Q&A: Eric Ries on Lean Start Up Principles for Nonprofits

A few months ago, Eric Ries and his team invited me to cover the The Lean Start Up Conference this past week. With over 1,500 attendees and a line up of inspiring and diverse speakers, I walked away with an even stronger feeling that Lean Start Up principles are not just for scrappy tech start ups, that many industries can benefit – including nonprofits.

In advance of the conference, I was lucky enough to talk in depth with Eric Ries about applying his methodology to social change work.

Q: Nonprofits do not exist to make money, but for social change. Is this an advantage or disadvantage when it comes to nonprofits applying the lean start up model to their social change work?

Even if it we are talking about for-profits, I think revenue alone is not a sufficient goal. Focusing on it exclusively can lead to failure as surely as ignoring it altogether. It is a misconception that for-profits exist to make money only. In the early days of a successful lean startup, they look like untentional nonprofit organizations because they are focusing on impact metrics: How effective are they serving their stakeholders or customers? Just so happens they also have a business plan to translate these impact indicators into dollars and sustainability.

I think financials should follow the impact – it does not work the other way around. A start up that demonstrates impact does need a business plan to become self-sustaining. The business plan is about how the impact they’re driving can lead to financial results that sustains the business.

Q: Nonprofits may get their “start up” or innovation funding from foundations. Venture capitalists fund start up businesses. Big corporations invest in internal labs to come up with innovative products or approaches. Can you talk about the relationship between funder and lean start up and what leads to success?

I work with large companies that are trying to invest in their “intrepreneurs” to drive innovation in the company. They are like VCs and foundation donors. The “interpreneurs” have promising evidence of impact, but no revenue to show for it. The focus in the early stage is on impact, not dollars. The dollar accountability is put off until the future.

There is also mutual distrust between funders and entrepreneurs. It is common for entrepreneurs to dodge accountability because being driven by the metrics suggested by the funder can get in the way of success. Experimentation, iteration, and pivoting is needed first. Funders that ask for ROI to soon create a bad dynamic for innovation. They pull the plug when the start up is on the brink of success.

To change that, we need an accounting revolution that goes beyond the traditional, narrow accounting methods to what is called “innovation accounting.” It is a more in-depth analysis that uses the “minimum viable product” to establish real data on where the company stands at any given juncture.

Q: In some cases, the people who work in nonprofits who want to apply some of the lean principles are not necessarily the organization’s leaders or funders. The lean principles require a mindset change for some nonprofits. How do people in nonprofit who want their organizations to embrace these ways of working get their leadership and organization to change?

From what I’ve observed, I think some nonprofit social entrepreneurs may over promise to funders to get their project funded. In other words, in order to get the grant, they might BS or simply have unrealistic expectations about short term outcomes. It catches them by surprise when funders ask for sustainability in the first year or the nonprofit realizes they need a pivot but isn’t honest in the final report.

I think that nonprofits should change what they promise to funders when asking for funding for innovative programs. Change the conversation from vanity metrics to validated learning. Vanity metrics are the numbers – how many people we served, how many views, etc. In these early stages, it is more important to honor learning. What is your hypothesis? How will you demonstrate that it works with a small group of people before we scale.

We need to understand that learning is the right unit of progress, not vanity metrics.

Q: Many nonprofits have a perfectionist complex about their programs and what they do. A sort of fear of making a mistake or failure. Your key concepts like MVP and rapid experimentation – what baby steps can nonprofits take to start to work this way?

Yes, it is hard to get past the fear. Perfectionism is not just in the nonprofit sector. There is an internal mindset that bad things in the world will happen if a product or program is not right from the beginning. We live in a culture of high quality and low risk tolerance and people want to be safe and not harmful.

We have to look at perfect vs fast. If you go slower, you get less feedback and that won’t help you build a better product or program. I think it’s wrong. You need to iterate towards perfection based on audience or stakeholder or customer feedback.

Q: In my book, I wrote about being “Data informed,” -- vs data-driven. The idea of continuos reporting is often met with a sense that this leads to “exhaustion.” How can organizations get to a “on-demand” reporting for continuous improvement?

“Data Informed” is so right on, I’m going to use it! People talk about the science as if it was turning the crank. More scientific decisions. Science is a science – and it is hard. But, we revere Einstein for his creativity. His creativity: I have a theory and I’m going to test it.

Remember that when you use the scientific method, your experiment is only as good as your hypothesis. You have a vision and then you creates a hypothesis. Data is not crystal ball. You don’t ask your GPS where you want to go? If you get lost… Aren’t glad your GPS can reroute?

Some view the experimentation and iteration as wasted time. And we get the question, “Why didn’t you do version 2 in the first place?” Well, we didn’t know that version 1 wouldn’t work until we experimented with it and then we needed to pivot.

I think the key to success with experiments is to make the experiment cheap and that is how to get around the wasted time issue. It is moving fast, but there is a reflective process. Being an entrepreneur is also a journey of making better discoveries.

Q: What is the difference between evaluating your work for impact vs continuous improvement? Nonprofits have big hairy social good goals – it is easy to identify in some cases – lives saved – but linking the incremental steps or micro conversions can get complex. How to simplify?

I have this conversation with ten times a day with start ups and big corporations. I believe in math in the spreadsheet and business plans. The spreadsheet that you need to create is to show micro behaviors that get into the macro behaviors. Spreadsheets need to operationalize innovation accounting. This is a whole new skill set and discipline. You wouldn’t expect to learn cost accounting in a single lecture. You have to practice it. This is a skill that takes time for entrepreneurs to master.

You need patience.

Q: Startups and nonprofits both often carry a sense of fervour and mission, and it isn't uncommon for the people behind them to go well beyond posted job descriptions and hours of work. How do you keep that flame alive, without burning staff and leaders out?

The truth is when we’re working crazy hours and that can be a death march. We behave in wasteful ways. It isn’t very helpful to work 20 hour days.

What if we used the concept of validated learning to make sure our work is not wasted energy. Frenetic activity doesn’t always create quality results. It takes tremendous discipline and courage to test this hypothesis: What if we just stopped doing all that stuff we do because we’ve always been doing it that way? What if we didn’t have the fancy report? How does the effect the people?

Q: Advice to nonprofits that want to embrace lean?

You can do it! There are real examples of people who are doing this in crazy situations like public school. We think it is possible and it can be done. The key to being more innovative as a nonprofit, is to think of everything you do as an experiment – whether or not you wanted it to be an experiment. It’s very liberating. Focus on learning the most you can. Get the most learning to run the next experiment. I found that is a relief compared to the burden of perfect. Let’s do it cheap, quick, and get embarrassment over with instead of spending energy trying to avoid it.