strategy+business Winter 2013 : Page 97

“ Learning is a four-letter word in most companies; learning means you failed to do what you said you were going to do.” S+B: What are the units of progress you should monitor? RIES: We still build spreadsheets— the finance guys insist on it—but they are built off more fundamental assumptions that we can test. This demonstrates that learning some-thing about a customer is worth money to the company. For example, the first assump-tion in the spreadsheet might be the number of customers willing to try the minimum viable product every day, beginning with the launch date. That becomes the basis of every-thing that follows: conversion rate of trial customers to purchasers, their repeat purchase rate, and so on. If everything goes according to the spreadsheet, five years from now we’ll make $100 million. But sup-pose that first input is wrong. Say we hypothesized that we could per-suade 10 percent of customers to sign up for a free trial. Everything in the spreadsheet is based on that assumption. What if that input is actually 0 percent? The five-year forecast instantly goes from $100 million to zero. So, the first thing we measure on the path to launching our great new product—our first “learning milestone”—is the accuracy of our hypothesis about customer uptake. We celebrate the successful mile-stone of discovering what that input is in real life, so that we’re no longer in a spreadsheet fantasy. Imagine that after you talk to 50 customers in a booth in the store, only one of them takes the product home. In traditional corporate set-tings, that’s bad news that has to be suppressed. You don’t want anyone to find out that you had a failure, because it means canceling the proj-ect. But I’m trying to train the new generation of finance leaders to say, “This is great news. We know where we are. That’s a successful mile-stone. Check, good job.” Now the experimentation be-gins. Build, measure, learn—on that cadence. What do we need to do to push that 2 percent customer signup rate closer to 10 percent? Ev-ery basis point improvement in that metric is worth a defined amount of money five years from now. At 0 percent, this business is worth zero dollars. At 10 percent, it’s worth $100 million. This is still a hypoth-esis at the far end, but we are taking the first step to test it. With the very first learning milestone, you show quantitatively that learning is worth something to the company if all the other assump-tions check out. But right now, you are only concerned with testing the first assumption. You will gradually test all the assumptions in the spreadsheet. As you do, you build a more accurate model of what the business is really worth. S+B: You said you can’t suddenly drop this approach into a large, multibillion-dollar global organiza-tion; the shock to the system is too great. What conditions are required to make this work? RIES: First, we need a general theo-ry of management. It would recog-nize that what we used to call gen-eral management and what I’ve been calling entrepreneurial man-agement are both particular cases. A general theory would encompass both forms of management, and in fact modern companies must. I think it’s an existential imperative. If you are not an innovation facto-ry, you will be replaced by someone who is. I think modern management will look a lot like portfolio theory. You wouldn’t put a guy who man-ages equities in charge of a bond fund and vice versa. Your high-risk, high-reward entrepreneurs need to thought leader 97

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