just start making stuff up what happens if five million customers all use the product at the exact same time if you thought of that oh no shoot better well what if they all use it exactly one minute apart what if everyone comes from Singapore have you thought about that what about you just you could do that all day and any product manager you do that too is so screwed because what are they gonna do either they can be like that's never gonna happen in which case what if it does happen fired or they can be like well we'll take that into account and plus up the project a little bit and now you can feel the scope creep happening and then you know scope creep just make sure think a giant bullseye for the cutting you understand how this works right so startups have this problem to the max because scalability is always on everybody's mind and yet when you have five customers like you don't have any scalability problems and the answer is to say let us not invest in prevention but rather in fast response so we whenever we have a choice when we identify a possible problem we could invest in preventing that problem or we could invest in generic process improvements that improve our agility so that if that problem comes to pass we can respond to it quickly and in the book I lay out the case the economic case for why it is always better to make those process improvements than prevention improvements and just so you understand what I'm saying so that you know when you say this to one of your engineers their head doesn't explode or after it does you can deal with though aftermath I'm specifically saying we will identify things that might go wrong potentially fatal scalability problems and then we will intentionally not fix them okay if you can do that then you're on the path to this kind of scalability now we call it just in time scalability because what's going to happen is we will be able to adjust so quickly to what's really happening we can constantly and systematically refactor our system so that it can scale and this is true of our technical systems but also our human organizational systems I advocated something I call adaptive management so that we can get the right level of process even as we scale so that bureaucracy is not our inevitable destination now I wish I could teach you all of these techniques while I'm here on stage but the whole point I had to write a book is that each of those is a whole chapter unto itself and you know I hope that you'll have a chance to read it and then email me and tell me what you think but I fundamentally believe that is the path to scalability okay we have time for one more question anyone look up here at the front hi my name is Ivan Francis is there a trade off between IP protection and kind of this design of experiments that you're talking about so if I just take my market and throw it take my product and throw it into the marketplace before I've done all this development then really I might not have any IP protection so talk about what that trade-off might be if it really does exist I'm not a lawyer and you should seek legal counsel before you do anything I'm not giving you legal advice but there's a very few kinds of startups where a really revolutionary scientific breakthrough is at the heart of the startup and that selling the patent to that technology that breakthrough is going to be important to the startups life in some way it is a very rare thing these days if you're in any kind of software business forget it I can't think of a lot of time I saw a legitimately patentable software idea and the reason we have this fear about IP protection is that in some jurisdictions and I actually I don't know anything about Canadian law but in some jurisdictions if you the kind of the clock starts for filing your patent protection the day you release the product to anybody versus when you publish it to the general public and I think that's just a terrible public policy choice that you know we're talking about how can public policymakers influence innovation reforming the patent system is one of the really important things that needs to happen unfortunately in the States we just made it worse so for God's sake but at the root of this fear is a fear that you know someone will copy your idea that's really what this is about patent protection is supposed to help you prevent that from happening but I have a better way to protect your idea from being stolen by a big company and that is to do nothing because big companies can't steal your idea because they're incompetent see that's the whole reason to start companies in the first place and so here I have a solution I have a cure-all anyone who has the fear of having their idea stole and I have an exercise that has cured a 100% of people afflicted with this that I've ever tried it on if you do this exercise I promise you will no longer have this fear and here it is every entrepreneur is a list of ideas you know all your amazing ideas won through a million and right now you're working on getting number one but you always know again idea number two ready so just pick one of your second-tier ideas it could be number two number five does matter second to your idea but still a good one when you believe in and try to have it stolen write a memo sent a telegram go to some find the relevant product manager at the relevant big company and you explained to them why this idea is one worth stealing and see if they steal it because guess what the relevant product manager has already thought of it they have a million good ideas the whole point is they can't execute them faster than you can if they could you're so screwed think about if you can't get through that build measure learn feedback loop faster than a giant company what does that say about you mean well that's a serious serious problem and no head start from stealth mode is gonna help you you still want to file patents I know and go ahead I mean I we had a IP attorney at M view very early who in exchange for equity help us file a bunch of pens I'm hold ton of software patents like all business process and software patents I think they're completely bogus but you know it was helpful and final so like there's only wrong with filing patents but I don't know any case of an early stage technology company again except in the very limited case of breakthrough science where patents actually made a significant difference one way or the other so I would never trade agility for IP protection never and then for those who actually have that problem there are techniques you can use a good lawyer can help you design how to do the rapid experimentation without violating any IP protection issues I'll just mention one last story just to leave you with a feel-good story when we raised our first venture capital round at in view we were approached by a large company that run big media company that runs a big website that you've all heard of and they said we'd like to buy your company don't take venture capital we'd be much better off buying and we were like oh we're not sure we think we want to take venture capital they said listen to sweeten the deal we'll make you this offer if you don't get bought by us we will build a direct competitor with you and kill you we're like okay really and they're all I guess we're totally serious we will destroy you so it's like take this offer or die it says something about our state of mind that we said okay fine we'll die we do we choose death and so we decided take the venture capital six months later one of my co-founders is now working at big company X working on a competitive product with 100 million dollars of funding and its disposal so they know everything about us our business plan every mistake we've made everything we've done up to that point because they got one of our co-founders on staff two years later big company X releases their competitive product and what's hilarious is that their product is an exact clone of the product we had released two years ago we thought that product was horrible we iterated thousands of times since there we had pivoted many times we were on a completely different model at that time they launched the product it didn't yield an you know immediate traction and because they put the big company brand on it that became embarrassing to senior management six weeks later or twilight amber how long it took that products not available in the market anymore that whole division gets shut down and this big company writes off a hundred million dollar loss so how valuable was the idea really right they stole it from us copied it and verbatim but guess what if you can out iterate you will win and if you can't out iterate secrecy will not help you so don't do drugs don't do stealth mode thank you all very much appreciate it thank you so I know we can keep going unfortunately Robin has it well unfortunately Roth Robin has a reputation is starting and ending on time and then unfortunately eric has a car waiting to take him to the airport tonight so we're gonna have to wrap it up here all the books have been pre signed I think and it's been a real pleasure to have you here at Rotman I think everybody really enjoyed its gonna hear this for a long remember it for a long time let's show our how much we appreciate this visit

Channel: rypple

Views: 78,813

Rating: 4.8899083 out of 5

Keywords: Eric, Ries, Toronto, Daniel, Debow, Rypple, Lean, Startup

Id: PXUd7wXrb0Q

Length: 56min 37sec (3397 seconds)

Published: Fri Sep 23 2011