Eric Ries, author of Startup Lessons Learned, has a successful career in risk-taking and starting something new.  As he said in Part 1 of our interview, “One of the exciting things that’s happening in this entrepreneurial renaissance is that for the first time, I think the first time in history, entrepreneurship is now a career that you can embark on.”

In part two of our discussion, we covered how the Lean Startup movement has spread, what the latest news is for the Startup Visa Act, and what he’s learned about entrepreneurship along the way.

(Eric is speaking at Web 2.0 Expo New York this October. To see him and dozens of other top notch Web 2.0 speakers, register today with 20% off discount code BLG20. We sold out well in advance of last year’s show, so be sure to secure your spot today.)

You can read the interview, which has been edited for length and clarity, below.

Pike: How far is the message of the Lean Startup spreading? You’ve obviously been speaking in a number of conferences and events, and you have this book now and obviously of course the blog. Can you give me a sense of how far it’s going? How many different countries?

Ries: Yeah, I think there are really two dimensions that are really interesting about how far it’s grown. The first is what you’ve just been talking about geographically. This started as a movement in Silicon Valley with a few of us sitting around a few tables. And very quickly it has grown into this international phenomenon because what people in other places have realized is that you don’t have to be in Silicon Valley anymore to have a flourishing startup hub, to be an entrepreneur, to have the kind of success that you normally only read about in magazines.

And I think there’s something about Lean Startup that has really resonated with those in the community. So if you look, there are Lean Startup Meetups now in more than 100 cities around the world that range from the super-active huge events like they do in the New York group to a handful of people meeting around a conference table once a month, once a week, or going out for coffee.

But those groups are all growing every day, attracting a few more supporters each time, and pulling more and more people into their orbit as these sort of ecosystems. So that’s very exciting.

Pike: It reminds me of the spreading of wineries – going everywhere as opposed to just being in France. Wine is now grown everywhere.

Ries: There’s something very similar because both are a fruit that flourishes only in a certain soil. And what people have realized is that they have those conditions right near them. They just never realized it before. So you take a crop that was specialized and, what’s the word I’m looking for? It was developed to a fine art somewhere else at a time when it was much more expensive to figure that kind of stuff out.

And now all of a sudden through globalization you can transplant it everywhere.

Low and behold, look what’s happening. A second indication of how wide the movement has spread is the number of different industries and the kind of companies that have been adopting it. So my background is all in software, consumer internet products, but the methodology is really a general purpose business philosophy, and so it has been embraced by people in clean tech, in enterprise software, in bio science, in big companies, small companies, in governments and NGOs, really quite a diverse set of companies, and we document quite a few of those case studies in the book.

Pike: How has your thinking about Lean Startups and the methodology changed since you first started teaching this? Do you have any mistakes you care to admit?

Ries: Oh, I can admit so many. I have an embarrassment to choose from.

Look, what is known today about entrepreneurship is so the tiniest tip of the iceberg. And when people look back on our time in the future, they’re going to laugh at us and how primitive our ideas about innovation were. And my journey has been a very steep learning curve all the time. Learning from other writers, other thinkers, and then all of just thousands of practitioners who took this idea, put these ideas to the test.

You know, I’ll mention one thing in particular because I think it’s really interesting even though most people think it’s really boring. And that is accounting. Today, accounting is a topic that no one ever talks about. It’s not interesting except when it leads to some kind of scandal because somebody messes it up.

And if you ask most entrepreneurs what accounting is for, they will say, “It’s that thing you do to keep track of where the money went,” because that’s pretty much all we know of accounting. We have totally forgotten what a revolutionary and breakthrough concept modern accounting was and why it was invented.

It was invented in the twentieth century in order to enable big companies to operate with multiple divisions, what Alfred Sloan, who was the most famous practitioner of this method, called decentralized division for centralized control. And the reason you need accounting to do that is because you need to be able to forecast how well each of your divisions is supposed to do in the future, so that you can hold managers accountable for whether they did better or worse than the forecast.

So the primary tools of modern general management are planning and forecasting. It’s straight up with the Alfred Sloan playbook. That playbook was developed starting in the 1920s. And most modern companies operate this way. If you do better than planned, you get promoted. If you do worse than planned, you get fired.

And of course the big question is, well, where do those plans come from? And how do we know that they’re accurate? Well, it turns out that as long as you’re a company with a long and stable operating history and you have the people who are smart enough and have the discipline enough to have the math skills just like Alfred Sloan’s original teams, if you do the work, you can figure out from your operating history what is supposed to happen in the future.

When I read that for the first time, I almost fell out of my chair because I have never in my whole career, ever, not even one time, seen a forecast of anything that came out to be remotely accurate… never seen it. I always thought forecasting was a thing we did as an intellectual exercise to satisfy stupid investors, but I didn’t understand why we did it, because it may never turn out to be right.

And what was a shock to me is that actually there was a time when they did turn out right. And there are still pockets of our economy where these forecasts are operating just fine, every place we have a long and stable operating history.

The shock to me was looking around the world and saying, “Gosh, is the world getting more and more stable everyday”? No. Definitely not. So what tools do we have to deal with that increasing level of uncertainty and of course, full circle right in our backyard, right here in Silicon Valley we have been developing those tools all along.

Because what is entrepreneurship but the management discipline for dealing with high uncertainty situations like trying to create a new product? That was a big shock to me because before then I had always been thinking about Lean Startup as a specific set of operating prophesies that was just like if you’re in a team, trying to do something, it doesn’t matter what, here are some procedural things you can do to increase your odds of success, drive down batch size improve cycle time, talk to customers, get data about them, etc.

And really, my realization was the mistake I was making was operating the wrong level of what I now call the pyramid startup way, which is that most of us like to talk about people and culture as the problems we’re trying to solve, and an exalted few actually can get down to a level of process and say, “No, we should we use agile methodology, Lean Startup, should we use waterfall.” What are the systems that are actually going to help people decide what kind of culture to build and therefore what kind of people can flourish here?

But the mistake was that’s actually still the surface. Below the surface is this big question of accountability, which I had never had any awareness of before and is really, I think, at the root cause of why so many ventures are being derailed. If we use the wrong accountability paradigm, if we give people the wrong incentives, if we expect them to meet or exceed plans and forecasts, they will never be able to innovate successfully.

And so, now I spend a lot of my time with audiences talking about accounting. Just like I said, it’s the most boring topic imaginable, but I think also the most important.

Pike: Moving along to a different topic: You’ve spoken in D.C. You’re heavily involved, of course, with the Startup Visa Act. Give me a sense of where we are with that.

Ries: We’ve just had a major breakthrough from a very unexpected source. For those who don’t know, Startup Visa is a very simple jobs initiative that we have been working on the last two years to get the United States Congress to adopt. And the short answer is right now, if you are an entrepreneur who wants to come to the United States with a great idea and employ Americans and create a high growth company and you have American investors willing to invest in you, there is no way for you to get a visa, which is just stupid.

We think there should be a category in the law that says we welcome these innovators and entrepreneurs. We want them to come to the United States. We want them to be part of creating the new economy here. We have had that bill successfully introduced into Congress on a bipartisan basis two years in a row, but the truth is that Congress has been basically deadlocked on any issue that relates to immigration because there’s a certain hard core faction of anti-immigrant xenophobes in Congress who just will not allow any action to happen on anything immigration related, which I think is really sad.

We still continue to fight that battle. We still think it’s important for people to lobby Congress because for the long term sustainability of our economy this is an action that’s going to require enshrinement in the law. But just recently, the Obama administration has been very supportive of this whole initiative. They of course want comprehensive immigration reform in Congress, which is an even more difficult project. They have been looking for administrative routes to make it easier for entrepreneurs to come to the United States.

And they’ve just announced a very important rule change, which while it’s not the complete, full Startup Visa, it is a very important first step, which allows people who are here on a H-1B Visa to be able to maintain their H-1B status as basically employees of their own company.

So there’s this odd loophole under current law that has meant that even if you’re allowed to work in the United States legally, you can’t do so as an entrepreneur. You can only do so at a giant company that’s willing to jump through the hoops of sponsoring your H-1B visa application.

And this will change, if successful, this will allow a whole new category of entrepreneurs to stay in the United States and, like I said before, create jobs. That’s very exciting and I applaud the Obama administration for taking that step.

Pike: That’s great. What’s also going on with our administration right now is the Startup America Partnership. What do you think of that so far?

Ries: Too soon to tell. I think one of the most important things, in any political initiative, is raising awareness among policy makers about the importance of your cause. And I think that Startup America is really unprecedented in that scope.

For the first time, we have a presidential administration who hasn’t just been paying lip service to the idea of so-called job creators or pro-growth policies, which is often code for basically handouts to rich and powerful corporations.

Here we have something really different, which is having individual Americans step up and create high growth companies. It is an important and different category of policy making that has historically been completely neglected by the government.

And I think it’s amazing to see the administration take that awareness and put it into reality. In fact, it’s been, on the administration side, it’s been a lot more than just rhetoric. I was recently in DC at an event on the theme of open innovation.

These are things that the administration and the whole government is doing to open up data, open up access to government services so that individual innovators can create startups that solve problems instead of the government having to solve them.

So it’s a very exciting time, a lot of cool stuff that’s happening. The Startup America Partnership is a public-private joint venture that’s trying to create services and resources that actually help incubate startups all over the country, and I just think it’s still too new to know what impact that’s going to have.

One thing I’ll highlight, and I think especially promising, is what is called the TechStars Network.

TechStars is one of the most successful incubator accelerators in the tech world and what’s been really exciting is that they have open sourced their entire model allowing people who are trying to create accelerators all over the country to basically license everything about it and hopefully that will bring the TechStars formula to a lot more cities across country.

But, like I said, these are early days. I think it’s hard to say what the true impact is going to be.

Questions from the Web 2.0 Expo Twitter Audience

Pike: I have two questions from our Twitter audience. First one is “What are the best questions to ask of your users when testing to run a first minimal viable product?”

Ries: That’s actually not the right question to ask, is the problem. And it’s not a bad question; it’s an important question. It’s just slightly wrong in that customers don’t know what they want. And this is something that innovators and visionary people have been saying for years to try to avoid having to do the kind of data based tasks testing that we advocate in a startup: “Customers don’t know what they want, therefore, I can just ignore them and just do my vision.”

Well, guess what? Not true. Just because customers don’t know what they want doesn’t mean they don’t have important information that we need. But the paradigm of asking them questions is really misleading. Yes, occasionally doing surveys and talking to customers, having a conversation with them, all that stuff is helpful and I’m not saying that’s a bad idea.

But if we actually have a minimum, viable product, if we have some version of the product we can put in front of customers, then it’s much better to conceive of what we’re doing as experimentation on customers as if we’re a diabolical mad scientist.

Trying to figure out, “Well, I wonder what their behavior will actually be in this situation.” And then the questions to ask are really the hypotheses to test depend on your beliefs about what the product is supposed to do.

So if I have a product that’s supposed to be insanely viral, I mean it’s going to be better than Facebook, better than Hotmail. It’s going to be one of the most exciting viral products of all time. Once people try it, they will be absolutely, absolutely impossible for them to avoid telling all of their friends about it.

Then, that’s a great thing that’s very easy to put to the test. Before millions of people can share it with their friends, 10 people have to share it with their friends. So let’s make a prediction. If I expose ten people to my super virus, I expect at least ten more people to be caused to sign up as a result.

That’s a simple, actionable experiment that has a very clear quantifiable outcome, like either they did it or they didn’t do it. I’ll make a prediction: The first time you try this experiment, you will come back with a result that will make you very sad.

Because, probably, the first time zero of them will share it with their friends. And yet that’s actually really good news because now we have real facts that we can use to decide what to do next. So I always say better to have bad news that’s true than good news that we just made up.

And once we have the bad news then it gives us something very specific to work on. What do we need to do to get ten customers to do this specific behavior? And then once we find that out, then we can move on to the next steps in the model. It really focuses the mind in on what we need to do with customers.

Pike: Second question. “When are you coming back to Vancouver?”

Ries: The next time I’m invited.

Pike: I think that counts as an invitation.

Ries: Well unfortunately, it used to be I could just go wherever I wanted, whenever I wanted. In fact, Vancouver was one of the first international cities to host me way before this was at all popular. So I had a great time then, and I have been back since. I hope to be back again.

 

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