Transcript of Podcast #115, With @EricRies on #LeanStartup From www.leanblog.org

Here is a transcript of LeanBlog Podcast #115 with Eric Ries, author of the book The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. We recorded this in March 2011 before the book was out. Auditory learners can listen to audio at www.LeanBlog.org/115 or you can download the audio and subscribe to my series via Apple iTunes.

Mark Graban: Hi, this is Mark Graban. This is episode 115 of my podcast for March 10th, 2011. My guest today is Eric Ries, entrepreneur and author of the upcoming book, “The Lean Startup.” Now, today we’ll talk about how Eric got introduced to Lean, to core materials such as books by Womack and Jones and Jeff Liker. And how he has put a lot of thought into how to take a proven Lean principles, such as reduced batch sizes, five whys analysis, faster time to market and customer focus, and applied them to startups.

And we both agree that there are a lot of applications of these Lean startup principles, even if you the listener are working on new products and larger, older manufacturing settings. So, I hope you’ll take 20 minutes to listen regardless of your background, as Eric’s work has certainly stretched my attempts at Lean thinking in new and better directions.

You can find the web page for this post at leanblog.org/115, which will have links to Eric’s sites and other posts about him and his work. So, as always, thanks for listening.

[music]

Mark: Eric, it’s really nice of you to take time out of your busy schedule to talk on the podcast. Thanks for being here.

Eric Ries: Thank you very much for having me.

Mark: I was wondering if you can introduce yourself, briefly, for the

audience. And also to talk a little bit about how, as a software developer, you got exposed to Lean or ideas that you eventually discovered seems very much like Lean.

Eric: Yeah. Well, my background is as a computer programmer. I’m one of those kids that grew up programming computers, and I was pretty surprised, pleasantly so, when I found out you could get paid to do that as a career. I just thought of it as something you did for fun in the basement. And I always had the experience as a programmer, just, maybe it’s just my bad luck or who knows? Working on projects that either never saw the light of day, or that basically failed in the marketplace. So, I have worked on a lot of different really cool pieces of technology that have no customers today.

And, as a programmer, I naturally was always looking for technical solutions to that problem. I always assumed that if I just used the right programming methodology, if we just used the right platforms and APIs and the right open source technology — I was a big believer in open source, user generated content — that those things would all solve that problem. And they didn’t.

And it was pretty frustrating, because, as a entrepreneur, as I started to do more things that were more entrepreneurial, I would always see these stories in magazines and see the movies, and there’s some great movies out now, where the crazy core programmer works on something really cool and then kind of dot dot dot. Then they’re on the cover of magazines, they make a lot of money.

And I kept doing all the same things that the person in the movie does, and then not having that outcome, and being a little bit, frankly, frustrated about that. So, I started to move away from purely technical solutions and I started to really think about how could we increase the odds the stuff that we’re building actually matters to customers?

I didn’t get exposed to Lean thinking directly until relatively late in my career, but I had been exposed to something called Agile programming, which is basically an application of Lean principles to the methodology of developing software. So, much lower app size, much faster cycle time than was traditional in what they call Waterfall style programming.

The irony, of course, is that Waterfall was taught to me, as a computer engineer in Silicon Valley, was taught to me as the manufacturing metaphor of software development. But it’s a completely linear assembly line, straight out of the Henry Ford playbook.

So, you can imagine how pissed off I was when I eventually discovered that they don’t use it in manufacturing anymore.

[laughter]

Eric: So, it wasn’t clear to me why it made a good metaphor for software development. But the challenge of software development is that it’s completely intangible. You cannot see the product as it’s being built. It’s all, intangible lines of code, the ghost in the machine. And so, people felt like a very rigid planning oriented methodology made sense to try to make the progress more tangible. That had never worked for me, so I was kind of open to new ideas. And also, Agile didn’t really work for me, either.

So, at the start ups where I was trying to apply Agile we would wind up building more efficiently by driving down batch size of work by making things more like what the customer wanted.

But, of course, we didn’t really have any customers. We were a start up. So, we would wind up using internal customers, or kind of the internal project visionary, as the person who set out the spec and we would wind up building that which is specified more efficiently.

But then that didn’t actually work very well because then it would turn out that the person that we thought was our customer wasn’t and the visionary was wrong. We were kind of right back where we started.

I was going to just finish the story by saying that we started to develop new techniques for how to bring the customer, and our kind of theories about the customer, into the product development process, itself, and take some of the Agile paradigm and accelerate it even further.

So, for example, driving the batch size of our work down all the way, as low as we could, to almost get into single piece flow, but rather than with physical widgets with the actual bits of code that we were deploying to customers. So we would deploy software to production, 50 times everyday using a process called continuous deployment.

And those techniques didn’t make sense according to all of the theories that I had been taught about what software development was and how startups should be managed. And so, it made it really difficult for me evangelize the techniques, even to other people who I worked with: my coworkers, my bosses, our investors.

Everyone would always say, “Why are you doing this crazy thing that doesn’t make sense?” And I was always struggling to say, “No, the thing that you’re doing doesn’t make sense. Look at the terrible failure rates in our industry, and look at how much better results we’re getting here.”

But when a dominant paradigm’s being challenged, that is hard. And so, I was on a crazy reading spree, just trying to learn as much as I could, searching for models to just make sense of my own experience and help me explain it.

And when I read “Lean Thinking,” it was like a light bulb went on for me. It was such a dramatic experience, because I said, oh, we’re just using the wrong manufacturing metaphor for our work. And if we use one that’s better, actually, it works quite well.

And, of course, what we’re doing is so different from traditional Lean manufacturing, because we still have this big unknown about the customer. But with a few tweaks, it seemed like we could take ideas that had been well proven in other industries and bring them into the entrepreneurship industry. And that was the origin of Lean startup.

Mark: Yeah. And I like how you draw those connections and parallels. If you look at Toyota’s approach, it’s often described as a customer in philosophy. And if you look at Toyota product development system for vehicles, the lessons around, not just building a truck and then trying to push it on customers. You need to understand their needs and also, understand the pricing. And make sure you engineer the vehicle to hit a certain price point, as opposed to just saying, well, here’s our cost and we’re going to market up and things you should buy.

Eric: That’s right.

Mark: Now, before we talk about, I’d like you to define Lean startup methodology. But, maybe one other point I’d like you to make, because I think we have a lot of listeners who maybe, who don’t work at startups. And I hope they continue listening anyway, because your definition of an entrepreneur, I think, is applicable, as well, to people who may be working in big large companies. Would you agree?

Eric: Oh, sure. Yes, absolutely. In fact, one of the biggest surprises, once I started being asked to speak in public about Lean startup is, I used to, part of my work was to try to bring the practice of entrepreneurship onto a more rigorous footing. I’m a very logical deductive style thinker, so it was

important to me to have good definitions, returns, and really understand what is entrepreneurship, who is an entrepreneur, so that I’m not just basing my life’s work on what I saw in the movies, which I just thought was not a very effective model. And so, I had this definition of a startup is a human institution designed to create something new under conditions of extreme uncertainty. And it was from that basic definition that I had proceeded to define a Lean theory of entrepreneurship. And one of the funny things about that definition is it doesn’t say anything about industry, sector of the economy, or company size. It just says you’re trying to create something new, build an organization to create something new under conditions of extreme uncertainty.

And so, for at my very first talks, I would say, and by the way, this is completely applicable to entrepreneurs inside big companies. And at that time, I was just speculating. I felt a little bit like a scientific theorist, making a prediction about the physical world without knowing whether it was going to be true or not. It just said, the theory predicts that these people should exist. So, if any one of you are in the audience, please come talk to me.

And from that very first talk, I remember it really clearly, there were people like that in the audience and they came up to me afterwards. And they were actually the most vehement of the people who wanted to really ask me, well, how specifically do I do this. How can we convince people in my organization to adopt it?

Because most of the, kind of, theories of disruptive innovation, most of the frameworks that they were using to create new products inside their own companies, treated the innovation like a black box. And just said, you get the right kind of people, and you give them the right budget, and you kind of do the organizational structure around them properly, and then magic happens.

And that’s basically what we used to believe about entrepreneurship, too, incidentally. And what these guys would say is, they’re like, “Listen, I’m the manager of this team, we’re in the black box.” And they said it to me like, I’ve got the firewood, and the kindling and my matches and the paper and all the ingredients right here. Where’s my fire? And when the fire doesn’t appear, they’re like, what specifically, am I supposed to tell my people to do?

And I felt like, well, OK. That’s actually the exact same problem we see with venture backed entrepreneurs, who get, you know, managed to raise a check for $5 million. And they’re like, now what? What specifically am I supposed to do every day? How can I tell if I’m making progress? And so, what has happened is this thing has grown into a movement as we have pulled in entrepreneurs from all kinds of different industries and sizes of company, and I think that’s one of the most exciting things about it.

Mark: And I like the way, I think it’s insightful the way you help emphasize the idea of that uncertainty being both technical risk and market risk. So, can you maybe talk about the two of those and dovetail that into what a Lean startup is and how it applies to situations like that.

Eric: Yeah. We live in a world of increasing uncertainty, just in general. And yet, our capabilities are also at their all time high. So, and this is, Lean manufacturing is a huge part of the reason why we find ourselves in this situation. We literally have more productive capacity than we know what to do with. So, the dominant question of our time is really not, can it be built, but should it be built. We really live in a time when any product, with the exceptions of ones that are based on true fundamental scientific breakthroughs, but the vast majority of products, they actually could be built, given sufficient time and resources. And the question really is, is there a market for those products? Is there a way to build a sustainable organization around a set of products and services?

And so, if you think of the world in a kind of a two by two matrix. On one axis we ask, how much market uncertainty is there compared to technical uncertainty? So, in some products, dominant questions are, can it be built. Market uncertainty means, can we build a business around it.

You could, kind of, put industries on that map. And you say, OK, well, for the classic new automobile introduction, we can say for sure that if we can hit a certain price point and get certain performance characteristics, customers will want it. Whereas in other businesses, we face a lot more disruptive innovation, we have a lot more questions. Like, if I build this new software product, will customers want it? If I can actually help people manage their advertising inventory and their enterprise more effectively, will they actually be willing to pay for it? All those kinds of questions. That’s one axis.

And on the other axis we have the question of, what’s the underlying cycle time of that business? So, again, automobile manufacturing situation, maybe we’ll bring a new model, a minor introduction, a minor change of a model once a year at the new model year, and every four or five years we bring a new major model to market. But in worlds like software, a year is an eternity, and so we can actually change the version of the product quite rapidly. In fact, when we practice continuous deployment, we can do it at multiple times every day.

Again, you could align industries along that axis too. In that upper right-hand quadrant where you have very fast cycle time and lots of market uncertainty, that’s the place where Lean Startup really excels, where we try to use our advantage in cycle time to help us reduce that uncertainty as quickly as possible in order to understand where to invest.

But there’s a caveat. Because the people usually hear this talk and they say, “OK, that sounds great. Lean Startup sounds like a great idea for those other industries that are in that quadrant. But, of course, in my industry we don’t have to worry about this.” You ask yourselves, “In what direction is the world moving right now on both axes?” My contention is it’s only moving in one direction, and it’s the same.

Every industry is being pushed inexorably towards more market risk. As everything gets cheaper and it gets easier to start new companies, it gets easier to introduce new products and to distribute them, we all face much more competition, both globally and domestically. And consumers are faced with many more choices about what to do as technology changes faster and the capabilities of primitive tools become more complex. So, the level of uncertainty is increasing across all industries.

The same forces are also driving down cycle time across industries. Interestingly to me, one of the forces is Lean Manufacturing. Because we have been systematically applying a cycle time reduction strategy to the way that we work so that we can bring new models to market quicker, we can adapt demand to what customers really want. But that same capability can be used not just for greater efficiency but also for exploring new product concepts, which I think is one of the capabilities that then we introduce into Lean Startup.

Mark: When I’ve heard you talk about your past experiences, you’re talking about cycle time and speed. I appreciate, in general, how you emphasize Lean is not about being cheap but it’s about being fast, and iterative. But when I heard you talk before, there were also a lot of aspects of what I would describe as Lean culture, respect for people, not blaming people for their errors. Can you talk a little bit about maybe some of the cultural aspects of what you would consider a Lean Startup to be.

Eric: I found Dr. Liker’s approach in “The Toyota Way” really helpful in terms of framing the pyramid of topics and the way it shows how process is the foundation for creating a Lean culture, which is really about fundamentally empowering people. I think the same thing is true here.

Most of the people who try to create new entrepreneurial cultures do so without having changed the process first. And as human beings, we always misunderstand. We always think, when someone’s behaving badly or being uncreative or doing something we don’t like, we assume it’s because of their personality, or that somehow they’re a bad person, or uncreative person. But, as we’ve all learned, those who have studied how work systems operate, most people’s behavior is determined by this system and incentives that they are embedded in.

And so, part of the work of Lean startup is to try and change the process by which the companies are built, change their daily work process, so that, when we’re working in smaller batches, we’re working more cross functionally. We get faster feedback from customers. We actually have the opportunity to unleash people’s creativity in a new way.

And I think that’s the most exciting possibility that this revolution is kind of bringing to attention, that most of the new products that are being built worldwide are a complete waste of time. And, as a society, we are squandering our most precious resources, which is the time and energy and creativity of our most talented people.

So, to me, this is about allowing those people to be more productive, but not like just in a very narrow efficient sense of doing their individual function really well. But making the products that they work on actually matter.

Mark: Yeah. And doing work that gives your life meaning.

Eric: Yeah, yeah, exactly. I mean, there’s nothing more satisfying than being an entrepreneur. It’s scary and risky and has all kinds of ups and downs, but so does life. It’s a very human enterprise. And so, the worst is when you have that experience of having really devoted years of your life to something and having believed in it so passionately, because you are wrapped up in what we call, some how we call the reality distortion field. The ability of a team or company to really convince everybody that the thing is definitely, absolutely, positively going to succeed.

If you’ve ever had that experience, when you finally realize it’s going to fail, you realize that you’ve been lied to. You’ve been deceived. You’ve been tricked. And that’s the worst kind of failure to have. And that breeds a lot of cynicism and bitterness in our modern workforce that can be removed, it can be fixed.

Mark: Yeah. Now, one of the word, or maybe runs the risk of being a misunderstood buzzword, this idea of the pivot. So, I’ve heard you talk before, it’s been real interesting how you describe the nerve that it takes to go start a company, the risk that you have to take isn’t always combined with that willingness to listen to the market. So, that stubbornness that helps you get started can also be your downfall. So, can you describe the pivot and then maybe, in context of that, we did have a question come in via Twitter from Joe Dager, at Business 901. How is a pivot different than just following the plan, do you check at cycle, where you react and adjust accordingly?

Eric: Yeah. So, Lean Startup has a complimentary theory to PDCA. We call it build, measure, learn. Basically, the fundamental feedback loop that we’re working in, we translate ideas into products by building. We have the customers interact with those products to generate data and that data informs our next set of ideas. So, build, measure, learn. Our heuristic, just as in any Lean context, is to minimize total time to the feedback loop, rather than becoming really efficient at any one of the three activities. But we reserve the term “pivot” to mean that one of our core business hypotheses has been invalidated and it’s time to make a change.

So, Lean startups will constantly optimize their product, constantly make change in response to customer feedback, to little split tests about, is one way of presenting the product better than another, new marketing messages, new features, new designs, all that, all kind of functional improvements to a product.

But entrepreneurs have this very special thing, we call it the pivot, which is that, sometimes your optimization techniques start to kind of yield diminishing returns. Where, you are succeeding in making the product better, but you’re not really getting any closer to having a sustainable business. And this is a kind of thing that really doesn’t have a regular old, kind of, Lean thinking analog.

Because, in general, once you start to manufacture a product and start to drive out the waste in your manufacturing process, you tend to get incremental benefit for incremental investment. Not, you know, 100 percent. Not every investment pays off the same amount, but because you really can understand, you have a way of forecasting demand, at least a little bit, you pretty much know if you can improve the cost targets, you know what you’re going to get.

But entrepreneurs often find themselves in a situation where we are actually improving our work, but customers don’t care. Because we’re helping them do something that they don’t care about. So, we’re making a bad product easier to use, is the most common case. So, we’ve figured out an easier way for people to discover what the product’s all about and get registered and get involved, maybe even, we’ve made it easier for them to pay.

But, fundamentally, the value propositions offered by our product is not one that any of our customers want. So, by making the product easier to use, we’re actually helping them more quickly discover that they want to bail out and not be our customers anymore.

So, that’s a situation where we have to make a significant change to our

business strategy. And we might make a change like a customer segment pivot, when we realize, oh, we thought we were selling to one kind of consumer, but actually, there’s another kind who would like our product better. We might have to change from being an application to being a platform or vice versa. We might have to change our engine of growth, so we might move from being a viral product that spreads by word of mouth, to being one that is supported by paid advertising.

And in each of these cases, what’s happening is, once we change strategy, then there’s going to be a whole cascade of changes that are going to happen as a result. Like, we might wind up having to throw out significant chunks of our product. We might wind up switching from a product to a service or vice versa. We might have to really change the way we market the product or even where the company is located.

So, there’s all these kind of secondary changes that come out of a fundamental change in strategy. So, it’s not something you want to undertake lightly, and it’s not something you do all the time, but it is necessary.

Because if you look at the history of startup success, you’ll notice this pattern that, the majority of the time, successful entrepreneurs started with a really bad idea. So if we are stubborn and persevere and just do that bad idea efficiently then we’re just persevering the plane straight into the ground.

Mark: OK. Well, we’re running short on time, unfortunately. I do want to ask you in the category of things that typically don’t iterate very quickly, traditional publishing, you’re writing a book.

Eric: [laughs] Yes.

Mark: I pre-ordered a copy. So, OK, come on, when is it coming out? [laughs]

Eric: Yes. I know, I know. [laughs] I wish.

Mark: Tell my listeners about how that’s coming, what the book is called.

Eric: Yeah. Oh great. I wish cycle times in the publishing industry were faster, alas. The book will be called “The Lean Startup.” It’s going to be published by Crown, which is one of the big New York business publishers. It’s going to come out in the fall, we’re hoping, or early September. I’m real

excited about it because it’ll be the first chance that I’ve had to really walk through the theory of a lean start-up and combine it with a number of really detailed case studies that are designed for a general business audience. Right now, the lean start-up is a very popular methodology with ventured back entrepreneurs in Silicon Valley with a lot of different tech companies and people who are kind of the early adopters for new ideas about entrepreneurship.

But if you think back to what I said before about how we’re wasting so much of people’s time, the biggest perpetrators of that waste are still general managers, individual sole proprietors, private equity and investment bankers, people who have a role to play in the innovation eco-system but don’t necessarily think of themselves as entrepreneurs or don’t necessarily think of themselves as needing new ideas about entrepreneurship.

The idea with this book is, really, to take the message to everybody in that category. To say, “Listen. There is something new happening here and there is a better way for managing entrepreneurship which is helpful regardless of whether you yourself are an entrepreneur or whether your job is to hold entrepreneurs accountable.”

It’ll be a complete contemporary business book complete with not just the theory of a lean start-up but really a lot of specific case studies of the ideas being applied in a wide variety of industries. I’m pretty excited about it. But, yeah, it does take a long time.

Mark: Yeah. It is exciting. People can learn more at lean.st, is that correct?

Eric: Yeah, that’s right. We actually built our own website where people can pre-order so that we can run experiments on you as you’re pre-ordering. So please do. In fact, if pre-order one of the things you will get is access to our complete experimentation system. You can step behind the curtain and you can see all the experiments that we have run, and are running, and see how we’re using the data to kind of evolve the marketing and kind of value proposition of the book. So I’ve got to eat my own dog food and feel like I’ve got to practice what I preach.

Mark: Yeah. Well, very cool. Well, again, Eric Reese was our guest today and I want to thank you for taking time out to talk today about lean start-ups, really interesting field.

Eric: Thank you so much. I really appreciate it. [music]

Man: Thanks for listening. This has been the Lean Blog Podcast. For lean news and commentary updated daily visit www.leanblog.org. If you have any questions or comments about this podcast email Mark at leanpodcast@gmail.com.

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About LeanBlog.org: Mark Graban is a consultant, author, and speaker in the “lean healthcare” methodology, focused on improving quality and patient safety, improving access, reducing costs, and fully engaging healthcare professionals. He is also the Chief Improvement Officer for KaiNexus.