Did Lean Startup fail at GE? – Startups & Venture Capital

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At the risk of hopping on an alreadycrowded bandwagon I wanted to discuss the topic of GE and Lean Startup in this month’s newsletter. With longtime CEO Jeff Immelt out and the stock price at a historic low, new CEO John Flannery is shaping GE to return to short-term financial health as quickly as possible. In the time since the transition this reshaping of the company has manifested primarily as cost cuts across business units, amenities and innovation programs. This news has come as quite a shock to those of us in the Lean Startup and Agile communities because GE was supposed to be the poster child for innovation at scale.

The work Eric Ries did there (chronicled in his new book, The Startup Way) bringing The Lean Startup way of working to bear on a broad array of products and services served as inspiration for those of us working with other large organisations on their own transformation and innovation efforts. The Fast Works program, as it was called inside GE, was the model we all pointed to and said, “if GE can do it, so can you.” And yet, despite the investment of time, money and people, GE’s stock price didn’t reflect the kinds of wins Lean Startup was supposed to deliver.

Crisis demands a scapegoat and many were quick to blame Immelt’s firm belief in Lean Startup as the cause for his and the stock price’s demise. If it wasn’t directly responsible, then at the very least Lean Startup served as a distraction away from GE’s core competencies, the critics said. To see if they were right, let’s take a critical look at the basic philosophy behind Lean Startup.

At it’s core, Lean Startup is the business-ification (forgive that non-word) of the scientific method. Boiled down it’s simply an admission that we live in a world of continuous change and uncertainty. In light of this admission, it forces us to reframe our ideas as hypotheses and to quickly and cheaply test them using the results to justify further investments (or not) in the work. In other words, it’s a risk mitigation strategy. When framed this way, it’s hard to see how these ideas would be the direct cause of poor financial performance.

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However, when framed through the lens of financial planning, Lean Startup does seem to take on a greater share of the responsibility. Why? Because the market (and hence the CFO) love predictability. They love to know how much profit your company will make next year. They love to know exactly what you’re going to make and how much it’s going to cost. And, most importantly, they love to know what the ROI will be on those products and services. Unfortunately, that’s not the world we live in anymore and Lean Startup practices make that perfectly clear. The vocabulary alone immediately sends up red flags during budget meetings - assumptions, hypotheses, experiments. None of these things sound like shipped products (or profits). Instead they sound like shipping delays, purchase delays and profit delays.

This mindset reflects a funding model that worked well in a predictable world - a world where manufacturing was the law of the land and barriers to entry were nearly insurmountable. In this world, anything not nailed down is perceived as risk to short-term profits and should be rooted out. However, this is no longer our world. We live in a software-driven world. Software allows nearly anyone to start nearly any type of business - virtual, physical, service, etc - with far smaller investments and risks. It allows the hobbyists in garages to build businesses that can compete with the biggest companies in the world. And the kicker is that this enabling technology improves at a blindingly fast pace. Things that were impossible 2 years ago, are now run-of-the-mill.

Lean Startup is not the cause of poor financial results. If anything, it’s a magnifying glass that reveals antiquated planning practices not suitable for a software-driven world. Our funding models need to change. They need to reflect two distinct but separate realities. The first is for our core businesses and the incremental improvements we can make there over relatively short periods of time. This is closer to the traditional model companies have been following for the last 100 years. Second, and more importantly, a separate funding track has to live in parallel that supports an increased level of patience for innovation efforts and the building and scaling of new businesses. 90% of startups fail. Does your organisation have the patience for 90% of its new ideas to fail? A typical VC fund return happens (if at all) in the 5-7 year range. Does your organisation have the patience to wait that long for a new business unit to return profits?

As a risk mitigation strategy, Lean Startup techniques help us sift through a series of bad ideas relatively quickly to find the ones that stand the greatest chance of driving future business growth and ROI. Funding for these efforts should be evidence-based, feeding those that demonstrate traction and starving those that don’t. If we wish to fend off smaller competitors, startups and entrepreneurs we have to start thinking and working like they do. Their agility is driven not just by their size but by their ability to adjust course as new evidence is discovered. This is unpredictable. It’s uncertain but it’s the defining characteristic of modern businesses. Those that embrace this uncertainty and fund the continuous learning efforts it demands, will win. Those that ignore it, sticking closely by the methods of the last 100 years, will find themselves perhaps succeeding in the short-term but putting their long term success at great risk.


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