Starting on page one of the introduction in his brand new book, The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses (Crown), Eric Ries confronts many of the shibboleths of being an entrepreneur: “Stop me if you’ve heard this before,” he writes. “Brilliant kids sitting in a dorm are inventing the future. Heedless of boundaries, possessed of a new technology and youthful enthusiasm, they build a new company from scratch. Their early success allows them to raise money and bring an amazing new technology to market. They hire their friends, assemble a superstar team, and dare the world to stop them.”
That was Ries 10 years and several startups ago. Except it was followed by the sobering realization his first company was about to fail even though it seemed he and his cofounder had done everything right. Out of money, unable to raise capital, he and his cofounder were out on the street in the rain, bickering, unable to agree on what to do next, until they parted in anger, heading in opposite directions. It was “like a breakup scene from a Hollywood movie” and “as a metaphor for our company’s failure, this image of the two of us, lost in the rain and drifting apart, is perfect.”
There’s a whole industry devoted to promulgating the myth that all an entrepreneur needs is perseverance, creative genius, and hard work. Ries learned the hard way this isn’t true. A few years later he joined another startup as chief technology officer, broke many tenets of business–they released a minimum viable product that was “terrible, full of bugs, crash-your-computer-yes-really stability problems,” which they charged for–and the result was IMVU, a social network that today has 40 million users who don avatars to interact in a virtual world and grosses almost $40 million in revenue.
Along the way he created a methodology for lean startups and in the book he tells it like it is. No, the vast majority of would-be entrepreneurs won’t morph into the incarnation of Mark Zuckerberg. Unlike in the 2010 movie The Social Network, if you launch a startup you will probably fail and often be miserable doing it, but if you learn from your mistakes and absorb his advice … you’ll still probably fail, but your odds of success dramatically increase. I like The Lean Startup for its dose of cold, hard reality tempered with useful startup strategies. In the spring I teach a graduate level course at New York University called “Entrepreneurial Journalism”–students conceive of their own media startups, write a business plan, and at the end of the semester pitch their ideas to a panel of venture capitalists and entrepreneurs–and I plan to put the book on the syllabus.
FAST COMPANY: Really, should we become entrepreneurs or should I buy an instructional book on poker and take my chances in Atlantic City?
Eric Ries: If your goal is to make money, becoming an entrepreneur is a sucker’s bet. Sure, some entrepreneurs make a lot of money, but if you calculate the amount of stress-inducing work and time it takes and multiply that by the low likelihood of success and eventual payoff, it is not a great way to get rich. So you might be better off becoming a professional poker player, and certainly better off working at Goldman Sachs.
Did you know how bad the odds were when you started off?
Not at all. I only knew what the business magazines told me. I actually believed if you work hard enough it was inevitable you’d succeed. Then I lived the Social Network movie, but only the first half. The hardest part is the grueling work of constantly being wrong. What aspect of your vision works and what doesn’t? Seeing around corners can be learned but none of us start with that ability.
The way you describe characteristics of great entrepreneurs make them sound, well, off their nut–you know, like some members of Congress.
The attributes for entrepreneurs cut both ways. You need the ability to ignore inconvenient facts and see the world as it should be and not as it is. This inspires people to take huge leaps of faith. But this blindness to facts can be a liability, too. The characteristics that help entrepreneurs succeed can also lead to their failure.
What’s the most miserable you’ve been as an entrepreneur?
Some things are like a punch in the gut–getting sued, losing a big customer. I worked customer service and once got a call that we ruined a 15-year-old girl’s birthday party. But the absolute worst moment was when I got the call that our business would fail. In the movie of my life, I heard a voiceover mashup in my head of the people who predicted we would fail, that launching a startup was a bad idea and our business plan was fatally flawed. I had brushed them off as the voices of the past who couldn’t see the future. The truth is the cynics were right. Most ideas are not good. The best way to be is cynical.
Works for me… What are the biggest mistakes entrepreneurs make?
The biggest challenge is identifying the root causes. In medicine, understanding the real cause of a disease is much harder than treating symptoms. For startups the obvious symptoms are not having enough money, premature scaling or underinvesting in growth, and believing you have a good product fit when you don’t or overestimating its appeal to consumers. But the root cause has to do with the way we teach management, which is largely based on executing a plan to get good results. But we don’t have a long enough history as entrepreneurs to know which management tools work. That leads to forecasting fallacy.
You talk a lot about breaking rules.
Its funny but at IMVU we thought we were releasing something buggy that no one would use. This was after trying to release something perfect. We have all been taught to do our best work, because you never get a second chance to make a first impression. But if you don’t know who your customer is you don’t know what quality is. We didn’t really know what our customers would want. So we used product launches as an experiment to find out. It becomes a rigorous process, and the sooner you find out what your customers think and want the sooner you can pivot toward an ultimately successful company. If you get a negative result to your experiment–let’s say you learn that people can’t stand your product–you can pivot to a new strategy. Of course you need a high pain threshold.
The “pivot,” as you call it, is when a new company has to make a big change in its approach or die. Part of it is not knowing what will happen but being ok with not knowing. Can you give me some well-known examples of this?
The pivot is only obvious in retrospect. When Groupon started it wasn’t about social commerce. It was an online activism platform called The Point. You could schedule a rally at City Hall but only if 100 people did it. It was based on the idea of collective action. The founders worked on it a year and they went through about $1 million but got no traction. They had to try something new. So they tried out the first version of Groupon–a coupon for pizza at a pizzeria located in their building lobby. They did it on a WordPress blog, loaded up coupons and hand-emailed them to people. About 20 people redeemed the coupon. Now the first time 20 people redeemed coupon may seem an insignificant event, but to the founders of Groupon they realized its significance. They had gotten people to take action. The failure of The Point made Groupon possible. To understand Groupon you need to understand how hard it is to coordinate group action. From that lens you can see how it succeeded and became the fastest company to amass $1 billion in revenue.
PayPal is another great example, which is beautifully told in the book Viral Loop.
Nowadays people talk about PayPal’s founders as prescient geniuses who would inevitably change the world. It was, however, not so obvious that PayPal would taste its first major success by helping people sell Beanie Babies on eBay. But they had a vision, a hope, and the perseverance to try multiple iterations until they got it right.
One of their first ideas involved beaming IOUs from Palm Pilot to Palm Pilot and making money on the float, that is, taking advantage of the monthly interest banks would give them for depositing money from their users. A far cry from what you see today.
Mark Zuckerberg is often viewed as a classic case of the entrepreneur who never had to pivot. But this is wrong. The first version of Facebook was actually Facemash, a kind of Hot or Not site for Harvard, where photos were taken from the facebooks of Harvard residents and users asked to rate who was more attractive. If he hadn’t created Facemash, it’s likely Facebook would have never followed. After Facebook spread to other college campuses, Zuckerberg said he saw no reason to go beyond that. It made sense at the time because serving a narrow niche of adopters means you can serve them so well. If you go mass market you leave them beyond. He was careful to make the product as good as possible then Facebook went mainstream. After that, Facebook pivoted again, this time incorporating the Newsfeed. Suddenly the platform went from being about profiles to interactions. Then Facebook introduced the platform and invited developers to create apps for it. Following that, another pivot: Facebook Connect, which embeds Facebook and its social graphs into the web.
How do you know that your theories of the lean startup are correct and don’t simply reflect your own experiences?
This movement is less about how to make web startups more successful and entrepreneurs richer than it is a fundamental reexamination of how to work in our complicated, faster-moving world. What we know about entrepreneurialism is merely the tiniest tip of the iceberg. The ultimate question is how do we do high quality work during a period of great uncertainty. I’ve talked to thousands of entrepreneurs, but this lean startup movement is only two years old, and we’re just at the very beginning of it. I’m the first to say we don’t know the whole truth; we need more data, more evidence, although I’d say we’re making good progress. But the lean startup theory makes predictions under specific circumstances, so it can be tested empirically. As entrepreneurs adopt these methods, they can see if it plays out.
You have the last word.
One of the most exciting things is that entrepreneurialism is becoming a career choice. It’s not just about living in a garage. You don’t even need to be in a small company to work as an entrepreneur. I argue in the book that big companies should have people whose jobs involve being entrepreneurs to help companies reinvent themselves. When this happens, entrepreneurialism will become mainstream.