The Warfield Theatre in San Francisco’s gritty Mid-Market neighborhood is a legendary temple of rock, host over the years to the likes of Bob Dylan, the Grateful Dead, and Guns N’ Roses. It’s jarring, then, to walk through its beer-soaked halls, plop down onto a threadbare seat in the cavernous auditorium, and listen to smartly dressed business types evangelizing about entrepreneurialism.
The speakers are an eclectic group, yet they’re singing from the same buzzword-laden hymnal. Jyoti Shukla, vice president of user experience at retailer Nordstrom (JWN), enthuses about having a “customer-first mindset” and “an ability to ride with change and embrace discomfort.” Alex Osterwalder of the consultancy Strategyzer, which coaches clients through “innovation sprints,” urges attendees to have a “21st-century org chart.” Even outposts of the federal government have mastered the lingo. Ann Mei Chang, a former chief innovation officer at the U.S. Agency for International Development, warns nonprofits not to measure success with “vanity metrics” and decries the perils of “ramping too quickly.”
The occasion for these sermons is the annual Lean Startup Conference, in November, and the speakers share a common trait: They are disciples of Eric Ries, author of The Lean Startup, the seminal tract that spawned a self-proclaimed movement of which this is a convocation of the faithful. The mantras they repeat—most prominently “minimum viable product,” or MVP, a company’s quickest, cheapest way to test the market, and “pivot,” which is what businesses do when failure demands a new approach—all come from Ries’s 2011 book, which has sold more than a million copies in English and has been published in 30 languages.
The mark Ries has made on the startup landscape cannot be overstated. Entrepreneurs everywhere have adopted his vocabulary as well as his methods, including testing their hypotheses with customers and gauging the success of innovation with relevant accounting measurements beyond revenues and market share. “He unequivocally has been as impactful on the mindset of startups as anyone else in the last decade,” says Rob Siegel, who teaches entrepreneurship at Stanford University’s business school.
The 39-year-old guru himself is here too, holding court in a dimly lit greenroom in the bowels of the theater. He huddles with a grateful team from the National Security Agency, which has implemented his techniques—on a project involving nuclear codes, no less. He bro-hugs Justin Rosenstein, who holds the dubious distinction (by his own admission) of having invented the “like” button on Facebook (FB) and now runs Asana, a collaboration software startup. The conference is more labor of love than profit-making effort for Ries, who sports a mustache-less scraggly beard and, in a pinch, could play stunt double for actor Seth Rogen. But the event also is an important linchpin in his one-man consulting, publishing, and speaking empire.
The companies that Ries has advised now number in the hundreds. And while startups are his passion, in the years since The Lean Startup appeared he came to realize the term had been too narrowly understood. Properly nurtured, he now says, innovation lurks in the bellies of even the stodgiest corporations. Ries’s second book, The Startup Way, published in October, focuses squarely on big companies, notably General Electric (GE), one of the first to hire Ries as a coach and to widely deploy his teachings. (Read “Teaching GE to Think Like a Startup,” excerpted from The Startup Way. )
Ries didn’t seek out big companies, which all had been innovative at some point but all too often have become bureaucratic, process-oriented, and risk-averse. But once they found him, he realized he could help. “I had several years where I was living a double life,” he says. “On the one hand I was talking with these guys”—successful entrepreneurs—“who were trying to figure out how to retain that startup DNA as they scaled. At the same time a separate group of people were trying to recapture that DNA they had lost.”
By following his own advice of relentlessly testing his hypotheses and asking questions, Ries hit on a formula for corporate innovation that’s relevant across the gamut of the business world. His ideas can seem straightforward or even obvious on the page, but like other adept teachers, he’s able to make them compelling and urgent in lectures, conversations, and coaching sessions. Today, he’s even got a fledgling startup of his own, an audacious gambit to create a new stock exchange focused on squelching the scourge of short-termism on Wall Street—to the benefit of founders of his beloved startups. Ries, it turns out, is the rare teacher who practices what he preaches, potentially making his lessons all the more valuable for leaders of all stripes.
A few days after the Lean Startup Conference wraps, Ries has holed up in an apartment he keeps as a writing retreat just down the street from his home in a leafy San Francisco neighborhood. The walls and the couches are all white. It’s a simple hideaway, a good place for reflection. Ries needs the tranquil setting. By late fall, he already has traveled to New York, Philadelphia, Boston, New York again, and Los Angeles to promote the new book; he has plans for a workshop with Procter & Gamble (PG) in Cincinnati the following week and a trip to London after that.
He never expected to be in such demand. After The Lean Startup came out, Ries was inundated with invitations to lecture, consult, and coach, a career he hadn’t previously contemplated. “It just happened,” he says, adding that it took a while to get used to people paying him to tell them what he thought. Indeed, Ries volunteers a startling admission for Silicon Valley’s preeminent business guru. “This is probably not good for the profile,” he says, the author-as-subject anticipating the impact of his words, “but I don’t really like business that much, at least not as much as most of the people I talk to. I actually kind of feel bad about it.” He says Jeffrey Immelt, the erstwhile chief executive of GE, once asked what Ries would do if he ran the conglomerate. “I was like, ‘I would die. I wouldn’t last 10 minutes. It would destroy me.’ ”
Related: 5 Big Companies Practicing ‘The Startup Way’
What came naturally to Ries was writing code and starting companies. He grew up in San Diego, where both of his parents are physicians and professors. (He has two younger sisters, one a psychiatrist and the other a federal prosecutor; Ries’s wife, Tara Mohr, a Stanford MBA, is a life coach and author. “I’m the black sheep of the family,” he quips, “the only one at Thanksgiving without an advanced degree.”) He studied philosophy and then computer science at Yale, dropped out to pursue a startup that flopped, then finished school. He quickly made his way to Silicon Valley to work on yet another failed startup.
At his next company, IMVU, Ries began developing the theories that would lead to the lean startup methodology. IMVU, which after several “pivots” now makes virtual avatars for social networks, became known for rapid product iteration, a process software people call “agile” development. Ries and his cofounder, Will Harvey, had a guru of their own, University of California at Berkeley professor Steve Blank, who would go on to write his own innovation bestseller, The Four Steps to the Epiphany. “Every Thursday we would get on BART”—the Bay Area’s mass transit line—“and go to Berkeley to audit his class,” recalls Harvey.
The irony of Ries’s subsequent exalted status among entrepreneurs is that none of his startups amounted to much. IMVU, still privately held with $60 million in profitable revenue today, is a plodder by Silicon Valley standards. Ries left in 2008, hung out for a time at venture firm Kleiner Perkins, and mostly devoted himself to an increasingly popular blog about his observations on starting and scaling companies. The blog got him going on the book, which led to his speaking and consulting career. Then big companies started calling.
Early in The Startup Way, Ries compares the traits of “an old-fashioned company” and a “modern company.” The contrasts are devastating for anyone who works at the former and wishes their employer were more like the latter. An old-fashioned company, in Ries’s estimation, focuses on quarterly results, has experts in functionalized silos, and tracks metrics that make managers look good. Middle managers, intent on doing things how they’ve always been done, hold tremendous sway. A modern company, in contrast, is long-term-oriented, utilizes cross-functional teams, deploys rapid experiments, and measures the meaningful impact of business operations. Above all, modern companies empower entrepreneurial thinkers as change agents.
Ries’s criticisms amount to an indictment of most of the corporate world. Initially, he flat-out resisted becoming a sage for big businesses. But he gradually came to see a contradiction in his own philosophy. Ries has a standard definition of a startup, “a human institution designed to bring something new under conditions of extreme uncertainty.” His rinse-and-repeat presentation on the subject notes that his definition “doesn’t say anything about size of company, stage, its age, sector, industry,” and so on. “It’s fundamentally about uncertainty,” he says. “And therefore anyone who meets this definition is an entrepreneur,” regardless of scale. Over time, as more denizens of the Fortune 500 came to hear him speak—and called his bluff—his intellectual curiosity got the better of him, and he accepted the challenge of working with megacorporations.
Ries reckoned that the trick for big companies was to stop thinking about their size. They needed to form small groups devoted to the practice of innovation, and empower and protect them on a continual basis—as the core of the “21st-century org chart” his followers admire. Once formed, these smaller units could run experiments that were outside the norm of how their companies might typically launch products.
One of the most storied companies to give lean-startup thinking a whirl is Procter & Gamble. The consumer products Goliath has an impressive history of innovation—it has 20 brands with more than $1 billion in annual sales—but in recent years, growth had stalled. The company hired Ries in 2016 to speak to its top commercial leaders. He inspired them to get serious about speedier and leaner product testing, says Kathy Fish, P&G’s chief research, development, and innovation officer. “Because we’re a big company we had lots of people involved with innovation,” she says. “Now we have small, dedicated groups, as small as three people.” (One unexpected bonus of lean teams? Fewer meetings.)
[/bs-quote]Ries was asked what he would do if he were CEO of GE. “I was like, ‘I would die. I wouldn’t last 10 minutes. It would destroy me.’”[/bs-quote]
While P&G’s lean-startup experiments will take years to play out, it already has seen a measurable change in its corporate mindset. This past fall, for example, it began market-testing new versions of its Always and Tampax feminine pads in the U.S. that featured simpler ingredients. It deployed a “transactional learning experiment” that introduced early versions in 200 Target (TGT) stores. P&G hoped the products would be popular with millennials, and the limited, speedy test—they got to market in a year compared with the typical three—confirmed that customers would pay a premium.
Whereas before P&G would have conducted attitudinal research and large market tests, “now we get clear early on ‘leap-of-faith’ assumptions,” says Fish. One of the three sizes for the pad initially tested poorly with consumers. Traditionally, that would have stalled the entire test; instead, P&G moved forward with two sizes.
At Ries’s most prominent test case, General Electric, upwards of 60,000 employees have been trained in lean-startup methods. They have worked on hundreds of projects, from speedily designed aircraft engines to “digital” wind farms that help customers determine how best to deploy GE turbines. The Ries way even has its own name at GE, FastWorks, which executives describe as a corporate way of life. “The language of the company has become the FastWorks language,” says Janice Semper, culture transformation leader at GE. “That includes customer value, understanding problems before we start, and being smart about our thinking before we decide on capital allocation.”
It speaks to the impact of Ries’s approach that FastWorks appears to have stuck at GE despite the departure of many of its champions, including Immelt and Beth Comstock, the vice chair who previously led GE’s innovation efforts. Of course, GE’s problems may be bigger than being more innovative. New CEO John Flannery is so frustrated with anemic growth that he has floated the idea of breaking up the company. Ries says he’s “cautiously optimistic” about GE, and confident the FastWorks efforts will bear meaningful fruit.
At the very end of The Lean Startup, Ries addressed a policy matter that was bugging him. He could help startups grow, but he couldn’t do much about the environment they’d face as public companies in a marketplace obsessed with short-term financial goals—a climate that stifles innovation by discouraging risk-taking. He proposed a long-term stock exchange, where companies would agree to focus on the long haul and investors would be rewarded for holding on to their shares longer. Its business model would involve competing for IPO listings against traditional stock exchanges.
No one acted on Ries’s proposal, so a few years later, he founded a company, called it the Long-Term Stock Exchange, and began the arduous process of getting permission from the Securities and Exchange Commission to list and trade stocks. In 2016 it raised $19 million from a bevy of VC firms, including Andreessen Horowitz, and tech-industry luminaries. It instituted novel governance rules, like forbidding quarterly earnings guidance. On the investor side, LTSE proposed so-called tenured voting, which gives shareholders who keep their stakes more voting power. Traders would be free to dart in and out of stocks, but they’d have little to no influence over management.
A rational guy, Ries can approach righteous indignation when talking about the need for LTSE. Fewer companies are going public, he notes, because it’s easier to stay private than face the wrath of ruthless activists and other short-term actors. “I don’t really understand what people’s plan is if this trend continues,” he says. “We’re going to wind up with, like, seven public companies that are mega-conglomerates, and everything else is private. That’s a terrible policy outcome.”
Translating theory into reality has proved challenging, however, and despite the efforts of a 15-person staff, with Ries as CEO, LTSE remains mostly an idea. Last fall, Ries said LTSE would file with securities regulators by the end of the year, but in December the startup pivoted. It reached an agreement with IEX, a new stock exchange whose founders starred in Michael Lewis’s bestseller Flash Boys, whereby LTSE-listed stocks will trade on IEX, which already earned SEC approval.
There’s also the niggling and widespread fear that favoring long-term investors will decrease values of the listed companies. It’s an assertion LTSE disputes: “We’re creating a system that allows companies to be held to a higher standard,” says Michelle Greene, an Obama administration Treasury and NYSE veteran who is LTSE’s chief policy officer. “When you really enable management to manage for the long term, that will enable them to create more value.”
For now, LTSE faces classic chicken-and-egg dilemmas. It can’t list any company without SEC approval; but once it can, any company that chooses it for its IPO will risk the most important fundraising event in its history on an unproven concept. “Before you take a company public there’s a lot you don’t know,” says Dick Costolo, the former CEO of Twitter and an LTSE investor. Adds LTSE adviser Lise Buyer, who runs a firm that helps startups go public: “Eric is trying to do good things, but it will be a long hard climb. Change comes very slowly to regulated markets.”
Still, Ries is so committed to the Long-Term Stock Exchange that it’s now his full-time job. He generally isn’t taking on new consulting clients. But he notes that “a lot of other entities have taken up the slack. There’s now a cottage industry of people who do startup consulting.”
Cottage industry may be an understatement. Corporate hunger for lean-startup help is so robust that groups with names like Bionic, Moves the Needle, and Leanstack—and oodles more that roamed the halls at the Lean Startup Conference—are ready to step in where Ries can’t. And Ries still has his hand in the game. Stephen Liguori, an ex–GE executive, now runs an innovation consulting firm that plays Ries-ian roles for the likes of Dutch bank ING and Hong Kong’s Jardine Matheson. Liguori and Ries also have a new side business, a membership organization called the Corporate Entrepreneurship Community, that brings together innovation executives from large companies to compare best practices. Charter members include GE, MetLife (MET), P&G, Vanguard, ING, and HP (HPE).
Ries, who has two small children, says there isn’t much time left for hobbies. But he does play piano and guitar, and he has a new musical passion that indulges his geeky side. “I taught myself sound editing and audio engineering,” he says. “I like the programmable and modeled instrument trend. They build a mathematical simulation of the physics of what the instrument would be, and then generate the sound waves from that.” If he gets good enough, Ries might even play the Warfield one day.
A Stock Exchange for the Long Haul
Eric Ries says that pressure from investors for short-term results is keeping innovative companies from growing. His solution: The Long-Term Stock Exchange (LTSE).
The company: LTSE, a 15-person company of which Ries is CEO, raised $19 million from investors in 2016.
The mission: To build a stock exchange whose rules and structure encourage long-term investing.
The rules: Among other things, companies that list on the exchange would be barred from issuing quarterly earnings guidance, and investors who hold their shares longer would get more influence, through “tenured voting.”
The obstacles: LTSE doesn’t yet have approval from the SEC to list or trade stocks. And some companies fear that buying in to the concept would decrease their market value.
A version of this article appears in the March 2018 issue of Fortune with the headline “The Accidental Guru.” We’ve included affiliate links in this article. Click here to learn what those are.