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Building a Startup for Long-Term Success

Alton McDowell, co-head of Technology and Disruptive Commerce, Middle Market Banking, sits down with Eric Ries, co-founder of the Lean Startup Co. and author of “The Lean Startup” and “The Startup Way” to discuss startup trends, lessons he’s learned along the way, and best practices for entrepreneurs. Eric and his team are known for creating a movement within the startup community and have helped companies make lasting impacts for sustainable growth.

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Tech Trends Episode 11 Transcript

Alton: Good morning everybody and welcome to J.P. Morgan Tech Trends. My name is Alton McDowell, I am the co-head of what we call Technology and Disruptive Commerce at J.P. Morgan in our commercial bank. This morning I'm excited to have a very important person on our stage…

Alton: …Eric Ries, founder of the Lean Startup Way, and also my recent book that I'm reading, "The Startup Way" itself.

Alton: Eric, thank you for joining us!

Eric: Oh, thanks for having me!

Alton: Why don't we just dive right into some questions. What is the Lean Startup Way movement and how did it get started?

Eric: Sure, so the short version is that the Lean Startup is a application of a number of previous theories, like lean manufacturing, customer development, agile, you know, dev ops, design thinking. Like elements from those theories but applied to the process of innovation itself. And it started out, out of a lot of failure. And not just mine, but I'll just tell you about mine 'cause that's the one I know the best! I really believed that if you had great technology and a good idea, and you were in the right place at the right time, then you would be successful as an entrepreneur. Because that's how it happens in the movies, and in the case studies, and in magazines. And it's like, step one, have great idea, young people in garage with great technology. Step two, question mark question mark question mark. Step three, on cover of magazines. Are you familiar with that?

Eric: And I was really very clear about step two, but it just seemed like everyone was doing it. And I got an entrepreneurship during the dotcom bubble, so I mean really, everybody was doing it. And I kept having the experience over and over again of doing everything just like it says you're supposed to do, following the management best practices, doing everything right, and then having the result be colossal failure. And I couldn't really understand why, other than just kind of the fundamental unfairness of the universe. For whatever reason, as I started to go through this experience over and over again, my attitude was, each time I'd go through this process, let me at least try to make some new mistakes this time, and not just do the same thing over and over again. And so I, and obviously with the help of a number of other entrepreneurs and thinkers, started to develop a playbook of different approaches to solving that problem that at first just seemed intuitively right to me. So for example, having customers be involved in product development far earlier than was considered normal at the time. Using a scientific decision-making framework for evaluating if the product is getting better or worse. Which, I mean can you believe that was controversial at one time? And then focusing on, not the quality and perfection of the final product, but rather the speed of iteration and rate of improvement over time. And from that, those kind of basic insights, we have concepts like the minimum viable product, like Steve Blank's customer development, the build-measure-learn feedback loop, and then most famously, or infamously, the idea that if the strategy is not working but you want to stay true to the vision, you should pivot. A change in strategy without a change in vision. And so that all happened around the time of the financial crisis in 2008 and nine. I started writing about it, it became this phenomenon, and I eventually wrote a book called "The Lean Startup" in 2011, and then it completely took over my life.

Eric: It's not exactly what I thought I'd be doing from a career point of view, but here we are.

Alton: So what's interesting is, when I think about, even just at J.P. Morgan, we have a very similar mindset in terms of, now, iterate quickly on ideas, and whether it's agile technology and thinking through, here's what clients want. Come up with ideas, solutions, quicker. Don't take 10 years, because guess what, by the time the 10 years are over--

Eric: Oh, exactly!

Alton: Something else is out there people want! So we have a very similar mindset, which is what, I think when I was reading the book, it really did resonate with me—

Eric: Oh that's great!

Alton: --on how we think about it.

Eric: I mean that really is the modern way in business, and I think every company will be organized that way eventually.

Alton: That is exciting. When you think about the conference and talking to people, and if you're at the beginning of your journey of a founder in your startup, what is the advice you give them?

Eric: It's funny, when people come to me for advice, they usually think that I'm going to talk to them about metrics and iteration. I think it's because of the selection bias of people who come to talk to me. That's actually not usually the issue; the issue is more likely to be a vision issue. So the most common advice I wind up giving people is, that if you don't have a truly passionate vision about what you want to accomplish, you literally can't pivot. It's like doing science with no hypothesis. If I walk into a chemistry lab and I just grab a vial of this and a beaker of that and start throwing them against the wall to see what happens, some stuff's gonna happen!

Eric: But is that science? Would you call that chemistry? No, that's just throwing stuff against the wall. And so usually what happens is the people are, they naturally bifurcate along the line of either, customers don't know what they want, and I am the visionary auteur, you know, who whatever, and I'm gonna tell customers how it is and it's gonna work out great! And I'm always like, "Hey, if that works for you, "God bless, hasn't been great for me. "I don't necessarily recommend that." But then you also have people who are like technology in search of a problem. So they're passionate about some piece of technology or they had some kind of insight or they just wanna make money. And they're like, I'd like to have a career making money, making something. And that's not a good way to get into entrepreneurship either because you can't formulate hypotheses worth testing. And if you know physics, you can have tremendous acceleration by running around in a circle. That's not good, we want to have some idea of where we're going. The other problem is entrepreneurship is a hard, long, slog. When you read about an entrepreneur who was an overnight success, it's usually an overnight success 10 years in the making. So it was a very long night. What do you do if you're working on something you don't really care about? If it fails, that's a blessing. The curse is it works, and now you have to keep working on it for a long time, and you don't even care about what it is. That's actually much more painful and much worse. I know many of you don't feel that way right now, you're like, Well I would be happy to have that pain! But actually it's very, very, very unpleasant. So you may as well pick something you really care about, you may as well pick something that you have a lot of vision around, both for moral reasons and emotional reasons, but also for efficiency reasons. Your experiments will be way better designed, your rate of iteration will be much faster, if you have some concrete idea of what is supposed to happen because now you can compare the results to your expectations and pivot more quickly.

Alton: Now that's a very good point, and it's funny, as you say it, I'm thinking, here at J.P. Morgan how we think about things. And we have this tag line, "Helping Companies Look Around The Corner."

Eric: I like that!

Alton: Yeah, the iteration of a process is hard. We think about, how do we help those founders, those entrepreneurs, those companies. Again, you're gonna go through those challenges but how do we help make that journey a little bit easier, or at least give people insight to think about it.

Eric: I mean that's rare. Most entrepreneurs are very lonely, and your partners don't actually help you that often, so that's sounding good to me.

Alton: Yeah, absolutely. Thinking about technology, and obviously this is J.P. Morgan TechTrends, and we think about technology and how it helps with companies and we have a lot of technology that we kind of created for consumers, whether I think about real time payments, even on the podcast we have clients thinking about cyber security, which is obviously a big issue. What do you tell entrepreneurs about technology, how they should think about it, how they should use it? I think you do a good job in the book talking about using it to come up with your MVP and testing, so if you can drill down into that a little bit.

Eric: I don't think you'll ever have a guest on your show who likes technology more than me!

Eric: You have a stereotype in your mind of the kid who was in their parents' basement programming computers and that's all they wanted to do and they didn't get enough sunlight and socialization, hi, that's me.

Eric: The first time my father brought home a beige IBM PC XT, for those that remember, with a 5.25 inch floppy disk, and put it in our basement, and from the day that that monolith showed up in my life, all I wanted to do was learn how to control it and program it. I really am that kind of person. All the entrepreneurship I've done in my life has been tech-enabled and I really think that building software is a uniquely powerful way of changing the world, because the power of software is limited only by the quality of your imagination. So it literally is imagination made tangible. Any other business has physical constraints, but software really doesn't, that's a rare thing. And especially now, we live in an era where the tooling is unbelievable, so the leverage that an individual person can have with technology compared to at any other time in history, is truly surreal. Even though I love technology more than anyone, I would say that the path to innovation and to breakthroughs is usually not through technology itself. It's usually the application of technology to some problem domain that's been historically unserved, and it requires some level of insight about the underlying thing you're trying to solve. So when we're talking to larger companies who want to transform and get into digital, I get called in to talk to them about digital transformation, because I'm the nerdy Silicon Valley guy, I think they kind of coming, expecting me to be like, give you a bitcoin and drone a little more, you know, you'll have digital transformation. And of course my message is, management transformation precedes digital transformation or it doesn't work. I wish it wasn't so. Learning how to manage a software project is not like managing other things. It's very difficult and it goes off the rails very quickly, and I've been really pondering why. I think it's because if you are not a technologist yourself, you're just too vulnerable to being sold snake oil. Because most technology is, as the famous saying goes, indistinguishable from magic, but the converse is not true. Things that seem like magic are not necessarily a sound technological breakthrough. So the number one most important thing is, if you want to be technology enabled, you have to commit yourself to understand technology and how it works. I strongly recommend entrepreneurs who want to be software entrepreneurs to learn how to write software. It's not that hard. It's easy for me to say, I know, but like if you can use an Excel Spreadsheet, you can write a computer program, and there's like 42 boot camps for teaching normal people software, that were started this morning. It is highly accessible, and the reason that's important is imagine I was an MBA, I graduated with my MBA program, and I'm like, I'm gonna be a manager of a factory. And you're like, excellent, step one of being manager in a factory is probably to walk the factory floor. And they're like, no, no, I have a phobia of heavy machinery, and the loud noises, the clanging, it makes me intimidated.  So I would like to manage factories but I don't ever want to go a factory. Those people exist, we've all met them. Are they successful at managing factories? No they are not. You can't walk the factory floor of software unless you can write code. So you don't have to be the world's greatest programmer, but when a programmer starts giving you mumbo jumbo about what is and is not possible, you can't fall for the solar flares defense. You know, software's late 'cause of solar flares. You have to be able to say, "I don't that is likely, no! I don't believe you." If you can't say that, then you're sunk. You may as well give up.

Alton: Very good point. At J.P. Morgan we talk to companies, and especially entrepreneurs about the moments that mattered, which is also akin to you discussing in the book the pivot point. And I think about that in our business, and there are pivot points where we say let's create this product, or this product we created maybe doesn't have the right fit, let's now iterate on a solution.

Eric: Yeah.

Alton: Can you kind of tell me, when you think about your journey, what your pivot points were?

Eric: Oh personally?

Alton: Personally.

Eric: Sure, I don't know how far back you wanna go. I discovered the internet by accident when I was probably 12. I was in the BBS scene, for those who know what that was, and one day a friend of mine calls me up and he says, "Go to your modem, and "dial this phone number." Sure, dit dit dit dit, remember that sound that it used to make when it would connect? Deedelee delee! Now all I cared about was using computers to play games at that time, and normally when you logged in to the thing, some graphic thing would show up, it just logged me into a prompt. It was like, you know, gibberish, colon, blinking cursor. And he's like, "Type the following, telnet," and he gave me what I now know to be an IP address. And then something magical happened, he logged me into what was called a multi-user dungeon, a MUD. Now I'm really dating myself. Text-based RPG adventure that could have 50 players playing it simultaneously, which was like a revelation to me. So my introduction to the internet was actually that it could allow you to do magic, like the real thing. Because the way these programs were written is you play the game, and you'd level up, and you'd be a character, and then if you got to the maximum level you could ascend. You could relinquish your mortal body and become an actual wizard, which is the people who program the game. And I was like, you think we have ethical rules in our society, you should have seen the ethical rules required for the behavior of wizards and MUDs, this was like a serious thing!  You're giving up something you've really invested a lot in, and that was an incredible way to learn programming because if you can type the scroll of the correct incantation, a physical object will appear in your hand and you can control its behavior. That was very important, so discovering the internet and the power that it would have, that was a very transformative thing for me. I didn't expect to become an entrepreneur. If you've seen the movie "The Social Network," I had the first half of the movie, The Social Network Experience. Fortunately not the second half part where we make any money and sue each other, but my friends and I were in an Ivy League university during the dotcom bubble, and had the idea that we should drop out of school, create a website where students from those schools could create online profiles for the purpose of sharing, which did turn out to be kind of a good idea, like some years later.

Eric: But we had the wrong idea, we had an idea that they would create those profiles and use them to share with employers to get jobs, with all the recruiting. We had no idea about entrepreneurship, and the best thing that ever happened to me in retrospect, is that a dotcom bubble popped shortly thereafter, and so I was only away from school for a short time before I could go back and finish my degree. And that was a very transformative experience because in the movies, this never happens. In the movie, the most satisfying part of these movies is the person who told you it would never work and you shouldn't do it in act one, the plucky protagonists is like "What do you know, old man! I'm gonna go off and do my adventure!" And then at the end, they come back and you're like, You were wrong, I was right, and I'm a champion, and you're not!" That's very psychologically satisfying. I want you to actually imagine the experience of going back to someone and saying, "Actually you were right, just like you said, it didn't work out and I'm going back to school to finish my degree." It's not a good feeling.

Alton: But did you view that experience, as you kind of say in your book, the information that will help you—

Eric: No, no!

Eric: I was totally devastated and I thought I was a horrific failure and I was really upset. And it took me a lot of years later, that I realized what a good learning experience it was and how much, how formative that was and how much it was a gift that set me up for so many good things later. So here's a funny tidbit, I don't know if I've told this story before. I went through that experience, I finished my degree, I applied for jobs. I applied for jobs in Boston, New York, the Bay area, and Seattle. When I went to interview in Boston with a technology company, I got asked this question. The person said, "Okay, I see that you have this failure on your resume, what mistakes did you make at the level of strategy in this company?" And I realized as he was asking me this question, I didn't understand the question. I actually did not know what the word strategy meant. And I'm trying to answer his question, I'm like, "Well, we did this wrong," he's like, "But at the level of strategy, what mistake did you make." And I'm like, man I don't know, what does this guy want? And then it was just like a total disaster. In New York, people just didn't care. The fact that I had this failure was irrelevant. In Seattle, I was talking to ex-Microsoft people. They liked the technology part of my story and the fact that I'd done the startup was neither here nor there. But in the Bay area, in Silicon Valley, the fact that I had done this failed startup was like the defining thing on my resume, and everyone viewed it as an unequivocally positive development, they were like so so excited to hear me talk all about how we messed everything up, and I was like why?  And they said because you got these great learnings on somebody else's dime. Someone else paid for your education, not me, so you're not gonna make those same mistakes again when you come work for me. So like a very different culture of understanding what had happened, so I wonder sometimes if I had moved to a different ecosystem even, would I have been able to extract the lessons that turned out to be really useful from that failure.

Alton: Interesting! And just pressing a point, I have a company, I have an idea, I'm in a marketplace, I come up with what I think, I do all of my work, MVP, all of a sudden someone has a very similar product.

Eric: Well it's gonna happen.

Alton: How do I continue to stay innovative and differentiate in that type of marketplace?

Eric: Thing you gotta understand is startups, competitors don't put startups out of business, startups put themselves out of business. So you have to stay focused on yourself and not get distracted by what your so-called competitors are doing, and every company that I have been involved in, like every venture backed startup that I've done, at least three times a year there'll be a board meeting, or someone's like, "Did you see this hot new thing that got funded to compete with you? And what are you gonna do about it?" And the only correct answer is nothing. What can you, like what are you gonna do about it? There's nothing to do. Probably that company, their press release of how great they are, is just a bunch of BS vanity metrics anyway. So a lot of those companies go out of business before they ever even launch a product. You gotta tune the noise out but it's very difficult because we're copiers by nature and we wanna copy from them. And when a bunch of venture backed startups who have no profits, and customers and traction are all copying from each other, it's truly the blind leading the blind. You gotta tune it out. And sometimes the fear of competitors prevents entrepreneurs from actually testing their ideas. This is what's dangerous. So I have an exercise, if you ever have this fear that a big company is gonna steal your idea if you reveal it to the world, here's an exercise for you. Take one of your idea, you have a backlog of ideas that you've always wanted to do. Don't have to take number one, but pull number 17 from the list, or just pick one on the list, and your assignment, should you choose to accept it, is to find the relevant product manager at the relevant big company and try to get them to steal your idea. Like beg them to steal your idea, please, and you will cure yourself of the fear that big companies are gonna steal your idea. 'Cause first of all they already had that idea, okay, it's not that good of an idea. That's not the reason they didn't copy it, it's all the other problems. And now having worked with a lot of big companies, I can assure you that that is not a concern, gotta just not worry about it. And yet sometimes the other startup wins and you lose. It happens. There's a wonderful set of interviews someone did of all the other social networks, that had launched before Facebook, talking to those founders about what it was like watching Facebook just destroy their business as it was happening. They're kind of heartwarming and kind of sad, crushingly sad but at the same time stories. While it was happening, they couldn't understand what was going on, they were just getting demolished. But now that you know the correct answer, now that you know what made Facebook great and their product bad, you can be like, yeah, 'cause your product sucked and their product was better.  And there was one guy I remember, he launched his startup at like 20 college campuses simultaneously when Facebook launched only at Harvard. And he had the big head start, and his product had like 100 features and Facebook only had poke. So you can imagine how confident he was that he had the right strategy and Facebook had the wrong strategy and now it's funny because we all know that that's not right, but when that happens to you, just suck it up and do the next thing, it's okay.

Alton: In the book, "The Startup Way," you kind of talk about companies now taking more of an entrepreneurial type of perspective, in terms of driving growth, driving value. When I think about J.P. Morgan and how we really now have this entrepreneurial mindset of unleashing creativity, and there are no sacred cows, and whatever you did in one way doesn't necessarily mean you'll do it any other way. I mean we're doing a podcast, that's an interesting change when you think about it.

Eric: J.P. Morgan himself never did a podcast.

Alton: No, he did not. You were at a company, and we talked about this yesterday, how do you jump start that kind of entrepreneurial creativity when maybe inherently at your institution you don't have anyone who's listening?

Eric: I mean that is a huge problem in the world today. Because every company is gonna work in this new way. So there's two choices; you can transform or be disruptive. I'm a terrible consultant, people call me in, hey come talk to this CEO and I'm like listen, I don't care, personally. As a consumer, as an investor, as a citizen. What does it matter to me if you transformed to this new way of working or you're replaced by someone who does, either way I'm fine. Imagine you were called in to talk to like a municipal cab company. Does it matter to me, really, if you make the transformation or Uber takes over your market share? As a consumer, as long as I can get trans-- I can go where I wanna go with a click of a button on my phone, I'm fine. If we're in that situation and we wanna make that change, how do we get started? The definition of a legacy company is that it has done things in the past that made it successful, so those things are unlikely to be the right things to do now. So you have a generation of employees and managers and leaders who've been trained, in almost by definition whatever it was, the wrong thing. We have to find a little pocket of entrepreneurial thinking in the company to start with. And ideally we have a senior leader with a vision and the enlightenment to say we know we need something new. But you can't just mandate, can you imagine, it'd be like all 10,000 employees, all 100,000 employees, everyone think like an entrepreneur starting on Monday at 9 o'clock. But I'm gonna put up slogans and posters! I mean it's just ridiculous, that's not how it's gonna work. But could we find like one division, one team, one place where we could pilot, test, experiment with a different way of working. And then the other thing is that to really take it seriously. "The Startup Way" takes its name from the book called "The Toyota Way," which was about the mechanics of how Toyota has been able to do what it's been able to do for so many decades, and there's this pyramid diagram of the foundation of the philosophy of long term thinking, which gives rise to the process type improvements that they are able to run, that stuff that they are famous for, which gives rise to a certain kind of culture which allows them to attract a certain kind of people. And the interplay between the deep systems and the surface characteristics is a big part of my work. So even if, once you get a few pilot teams thinking in an entrepreneurial way, it's still not enough to get the whole company thinking that way. There's a lot of that deep deep work that's gonna be required but we gotta take it in a step by step process.

Alton: That's a very good point. Even I see it at our firm. It's funny sometimes, I'm in the elevator bank and I may have a client meeting with a well-established client so I'll have my suit on and then my colleagues beside me are in their jeans, in their--

Alton: It is interesting when I think about how we as an institution just transformed to much more of that kind of startup mentality.

Eric: Have you found that the company makes reference to some period in its history, or where do you guys take inspiration from, like making that transformation or what you wanna do?

Alton: Yeah, you know, I think it's a couple places I would say, I would start at the top, I think with Jamie. I think he sets the tone, that old way doesn't necessarily mean it's the best way. And if you know your clients, and you really serve your clients and you know them well, I feel like, back to that MVP analysis, I'm constantly iterating on what do you need and what products and services make sense, and I think about things like we created for the gig economy like real time payments. People don't want to take five to 10 in 10 hours to get paid, they want it in five seconds, 'cause that's how you operate in your real life! And so we've started to incorporate a lot of that into our products for clients and companies. Or how we actually connect with clients in my group in technology and software commerce. There is a reason that if I'm an entrepreneur sitting in Austin, Texas, I don't have the benefit or the great learnings for another company we cover sitting in Silicon Valley or Boston or New York. So I love this notion that when technology allows us to do is really strengthen lines of communication and make it one step.

Eric: Yeah.

Alton: But that makes it really fun and interesting. One other point I wanted to ask, what do you think about the humanization of work? Is that going to be not only a baseline but the expectation for people? I know we think about it at J.P. Morgan, whether it's our cities initiatives, we do a lot with Detroit, and how we think about making sure people, even if you have a prison record, second chances. Let's ban the box, we're very focused on that. How is that trend coming, and how do you think that will play out?

Eric: I think this is still very much underappreciated in the lead circles, that there's a wholesale revolution going on, and just what are the jobs that human beings are going to do in the future. And what would be the Bill of Rights of being an employee of an organization. Like what is our expectation gonna be? I mean if you look at what defines being a 21st century company, clearly one one of things, in kind of the corporate governance world, you know I'm putting on my LTSE hat for a second, we talk about multi-stakeholder-engagement, like a very fancy word, but what it really means is actually caring about not just your shareholders but your employees, your communities, your customers your vendors, and their well-being. There are not gonna be boring and routine jobs anymore. Because anything that is routine, computers are better at than humans. Toll booth takers, elevator operators, but also a lot of what we now consider to be white collar work is going away, because computers are better at it. When Lee Sedol lost that match to AlphaGo, like that was a big deal for me, I don't know how much you guys follow that but if computers can play Go better than humans, then we are on a whole new level of understanding. And you look at it now from that same team and that same technology, it just now, previously unthinkable breakthroughs are coming now at a crazy rate. I mean I studied, wasn't even called machine learning, what we used to call artificial intelligence in college, and I remember thinking boy, I hope my kids or my grandkids one day will see this inevitable development. We are way past all that stuff. If you have work that is fundamentally not creative in scope, it is not gonna be done by a human being. It is inefficient for that to happen, it's gonna be done by a computer. So that means all jobs will be knowledge work jobs. Or they'll be make work jobs. There'll be like prison labor, and then computer programming. What will it look like, it's gonna look like companies where the people who provide that knowledge work have unbelievable leverage over what happens and that means we could build a more humanistic work culture where values orientation and kind of doing the right thing, and treating everybody with respect are considered sources of strategic advantage as much as moral imperatives. And I think we're starting to see that, I think you start to see just a little bit of glimmers of that in this next generation of companies and their leaders, and I would expect we're gonna see a lot more of it in the near future.

Alton: One question, it was in the book, which I wanted you to talk a little bit about as an accounting finance person, a little bit of accounting geek, talk about innovation accounting. I find that to be fascinating!

Eric: Oh, thank you! That is not something I get asked about very often so I'm delighted to talk about it. And you almost made the same slip up I used to make, you call it innovative accounting and you get in trouble, that's what you go to prison for!

Eric: So, it's a bit of a dangerous term, innovative accounting. So here's the problem, I have seen this exact same negotiation happen in three very different contexts. It can happen, like you're a venture backed entrepreneur talking to a VC, you can be a corporate entrepreneur talking to your CFO, or you can be a garage entrepreneur talking to your spouse. And it's like honey, CFO, VC, have I got a deal for you! If you give me our whole life savings, or $10,000,000, and 18 months or a year, give me a year and our whole life savings, I promise you the most unbelievable results! We're gonna have millions of customers, we're gonna make billions of dollars, I'm gonna be on the cover of magazines, gonna be so great! And we all know that the sense of momentum and political capital of a new venture is never quite so high as the day after it's funded. And it monotonically decreases from there. You get the money, now let's magically fast forward 12 months, what do we know for sure is true? I guarantee all the money has been spent, right on schedule. And one of the entrepreneurial superpowers is spending other people's money, okay. Number two, I guarantee that everyone involved has been very busy this whole time. Lot of milestones have come and gone and another entrepreneurial superpower is keeping people very busy. So we definitely did that. If we're being really honest with ourselves, do we have millions of customers, and billions of dollars in revenue, are we on the cover of magazines? Okay, probably not. I remember talking to a VC once, and I showed him this beautiful hockey stick shaped graph of our results. And they were like, this is incredible!  What are the units on this graph? Is this in thousands, or tens of thousands? And I'm like oh no, no sir, this is in ones.

Eric: These are the actuals. And he's like, you have $7,000 in revenue total. And I'm like yeah but it has a hockey stick shaped curve so look! And he was just like are you asking me for how much money on the what with the ones? Like honey, so remember when I said we'd be on the cover of magazines and have billions of dollars in revenue? CFO, we didn't exactly hit our accountability target. And he's like okay, what, did you miss by 10%?  It's like no, we missed by three orders of magnitude.

Eric: We have 125 customers instead of 125,000 customers. And he's like, on my sheet here it says were to have 125 million customers. You know, I don't remember saying that. It's funny because what does every entrepreneur say in this situation? I know we didn't hit the target but we learned so much, and if you just give us like another year and even more money, I promise you-- And it's funny because you're fired. It doesn't matter who you are, if you have the power of spending other people's money, they wanna know what did I get for my money, what was the ROI? If you're a corporate CFO, someone yes gets fired for missing by 10% and you missed by an infinity percent, you're fired! And yet we know that great innovation is gonna have this flat part of the hockey stick. Like what people forget is that if you wanna have hockey stick shaped growth, the most important defining characteristic of the shape is the long flat part. When ROI is negative by definition. So when entrepreneurs get together privately, we love to complain about the vulture capitalists and the CFO gray-suited blah blah blah dudes who don't under-- who are constantly canceling innovation right before it was about to turn the corner, you know what I'm saying? Any of you had those kind of, yeah. But like look at it from the finance person's point of view. If you're a corporate CFO and somebody says, "Give me a "million dollars," and then a year later they have nothing to show for it. Possibility A, they are in fact on the brink of a breakthrough and learn great things. Possibility two, they're Bozo the clown and set the money on fire and have been sitting on a beach doing nothing the whole time. By the metrics of conventional finance, those two situations would be indistinguishable. I would call that total paradigm breakdown for the metrics of conventional accounting. We can't tell the difference between the next Facebook and the next everything else book. So innovation accounting is a financial discipline for evaluating the leading indicators for future success. It's super boring, I'm sorry.

Eric: You all come to a lecture about entrepreneurship and I start talking about accounting and they're just like whoa, my God, I know. I don't get a lot of fan mail about innovation accounting, believe me, but it's critically important because the only way to sustain vision over time is to be able to stay in the resource of investment over time, and that means being able to show progress. But just there is a math now, we do have the mechanics. When someone says they learn something invaluable, we can prove it, and we can show in net present value terms, the impact of the things that we're learning at the MVP stage, and we can go MVP by MVP and show that cohort by cohort we're making progress against a really macro goal, and it's a super powerful technique, not just for CFOs and VCs but for entrepreneurs themselves, because the most important stakeholder, the most important person you need to convince that you're making progress is yourself. Self-delusion is really the fatal problem. So this is a way to penetrate that fog every once in awhile.

Alton: I was gonna say why it resonated with me so much is because when I think about what we deal at J.P. Morgan and how do you stay close to that consumer and that client and right, sometimes the ideas and solutions will be in that flat part of that hockey stick before you see innovation. Back to your point, if we're true to the vision, and we absolutely believe that it helps the client, we have the latitude to be able to persevere on that hockey stick and kinda wait to get the investment.

Eric: You have to do it.

Alton: Yeah.

Eric: I'll tell you one funny story from one of your competitor institutions. This is back in the pre-stripe era. I was doing a startup where, before stripe and stuff, when you wanted to do credit card processing online, it was a very extensive application process that was required to get permission for the privilege of taking credit card payments. And I remember they had this checklist of things they had to certify. And in those days, they had to come visit your office to make sure you were a legitimate company. They sent someone to our office and we failed the checklist and we were like what's the problem. They said well it says here, item number 729, you have to have a sign on your door that says the name of your company, and you don't, so you fail. So we had to reapply and they came back and we literally took a piece of paper and wrote the name of our company and taped it to the window and they were like box checked.

Eric: And we passed the thing. And it was like oh my god, talk about having the wrong metric for success. It's like classic some guy made some checklist somewhere and the person doing the check, they have no say about what to check. Their job is just to make sure that the box is in fact, was checked. So yeah, if you want to evaluate startups, you really have to develop a competency around that.

Alton: Well with that, Eric, I want to thank you very much for taking the time to answer a couple of questions. And we appreciate you attending the J.P. Morgan TechTrends podcast.

Eric: Thank you for having me, thanks everybody.

Alton: Thank you much.

Eric: Thank you, thank you very much.

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