Eric Ries of the Lean Startup joins Nick to discuss The Hyper-Scaler CEO Whisperer and Founder of the Lean Startup Movement on Incorruptible Startups, Building to Thrive and Survive, and Creating a Governance Fortress. In this episode we cover:
- The Concept Behind “Incorruptible”
- The Story of Saul Price and FedMart
- The Governance Fortress and Legal Structures
- The Role of Mission-Driven Companies
- The Case of Novo Nordisk
- Advice for Founders
- The Importance of Mission-Driven Entrepreneurship
- Eric’s Approach to Advice
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0:17
Eric Reese joins us today from the Bay Area. He’s the creator of the Lean Startup method and author of the best seller The Lean Startup. As a founder, Eric has built IMVU, the long-term stock exchange, Lean Startup Co, and answer.ai His new book, Incorruptible, explores how great companies scale without losing their soul. Eric, welcome back to the show.
0:42
Hey, it’s my pleasure, and good to see you.
0:44
Yeah, it’s good to see you too. I’m excited about the book coming out later this month,
0:49
so much. I’m really excited to finally have it be out out of the world after so many years of working on it.
0:54
Yeah, yeah. Out of curiosity, how long were you working on
0:58
it? Oh gosh, more than two years when you when you count from, but yeah, it’s been, it’s been a slog.
1:05
So, you wrote the Lean Startup, one of one of the seminal texts for, you know, startup building. Do you think the core principles still apply in this, you know, AI-driven paradigm shift we find ourselves in?
1:18
So far, so good. I, yeah, I feel like the concepts have held up pretty well. The AI labs that are embracing the concepts. I was just on Lenny’s podcast, and he was – he actually made this observation. I hadn’t thought about it like that, as he’s going through interviewing all the engineering leaders and the product managers at the key labs, the ones that are aligning themselves with Lean Startup, like they’re not so using the lingo externally, but in their actual practice, they’re building minimum viable products. They are, they have very rapid speed of iteration. They’re learning a lot from customers. He feels like that, that was pretty good. And then, yeah, just generally speaking, the idea that we were.. I wrote this in 2011 so I didn’t know what was coming specifically, but the idea that the mega trends of the coming years would be an increase in velocity across the board, and an increase in uncertainty across the board. I feel like those have held up pretty well. And when you have that unique combination of rapid cycle time and high uncertainty about what’s going to work, then Lean Startup is your friend.
2:14
Love it. Good. So, so why did you write Incorruptible?
2:20
There has been this like lurking demon, this dark side to this business that has been bothering me for a long time. I’ve seen it over and over and over again, and in the book I explain how this pattern has been going back at least 200 years. The pattern is this: you have a founder, a leader, someone who figures out a better way to build a business, maybe they figure out that if you treat employees well instead of like crap, that’s a source of competitive advantage. If you’re trustworthy to your customers, if they believe the things that you say, that’s going to be an advantage. They figure out this so-called enlightened capitalism, and then they figure, if I can prove that it works, then the market, the market rewards value creation. The market will protect what I have created. It will help me spread, in fact, to other companies, because this is a competitive advantage. And then they act so betrayed, so surprised when the market does the opposite. Instead of when they get betrayed, founder gets fired, founder loses control, like Frankenstein and his monster. The company becomes bureaucratic, it drifts from its mission, adopts a new mission, it gets betrayed at the board level. There’s so many of these ways that companies lose their soul, lose that special thing that made them worth investing in in the first place. This problem is so common, we don’t even know what to call it, even though, like, when private equity takes over your favorite restaurant, you can taste it in the food, like this is so common that, like, private equity has a taste. How can the capital structure of a company be edible? I don’t know, but that’s what we’re living with. Everyone I talk to, inside and outside the business, is always talking about this topic. There, everyone’s like, everyone knows this is going on, but what do we call it? We have this instinctive idea that there’s something wrong with making money without creating any value, but we don’t have a word for it anymore. Well, turns out our grandparents did have a word for it. They called it corruption. I wanted to write a book about how can we build organizations that are strong enough to resist this corruption structurally, so that they can endure for a long time, so that they can create a lot of value for their employees and founders and customers and even their investors, yet they don’t succumb to the financial gravity of our current financial system.
4:34
And are we talking about building value or sustaining that value, or both?
4:40
I don’t think there’s much distinction between them. Most people think that, like, stewardship is a really natural human instinct, to, you know, if you, if you inherit something, to want to be a good steward of those resources, and we have, like, you see this in individuals, but also in organizations, if someone’s a poor steward of the resources under their command. Like we think less of them, so I think if you see most organizations as like an engine, it’s like a machine, like a living being that generates value, that’s like that’s the sign of health that it’s continuously generating more and more and more value, that’s how you know it’s like it’s healthy, it’s functioning, money investment, the like the resources it has to take in to do this magic trick are like the food and the oxygen it breathes, and we have just utterly confused the idea that just because oxygen is necessary for life, that doesn’t mean that the purpose of a life is to breathe as much oxygen as possible, as the old poem says, as though to breathe were life, and so we’ve gotten confused about what are the inputs and what are the outputs to this process, and I think it’s really sad.
5:48
Eric, if you had to distill down why companies fail, you know, to sustain success, how would you describe
5:57
it? Can I answer it with a story,
5:59
please?
6:00
Because I feel like this can sound very abstract to people, and it’s like now we’re going to have some kind of debate about capitalism or something. Like, no, this is very concrete, very tangible, and there are specific choices you can make to either have this betrayal happen to you or to prevent it. Let me tell you, the legend of Saul Price, because I feel like in startup entrepreneurial circles, Saul has kind of fallen out of public consciousness, but he shouldn’t. He’s a legend. Price
6:25
Club, yeah,
6:26
the father of modern retail. I learned in the researching of this book, I knew I knew Price Club very well. I knew his story like a little bit. I grew up in San Diego, where Price Club was founded, but I didn’t know this when Sam Walton was thinking about getting into retail, he was, I wish I call my company, and he called it Walmart as an intentional tribute to Saul Price’s first company, Fed Mart. Fed Mart was the original discount retailer. Now, Saul, before he became a founder, was a lawyer. He had trained as a lawyer, and as a lawyer, he said, “I’m a fiduciary to the client. What does that mean? It means I put the client’s interest before my own. So, when he became a retailer, it was obvious to him. He thought it was just a natural idea that the customer was his client. So, his principle of business, he called it being a fiduciary to the customer. When competitors would try to undercut Fedmar on price, he would literally put up signs inside his own store saying, “Don’t buy this product for me, you can get it cheaper down the street, telling people exactly where to get it, because, like, my job is to get you the lowest price, I don’t care if it’s from me. So, as a result, customers loved FedMart. People would drive miles out of their way to go to the store, it was super big. He took it public, he made a lot of money, he became wealthy. He made a lot of money for his investors and for a lot of his employees, for that matter. But there was a problem. As a public company, he felt this gravitational pressure, whereas he believed in low prices and high wages. Wall Street always pressured him for high prices and low wages. They wanted faster growth, and most importantly, he felt the pressure was to adopt the best practices that everyone agreed this is what it means to be serious about business, but Saul was an uncompromising founder, as they often are, and he would not compromise ever, so he kept trying to solve this problem, because he’s having tension now with his own investors, he brought in new investors from the retail sector, like who knew retailing well, to specifically buy out control of the company from the public market investors. So he built, he built a new partnership where basically the new investors owned 51% saw had 49% deal was to take the company private, which they did eventually, but that didn’t solve the problem, because once he had his new board in place, what did the new board want? Well, the new board was just as captured by this financial gravity as the old board. They wanted higher prices and lower wages, they wanted faster growth, they wanted conventional retailing. The board understood something that I don’t think Saul ever really did. They understood that perversely, precisely because customers trusted Fedmart, they could betray them and get away with it. So, and all this came to a head one day in 1975 Saul Price comes into work, but he can’t get into his office. Why? Because they’ve changed the locks on his door and he doesn’t work anymore. How many founders do we all know that this has happened to? It’s, it’s really sad. So, this gives us a natural A/B test experiment in business history. What happened to Fed Mart? What happened to Saul? Let’s take a look in Branch A, Fed Mart. It was indeed returned to best practices within seven years, it was fully liquidated and bankrupt. It took them seven years to destroy what Saul had taken more than 20 years to build. In the B corner, though, Saul was not done, like a lot of entrepreneurs. He was betrayed, he was upset, he licked his wounds, he took a two-week break. Like he took two weeks off, and then he leased the office upstairs from Fed Mart and started again. He created this company we were joking about before, called Price Club. Now, when I was a kid, Price Club was the major retailer that my family shopped at. I didn’t even know, by the way, that the word price in Price Club referred to a person. I just thought it was the place you bet for low prices. No, his literal name was Saul Price. Anyway, Price Club was a huge success, but today most founders don’t know Price Club because of what happened next. Because Saul was not the only person who was outraged by what happened at Fed Mark, there was another guy there, his name was Jim Senegal. He had literally worked his way up from stock boy to executive at Fedmar, and he quit in protest when Saul Price was fired. He actually went to work with Saul at Price Club for a while, and then he struck out on his own, started his own new company, following the Saul Price formula. And a few years after that, his company and Saul’s company were to be merged. They joined forces, and the two, the combined company was called Price Costco, but pretty much we just call it Costco now. Cost, this is like the deep cut pre history of Costco came to be. Costco was has been going strong for 40 years. It is a $400 billion public company, and yet people ask me sometimes, why is Costco the exception to like every rule in business? Is it just because it’s so big? It’s just because it’s so profitable. Costco today maintains the 14% capped margins that Saul Price preached. The ethos of Saul is still alive in this company, but there’s a second element to the story that I think most people overlook, which is that the reason why investors destroyed FedMAR but have not been able to do it to Costco. Is not for lack of trying. Oh no, Wall Street has tried many times to dismantle what makes Costco special, and they keep being frustrated because Jim Senegal was there the day Fedmar died, and he saw what happened. So he built Costco with what I call a governance fortress that protects it from these outside pressures, so as a result, Costco has not just the ethos, it has a second attribute that I call integrity. If Costco makes you a promise, they’ll keep it. They’ve promised to keep this hot dog combo that they sell outside their store only $1.50 They’ve kept that promise for 40 freaking years. It’s really difficult. I mean, it’s a very hard promise to make. Most people don’t realize how big Costco is, just to give a sense of scale. They sell more hot dogs from the cart outside their store than every major league baseball stadium combined in a year, more than 200 million. So they had to, like, vertically integrate their supply chain. They’ve had to do all this extra work just to keep this promise, and of course, the hot dog’s not what’s important, although it’s, of course, the famous story about the time that someone suggested to Jim Senegal that they raised the price, and he said, “If you raise the price of this hot dog, I will effing kill you, figure it out. That quote is so famous, you could buy a T-shirt on it. It’s a very famous story that is just the tip of a fully integrated iceberg of practices that make sure that everyone that works there understands what the company stands for, and that’s why they’re this exception. So that’s kind of like to answer your question, now the thesis of incorruptible in a nutshell, like in a fortune cookie way, is ethos plus integrity equals incorruptible.
13:21
So, you mentioned a government governance fortress, right? What are the key elements of this?
13:27
Yeah, so there’s a lot of different ways to do this, but the key is we have to embed into the company’s legal structure a commitment to pursue its mission. Most companies today have a lofty sounding mission statement that is frankly bullshit. It may even be sincerely believed by the people who talk about it, but if you read the legal documents, the legal documents will say something different. For example, remember Silicon Valley Bank,
13:56
of course.
13:58
Yeah, that was my bank. When Silicon Valley Bank was a run on the bank, like in Mary Poppins. It happened to my bank. I had, like, a significant amount of money across all my companies. The amount of money I had deposited at Silicon Valley Bank was significant, and that was a very..
14:10
any of us got any sleep that week? That was..
14:12
I was awful. And I was on the phone the whole weekend, 20-four hours a day, not trying to protect my assets, but trying to help, like, hundreds of companies who were all panicked about what to do. I was actually very fortunate we had our money in the right, in the exact right structure, so that we were, we were protected, but a lot of people weren’t. Anyway, I’ve looked it up afterwards, because I wanted to understand, like, why did this happen to my bank? So, something about my bank had this really cool mission statement, it was like to move the innovation economy forward, or something like that. Sounded really cool. I was like, yeah, that’s the kind of bank I want to be with, but because they’re a bank, all their legal documents are public. You can look them up, so you can look up their corporate charter. Corporate charter says the Silicon Valley Bank Corporation is hereby incorporated to pursue, and like, in every corporate charter, there’s like a blank spot, like a Mad Lib, you fill it. In any lawful act or purpose, like, is that the same as to move the innovation economy forward? Like, I can think of some lawful acts that would not make the innovation economy any better.
15:15
Is that just legal speak, or is that.. do you think this is
15:17
the key? Most founders do not understand this. In our world today, we live under the idea of a legal doctrine called shareholder primacy, and it holds that when you see any lawful act or activity that actually has a different meaning than the plain English meaning, it actually means maximize shareholder value. So Silicon Valley Bank claimed to be moving the innovation economy forward, but actually they were trying to maximize shareholder value. This is not a theoretical thing. This matters a great deal. Five years before the collapse, the CEO of Silicon Valley Bank went to Congress and spent a bunch of money lobbying the government to change the banking regulations, so that he would have permission to make these ridiculous, risky bets, which in the end bankrupted the company. What’s interesting about this is at the time that he did this, it was considered good governance, because his job is to maximize shareholder value. He’s trying to find new ways to make more money with the bank’s assets, but my point of view is it was not good governance, because even if the bets had paid off, would that have done anything for the mission to advance the innovation economy? No, just would have been more money for the shareholders. That’s not what really matters. That’s not where shareholder value actually comes from. So I think we have this economy now where we have created so many ways to make money without creating value, that in the name of profit, we are killing the golden goose over and over and over again. That’s what happened to FedMart. That’s what happened to Silicon Valley Bank. So, the first step to building this structure, the governance fortress, we have to get back to writing the company mission into the charter. You do that. It’s actually a very easy thing to do. It’s called a public benefit corp filing. It’s literally a two-page form. You fill it in Delaware. Your lawyer can have it done for you tomorrow. I think every Delaware C corp should do this, and you can do the same thing in 44 other states. So, it’s a very common thing you could do it now. Yet, most founders never get around to it. They get told by their lawyers, like, ‘Oh, you can always do it later. There’s no rush. No one ever says no, but they say not yet. And then yet comes in your, in your sol. So the principle in the book is that it’s always too early until it’s too late. Now that’s not the only PPC is not the only solution. There’s a whole integrated set of things that comprise a governance fortress, but like that’s one that’d be a good place to start.
17:40
Pick up the book, you can read about the others. So I’m going to challenge you. So, is it is maximizing shareholder value? Is that really the problem, or are we really talking about duration? Right? If we go back to your Saul Price example, he was maximizing shareholder value by way of,
18:00
oh yeah,
18:01
serving employees and serving serving customers, but my question really gets to kind of the nature of public markets, largely in quarterlies, and trying to do that in the short term versus if you’re taking, you know, a long horizon, a lot of founders do in the private markets, a lot of public companies kind of lose sight of that.
18:23
Yeah. Oh, for sure. Now, the private markets are no panacea, as we can tell by every time private equity takes over a company and ruins it. A fair amount of private.. and I just.. I keep one of the funny things about doing this publicity tour for the book is people keep telling me new stories. I thought I thoroughly researched this book, and I have like hundreds and hundreds of case studies that I researched to make sure I had the most horrifying, ghoulish stories in there to scare you about how bad this is. And people keep being like, well, you don’t know this story, and I keep people now teaching me about all kinds of stories that I didn’t even know. And someone told me just, just learned the story of Panera Bread. Anyone ever eaten at Panera?
19:03
Of course, yeah. St. Louis
19:04
company was built on these really sustainable principles, of like, you know, freshly baked sourdough bread and high-quality ingredients, and whatever. Anyway, got taken over by private equity, and they not only.. so this just goes to your time horizon question, because, of course, at some level, you’re right, like this is like I built a long-term stock exchange, because the end of day, like time horizon, the philosophy of long-term thinking is one of the most problematic things, but it also goes to the question of who, who are we a fiduciary to? Is it okay? Like, I think shadow of the primacy, one of the ways it leads people astray is, it is, it basically says that it’s okay, in fact, it’s required to view customers and employees and communities as a resource to be mined for the benefit of shareholders, so they literally will write stuff like extractive
19:52
by nature.
19:52
It is, it’s not permissible for a for-profit company to consider externalities, aka your life in. Accept, insofar as it benefits shareholders. Now, to your point, if you take a long enough view, of course, these things matter. But the problem is, human nature is not that long term by instinct, and people keep convincing themselves they can get away with stuff. So, Panera Bread, so what do they do? They got rid of the fresh baked bread, they got, they started using lower quality ingredients, they shrunk all the portion sizes, they started adding a bunch of junk to the menu, it’s
20:20
typical
20:21
private equity playbook, so customers don’t like Panera anymore. If you want to see how bad it is, just go on Reddit R slash Panera. I was like checking the comments out, it was like I was curious if this is really true. It’s like, oh my god, are people pissed? Okay, good to know. But, of course, it wasn’t enough, so then they started to mess around with something they called, was called Charged lemonade. Okay, this was a drink that they made available in the soda dispenser, like next to regular drinks, like where kids could get it. It was a lemonade where a glass of it had more caffeine than six espresso shots, and people died. People drank themselves to death of charged lemonade. They’re being sued by multiple people for wrongful death, now. Wow, because you never get away with it. It always comes out, and it’s like, what were they thinking? What they were thinking is faster growth at all costs, right? That’s the mindset. So, if you, if you want to break it down in the book, I do do the formal argument here, that this is, we’re talking very casually, but I actually think there are, like, you said, it’s about time horizon. Actually, think there’s like three fundamental problems with the conventional way we teach profit. Like, what does it mean to be a four?
21:29
Are these the elements of financial gravity? You’ve mentioned that phrase,
21:33
I’ll explain that in a second, too, because they’re obviously deeply related. Financial gravity is the mechanism by which this indoctrination takes place, but, like, we’re indoctrinated to this idea that if you, if you find a way to make money, you’ve already done, you’ve automatically done something good, but people who build for a living all have a different, or like, no, that doesn’t, that’s not right, you, if you make money by creating more value than you capture, then that’s that’s meritorious, that’s something to be proud of,
21:59
value is
22:00
a lot of other ways
22:00
to make by what, what’s that
22:03
value? Value is defined by what.
22:05
Well, we’ll get to that in a second. I think it should be defined by human flourishing. That’s really the bottom line of what I think, but which
22:12
is abstract, hard to measure,
22:15
not that hard, not that hard. When people die from the lemonade, we can measure that. So, the measurement problem, though, there’s three dimensions to it. You mentioned the first one, which is, which is time horizon. So, when you create deferred liabilities, that’s the accounting term for it, in a Ponzi scheme, or like, if toxic way, right? If you do something that benefits, like Fed Mart was a classic deferred liability thing, you seem like you’re making money today, but you’re creating liabilities into the future. Eventually, that catches up with you, like a Ponzi scheme, and you collapse the second category is what we’re talking about, with you know, in cigarette smoke or in pollution, what are called negative externalities, where the people who you directly interact with cause damage to others, so you have like third parties who are being damaged, so just to give up, to put a number on it, the cigarette company, like Philip Morris, has something like 10 $8 billion I think, in net income annually, but they create $600 billion in costs in the US economy alone, so they claim to be super profitable because they have all this net income, but of course that’s because they’re not paying for all these negative externalities,
23:20
okay,
23:21
and then the third error is what I call using a human life as an input factor of production. This is more like the Panera example, where, like, you build a product where some people will die as a consequence of using it, and you don’t have to pay for that. You think he’s like, well, that’s not that’s not on my books. The death of these people from the lemonade is not on Panera’s book, so they seem to be very profitable. So, my claim is that since the way we teach this today has these three problems: deferred liabilities, negative externalities, and seeing a human life as an input factor of production, we need new definitions that get rid of this. In my proposal, if we use the definition of the purpose, like what it means to make a profit, is simply to maximize human flourishing, and that includes it’s like not replacing the old definition, like the idea that you can measure margin, right, like margin is an indicator of of the value add that you have done through your economic process, like that’s not bad, that’s good, we just have to consider all of the things that are affected. We have to think short and long term. We have to think our people and others, and of course, we have to have special care to the well-being of the people we touch. There’s so many companies that are in fact built around these principles, they just don’t talk about it that much. And so, part of my goal with the book was to like show people these exceptions, the Costcos of the world, and say, like, these are not flukes or random outliers, they have something in common. There’s a structural similarity they all share, and by the way, every single one of them violates practically every so-called best practice that we teach people are the best way to run a business today.
24:58
How do you think about companies? He’s like in the context of human flourishing. How do you think about companies like a Facebook or a social media company, a Meta, you know, that is connecting people, it’s creating a lot of awareness of what’s going on with your community, but at the same time it’s, you know, lowering attention and creating out, oh yeah, social media
25:21
consequences,
25:22
and of course you’ve got companies like Apple that have done a lot of good things, they’ve connected a lot of folks, you know, the phone, the smartphone has become a portal to knowledge and connectivity and lots of good things, health potentially, you know, they’re working on that, but there’s a lot of negative externalities and effects as well.
25:41
Yeah, I would say that most companies today are a mixed bag. I would guess people sometimes say, like, wait, Eric, if you change the definition of profit, aren’t you saying that you’re saying that most companies that exist today are not profitable? Yeah, they’re not. It’s okay. We know we intuitively know this is right, because we’re living through a time of institutional collapse, we’re watching them die left and right. The average, I can’t.. I don’t have a stat in front of me. The average lifespan of companies in the s5&P 100 is like collapsing so rapidly it’s ridiculous. The total number of publicly listed companies has fallen by more than a half in the last 25 years. Like this system is destroying companies, it is not maximizing value creation. Now, Meta is a great example. Facebook’s a great example, because we’ve had multiple whistleblowers bring their documents forward, like that. The companies that get involved in litigation are the best for business case studies, because we have their energy rarely get the internal documents of a company you didn’t work at. So, we know, for example, Facebook literally, in its pretty early on, started commissioning research, independent research to understand the human flourishing consequences of using their products, and they’ve multiple times found the product makes people depressed and has all these like really negative consequences for them, and yet they go public with this research. Did they say, “Okay, we’re going to change our ways? They were to make no, they buried it. That’s to me, is like the acid test of a company’s integrity. Is like when you find that you’re gonna make mistakes, it’s gonna happen sometimes. I would be, I knew Zuck like before he was super famous, like I knew a lot of people there, like I believe that they actually had good intentions and thought they were doing something like I don’t think they intended to do something bad, but that’s no excuse. They, they eventually like you become so rich. What’s what is your excuse like you if you didn’t commission the research? Why not? And if you did, why didn’t you go public with it? Why didn’t you just accept this thing? That is obviously Instagram is even worse. I know the Instagram founders well, like I taught them how to do the pivot that took them from bourbon to Instagram, so like I’m complicit in this too, but what’s so sad to me, we have all this research that Instagram is dangerous for kids in particular and their mental health, and someone put it to me this way: they were like, “Look, because we get wrapped up in, like, should the government ban social media, should it do this? Like, when we get to regulation, it gets complicated, so this book is not about policy or regulatory questions, not because I’m scared of those questions, but just like, I like, we have plenty about that. I wanted to write a book, a different book about what organizations ought to want to do, not what they should be allowed to do, but the way that the thing you know that there’s something wrong here is just ask yourself if you had the opportunity to design Instagram from the ground up, so that its goal was to really improve the well-being of teenage girls, that was its explicit mission. Could you think of anything they do differently? And since every person can be like, oh yeah, it would be unrecognizably different, and it’s like, see, you’ve already proven to yourself that this thing is really malign, because, like, if you’re selling a product to teenage girls, like, you, what, what kind of monster do you have to be not to feel like, wait a minute, I, that’s a, that’s a, that’s a precious part of humanity that we should be protective of, we should want them to thrive as our next generation, that they matter a great, so I just to be indifferent and callous about that, I think, is really sad, and ultimately it will, it will push those companies into being seen the same way we see cigarette companies today, like the brand of Facebook, I think is irrevocably tarnished, and despite all their success, and how big they are, and all the money they make, they’re constantly running away from this reputational damage that is a self-inflicted wound.
29:23
And do you believe that these things can be complementary, you know, like if Instagram were to have that mission statement, you know, can they also be a very successful capitalist company that achieves, you know, what they, they have achieved, obviously, as a part of meta, of
29:41
course, of course, they can. That is absolutely no trade off here. And this is hard for people to believe, because we live in such a cynical era, but the evidence shows that mission-driven, purpose-driven companies outperform. They actually like, there’s a source of competitive advantage, but unfortunately, there are many industries where there is no such competitor, so there’s no offer. To demonstrate that this is going on, and of course, there are many industries where the anti-competitive power of the incumbents is so high that nobody can get a new thing started, whether it’s mission driven or not. So that’s not this is not like a magic bullet, where, like, oh, snap your fingers and boom, kumbaya, everything’s fixed. My goal with this book was to arm those founders that want to be mission-driven with the tools they need to defend that insight against people who will try to talk them out of it, and, and I give examples in the books. I really wanted to make clear the economic upside that’s available here. One of the, one of my favorite stories in the book is, it’s so ridiculous, it sounds like an exaggeration, but I’ll tell you the story. There’s a time when the nonprofit trustees of a certain company intervened to to prevent the for-profit subsidiary from doing a certain action, one of these like Fed Mars style betrayal actions. By doing so, they created not for themselves but for the shareholders of a publicly traded company more than $500 billion of shareholder value,
31:03
is this Novo, or
31:05
Novo Nordisk? Yeah, you know the story. Novo Nordisk is an example of a two-entity constellation. It’s a structure that, in the academic literature, they call it the industrial foundation structure. The origin of Novo Nordisk in the 1920s one of the first female doctors in Denmark, her name was Marie Krogh. She got.. she was diagnosed with diabetes at a time when it was a fatal illness. Marie today is mostly famous because of her husband, August, who had just won the Nobel Prize. So, even though she got this fatal diagnosis, he asked her, would she come with him on a lecture tour of North America? She says, ‘Sure. So, they go to North America. He’s going around lecturing about this Nobel Prize. They’re meeting all these cool scientists. One night at dinner, the person sitting next to her at her table at the dinner tells her about these Canadian scientists who have isolated insulin for the first time, a potential cure for diabetes. So she convinces August they should go to Canada and see this breakthrough for themselves, which they do. This is all in the 1920s They realize its potential, and they ask the Canadians, “Can we license this technology and bring it back to Denmark? But there’s a problem. Everybody involved with this science, they’re all scientists – Marie August, the Canadians are all scientists. They all believe in science as a public trust, and they all can foresee a day in the future when, look, man, let’s say that you make a life-saving medicine that I need to live, okay? In that case, I want you to charge me a fair price for it, like I’m psyched for you to get rich selling me this medicine. I want you to have every possible incentive to keep doing it, right? But I also live in fear that one day you’ll wake up and say, “Wait a minute, Eric, Eric needs this medicine to live. I don’t have to charge him a fair price. Check the price, this baby, I could charge him anything I want, right? And so, decades before Martin Shkreli actually did this, the crows understood that this was a danger, and so they wanted to build the company, which they called the Nordisk Insulin Laboratorium, but is the predecessor company to what we now call Novo Nordisk. They built it with this industrial foundation structure. They built a nonprofit that owned the for-profit subsidiary. The for-profit is still a full-on for-profit. It took investment. It’s today a publicly listed company. Novo trades like a million shares a day on the New York Stock Exchange, like it’s a huge company. People have made ridiculous amounts of money, but that’s the structure they chose. That structure has endured for more than a century. If you think the same Wall Street that tried to destroy Costco, that has destroyed Fed, but if you think that same force hasn’t come for Novo Nordisk, then you are absolutely living in fantasy land. Of course they have. And so this story is just wild to me, and there’s actually a great acquired podcast episode where all they do is like reenact this story in dramatic fashion. It’s pretty fun. So, check that out. The for-profit subsidiary has its own separate board, so it’s not like Open AI, where there’s just one board that’s very unstable. You want to have complimentary boards. You have nonprofit trustees that oversee the for-profit directors. The for-profit directors get it in their head in the early 2000s that pharmaceutical companies all need to merge. That was the hot trend in M and A back then. If you remember, the idea was, if you don’t get bigger, you’ll get, you’ll get replaced by someone who does. So Milroys was worth like 10 or $15 billion at the time, if I remember right. They go get a signed merger agreement with a bigger pharma company, and they’re going to get like $20 billion for Novo Nordisk. Okay, they’ve got a huge premium. They’re all super excited about this deal. They have literally negotiated it, they’ve done the due diligence, everything’s all set to go, but they have like a last due diligence checklist item, which is they have to get the nonprofit trustees to sign off on the transaction, no problem. They go have the meeting. The trustees ask them this question that they don’t have a good answer for, because they say, well, what is the purpose of this transaction? And you could just imagine the directors being like, do you see how much money we’re going to make, like questions. Like I have a giant dump truck full of money right here. Like, what are you doing?
35:04
Morals,
35:05
like, well, we don’t understand what is the purpose of this. Our charter says we can only approve a sale of Novo Nordisk if it’s necessary for the survival of the company. Their job is to act as what I call mission guardians. That’s their only job. They’re like the last court of appeals for the mission, so my favorite detail in the story is that they have to have a second meeting, because you can just see like the for-profit people all look at each other and they’re like, “Okay, we obviously didn’t come prepared for this meeting, like, we’ll come back, we’ll bring our bankers, we’ll do a proper presentation, and they leave, and they come back, and they come back, and they’ve got this whole song and dance about the new best practice of pharma is to consolidate, it’s eat or be eaten. It’s necessary for the survival of Novo Nordisk to do this transaction. The fact that the bankers are all going to make like gazillions of dollars, I’m sure had nothing to do with it. So the trustees are like, okay, that sounds interesting, but Novo Nordisk has been profitable and growing like 20% a year for 10 years in a row. What problem are you trying to solve, and the bankers can’t answer this question, because there is no problem, they just want to make money, so the trustees say no, no deal, merger blown up, everyone’s so pissed, but we know exactly what would have happened if they had said yes to this merger, it’s like one of the weird coincidences. Within the following two years, two really important things happen. First of all, the company that they were going to merge with was sold to Merck, and Merck shut down all its R and D programs. So we know if Novo had been part of that transaction, the same thing would have happened. That’s what’s called a killer acquisition. There’s all this data that shows that in pharmaceuticals part of the reason they do all this M and A is to shut down R and D, not to enhance it, another way of making money without creating value, but they said no, and by coincidence the day they said no was year, if I remember right, year 11 of the eventually 13 year program that would lead to the creation of GLP one. Now, as far as I know, the board, when they said no, had never heard the phrase GLP one, had no idea about this. They were just protecting the mission, but it took a lot of years of fruitless work to get GLP one to work. That’s the compound that makes possible drugs today, like Ozempic. Ozempic, I think, is the most profitable pharmaceutical in human history, and as a result of its success, Novo Nordisk eventually had a market cap that exceeded the GDP of Denmark. So, if you freeze frame on that day when it pro, I think it had a peaked at something like $650 billion valuation from the 20 they were going to sell it from that delta is the shareholder value the trustees created, all because this Nobel laureate figured this out 100 years ago. So, when I talk to founders, I always tell them, look, you may be very smart, and I’m sure your lawyers and bankers and VCs and all these experts you have around you, telling you what the best practices are. I’m sure they’re all very smart, and I want you to ask yourself this one simple question: Are you sure you are smarter than a Nobel laureate? Because August and Marie worked this out more than 100 years ago, it’s palpably worked, and yet many of these so-called best practices people are pushing on you are younger than the trees in your local park,
38:22
so to pull on that thread, what would you suggest to a founder that’s just getting started? Right, they’re incorporating their business. What are the key things that you would suggest they do? We’ve talked about public benefit corporations, we’ve talked absolutely nonprofit ownership structures.
38:38
Totally, yeah, it’s not a formula, so you obviously have to customize to your specific situation, but like when I did that, when I did this literal conversation with the founders of Anthropic, when they left Open AI, we literally do the same conversation I’m having with you, and the only thing that made them special compared to many other founders that I met in that era is they took it seriously. So, like, what do they need to do? They need to make sure everybody was aligned, like the watchword is alignment, coherence. We want to make sure that, like, for them it was like everybody who works there, everyone who invests there, is all really sincerely committed to AI safety. That was their whole premise. That’s why they attract the best talent. That’s why they’re having all this success today, is because they really laid this proper foundation. So, there’s an operational side to this, like, like the ethos, like Saul Price had. I call it the path of ethos. How do we make sure that the business model is set up so that we can only win, we only make money by accomplishing the mission? How do we make sure that the culture and the leadership structure of the company is aligned to the mission? And then we have the structural side for anthropic public benefit corp was obviously the first thing they did, complete no-brainer to do. All the major AI labs started with PPCs, very common now in AI, but we also built something called the Long Term Benefit Trust. So, whereas Novo Nordisk is protected by a nonprofit foundation, that’s actually just one of a bunch of these two-tiered systems that people have worked out over the years, where you have some someone to act as the mission guard. And in the case of anthropic, the LTBT is an example of what’s called a perpetual purpose trust under Delaware law. It’s like a different legal category of things, and part of the reason this is so confusing to founders is all the different advocates and reformers for all these different techniques all kind of don’t like each other, so they all are like, “No, you should do my thing, not that guy’s thing. So don’t get caught up in that, the book I try to lay out how to figure out which one is right for you, that so they have a set of outside trustees who have the ability to appoint directors to the for-profit company’s board, and they put that into the charter, and we had to defend that through every term sheet the company received in the first, like, two years. I don’t think they actually installed the LTBT as a legal entity until the series C, so it just required a lot of explaining and a lot of defending of these key concepts, which they were willing to do because they were true believers in the mission. That’s why everybody trusts them. That’s why the talent wants to work there, because you can just see they’re willing to go through all this extra work to defend their mission. So now I feel like the table stakes for any companies that at least do what Anthropic did, because all the objections people usually have about this stuff, they’re like, well, you’re not going to be able to raise any money. It’s like, well, Tropics been able to raise some money, that’s not really been the problem. So, I think I think we’re going to start to see this become more and more normalized. Just to give you a sense of why do this, because I know some people are like, God, I’m trying to get product market fit. Just trying to run my company. This sounds like a lot of extra work. I hear you, man. But the upside is worth the extra work. For example, companies like Novo Nordisk that have the industrial foundation structure – we have a lot of them in the world. There’s so many of them that we can build a data set to see how they perform. Companies with that structure are six times more likely to live to year 50 than company with conventional structure. We’re talking about 10% versus 60% probability. It’s a huge difference. So, it’s totally worth the extra work. The principle in the book, I call it “harder is easier. Not only is it worth the work, because you get this upside, it actually makes other business problems you’ll face down the road, much easier to solve.
42:02
Yeah, I was going to ask you about some of the data points you just highlighted. 6x survival over 50 years, you also talk about dual class, outperformed single employee-owned firms had 50% fewer layoffs in 2008 and recovered faster, and other other good data points, so worthwhile to cite those, and do you think I mean anthropic hot company had leverage in various fundraisers, not not every founder does, right, especially at the early stages, so How do you advise them, you know, when they’re negotiating against VCs that have a lot more experience in this, and those VCs?
42:49
I say in the book that the one thing the techniques in this book have in common is that people will try to talk you out of them. So, yeah, don’t do this, and there’s another kind of thing you learn on a podcast in five minutes, okay? You need to understand it, otherwise you’re gonna get your butt kick. People, people mythologize Dario now because he’s like this larger than life figure, and I’m very proud of him. Okay, like I like him a lot, but like when I met him, he was just first time technical founder, you know? Like it was not as obvious to people then as it is now what this was going to be, and he didn’t have as much leverage as you think. In fact, his, he was not able to get dual class control of Anthropic. He didn’t want it, but he couldn’t gotten it, because everyone’s like, that’s dangerous. We, the whole point of this is not to have centralized control. So, he had to be creative about how we’re going to find a structure that works for everybody here, and that’s really the solution. You just have to treat this like a design problem, you know. I quote Brian Chesky in the book, who said that the greatest product Steve Jobs ever designed is Apple. I think a lot of founders miss this. They think of compliance, governance, all this legal stuff is just like blah, it’s like a building permit, but no, governance is the art of organizational soul craft, it is like a really vital part of entrepreneurship, and it is a product design strategy challenge. You got to find the right solution, like you do with anything else. Now, I have personally coached dozens of founders through this negotiation with VCs, including very nasty, skeptical VCs who don’t get it, and, of course, more enlightened ones, and everything in between, so I actually kept a running list while in the years I was writing this book, literally kept a running list of all the objections and questions we heard from VCs, and there’s a whole section called How to talk to your VCs about this, like I mean, I really tried to take seriously the need for practice to help people understand, and the cool thing about investors, the thing that I think a lot of founders don’t understand is that most investors are basically amoral actors here. They’re not immoral, they’re not against you being mission driven, they just don’t know about it. It’s not their primary concern. They’re busy trying to think about how they’re going to raise their next fund, so the. They just have inherited this ideology about what they think their job is, like when you put VCs on your board. I can’t tell you how many VCs I meet who, when they’re raising money for their fund, or when you’re raising money from them, are like founder friendly, founder first, mission driven, missionaries versus mercenaries, and all this stuff. And the second they become a board member, it’s like a light switch goes off, and now they’re like mission is kind of like the dessert after you eat your vegetables of product market fit and find it, like they just, they start to treat mission like it’s like a nice to have instead of the reason this company was worth investing in in the first place. I don’t blame them. This is how we teach what it means to be a board member, that’s the problem. So, as more VCs become more educated about the fact that being mission-driven, being purpose-driven, is a source of competitive advantage, the more, the more success we’re going to see, more mutual partnership between founders and VCs to do this. I think that’s just.. oh, go ahead.
45:59
Just as a VC myself, you know, we’re also optimizing for some short-term objectives in order to win the long. A lot of VCs are, yeah, and there’s financing risk, right? Like, you’re gonna have to go up back out to market in six to 18 months or six to 20-four months.
46:15
Oh, totally,
46:15
and anything that can impact, you know, the viability of that, that fundraiser, assuming you build the business and things are going well, but I mean, I’ve been in many circumstances where VCs will opt out for trivial reasons. Oh, I don’t like it that you’re based in Chicago or you’re based in Atlanta, or I don’t like it that you have this PBC thing, you know, that’s probably not for me, and maybe that’s not the right investor to, you know, be pitched, but
46:44
first of all, that’s yeah, technically, but like I’ve personally, I have seen more people blow up around over something dumb, like where the place, where the company is based, I’ve almost never seen it blown up over PPC, it’s just because people don’t care enough about it for it to be a thing, honestly, for most companies, it doesn’t even get discussed till the term sheets already signed, and we’re in due diligence. So, the thing that I also think founders forget, and some founders – I had a lot of test readers for this book – you might have heard I’m a big believer in feedback, no kidding. A lot of test readers for this book, and a common thing I got from founders, they really didn’t like this passage. I have a whole section there called “Don’t Forget, you can always capitulate, which founders hate the idea of capitulation. It’s like, but I was like, look, the truth is, if you ever, if you have these structures and protections in place, and you ever get yourself in a situation where you don’t have leverage, and you have to raise money, and someone says, look, it’s a deal breaker for me, you have to break this structure for me to give you the money. Well, if you’re an addict and you need the fix, the person says you must do this thing for me, you’re gonna do it. That’s okay. It happens sometimes, like you’re not always gonna have the lever. This is not this is not a fantasy book, okay? This is not like a rah rah, you, the good guys always win, and that’s not how it is. Sometimes you’re gonna get screwed, it happens, but even if you try and fail, you’re better off for having tried, and more importantly, you don’t know why. Would we preconceive that you’re going to be a low-leverage company? Maybe that mentality is going to make you a low-leverage company, you know. So, I think actually acting like you expect this to be big is really important, and a lot of companies are frankly hypocrites, because when they’re fundraising, they’re like, rah, rah, rah, we’re world beaters, we’re going to destroy the world, take it over, we’re, you know, we’re going to change the world and own it, and do whatever, and then you’re like, oh, interesting, you’re going to change the world, you’re going to own everything, in that case, oh, Emperor of the world, what are your moral responsibilities to the people that you command, and then they’re like, “Oh no, I’m just a little database plus, you know, I hardly do anything, I’m just a technology company. It’s like, “Wait, which is it, buddy?
48:48
Yeah,
48:49
right? Like, are you taking over the world? In which case, man up and own your responsibilities, or you’re just a little piece of technology, okay? Fine, but then were you making these crazy promises for? And so I think a big part of this is just like, as the tech sector, especially matures, we have to start to take responsibility for our own actions, and I just think there’s so many people in our industry who need psych, have a deep psychological need to be the hero of their own story, but they’re not. These companies have gone off the rails, they’ve become really maligned. I don’t care what they like, no matter what their good intentions of the founders were, like whatever happened to don’t be evil, whatever happened to it, you know, like there’s been a palpable loss, and I think a lot of the wealthy people surrounded as they are by sycophants, and like almost like a medieval court of people who tell them what geniuses they are every single day of their life, like it’s it’s actually a form of mental illness that they’re going through as they have to reckon with the consequences of their actions, so I think for the next generation of founders, especially, I’ll just tell you one last story. I was talking to a founder in the humane tech space, he was like, wants to reinvent an existing tech category, but do it in a more human-first way. This is a number of. Years ago, before I had really had all my pithy phrases and all my things figured out, you know, I was like trying to explain this to him. So we’re having this very raw, very real conversation, you know, at night. You know, it was like a situation where he was like, I really need your help, like, tell me what I need to do, and I’m explaining. And he has this moment that lets.. he had this light bulb. He tells me this heartbreaking story. He was like, you know, I was at this party the other day with a bunch of these like really successful founders, you know, multi, multi millionaires, people I really admired for a long time, and they were like on the dance floor by themselves, like hitting on these 20 year olds, and he was like, “Is this my life? These people have all the money in the world, they’ve had the success that this industry promises, and they seem miserable to me, lonely and sad. Is that what I’m signing up for? And I was like, yeah, if you don’t change course, that is what is going to happen to you in the best, the best case scenario, but if you do change course, you can build a company that becomes an incorruptible force for good. And he broke down in tears. It was actually a very moving moment for me, because listen, people liked the Lean Startup a lot, but it didn’t make anybody cry. I’ve had that reaction now from a bunch of people who’ve read this book, that, like, it’s very emotional to consider we’re talking not just about how much money you make, but like, how your grandkids will remember you. Are they going to be embarrassed when their friends find out who their grandparents are, like, because they did this horrible company that everyone hates? Like, that really what you want? So, if you say yes, it’s what I want, I can’t help you. Okay, great, do your thing. But for those that are like, no, I want to find a way to prosper and to feel good about my work, to be that incorruptible force for good. I have a blueprint for you, and is not impossible. You can do
51:49
it. Eric, do you have any habits or behaviors that are a secret weapon?
51:53
Well, I don’t know. I feel more like every blessing is a curse, and vice versa, you know, like it’s it’s it’s a gift and a curse for me. I think one of my secret weapons, like people come to me for advice about startups every day of my life. It’s like the most common phone call I have to this day is someone calling me to be like, “I’m starting a company, I’m raising money, who should I raise money from? Or I’m a company, I’m taking it public, what should I do? Like, I have a public company to revitalize it. Like, people call me with their business dilemmas, and I was reflecting on this the other day. I get a lot of word of mouth referrals, and I mean a lot, even more so than people that cold email me from having read the Lean Startup. Although I get a lot of those too, get a lot of things. It’s like I was talking to another founder, and he said the person I need to talk to is you, and I was trying to figure out, like, why I’m not that smart, not that helpful, like even if, even if my ego is like, yeah, because my prescriptions are so great. First of all, I publish almost all the things I say, so a lot of people are calling me, and they’re, I’m like, look, the end of the day, like, I wrote a whole book about it, so get to read the book. Why are you calling me? And I realized at a certain point, I think my strength and my curse of these interactions is I can’t help it when someone pitches me a startup, I always think it’s gonna work. I’m just not skeptical, so I don’t care what the probability of its success is. I don’t care. I’m not a professional investor. It’s not my job to maximize some LPs’ returns. I don’t care, so I don’t like, and that’s like, I was joking about not investing in Anthropic, but like, I could have a real conversation with Daru, because I didn’t want anything from him, I was just like, yeah, he pitched generative AI to me years before ChatGPT, and I was like, okay, yeah, let’s let’s take for granted that this is going to take over the world, just the way you say now, let’s reason about what to do, and I think that has helped me a lot more than it’s hurt me over the years, because it allows me to enter into the vision of the founder in a way that, that even the smallest amount of skepticism can be, can be hard, hard to let you do. Now, do I advocate for testing and double checking and being rigor? Of course, like that’s the whole point, is only from a place of true belief can you really do science, and I think that’s something people forget, like the skepticism is not really a helpful part of this process, and I wish, frankly, we had a lot less of it in the industry.
54:12
Awesome. And then, finally, here, what’s the best way for listeners to follow along and find the book?
54:17
The number one best way is to join my mailing list. All social media algorithms are all effed and they are shaping what content you see and don’t see, and so by definition the people who are succeeding and getting you information through social media had to warp themselves and their values to do so. So, like, I’m on those platforms, you of course can follow me there, but I’d much rather just directly communicate with you by email. So just go to incorruptible.co that will tell you everything you need to know about how to get the book, including all the cool bonuses that we have. We tried to make it as advantageous as possible for you to be on the mailing list and get the implementation guides. We have readers guides, we have a whole like affiliated workbook that I’m working on right now, special events and stuff like that. We just gave out, I was just at Startup Grind that we had people there who got like because. Because they pre-ordered, they were able to get a free ticket, so we’re trying to find stuff, reasons for you to do it, and the most important thing on the website, of course, we have links to all the major retailers, you get the booking, hardcover, in ebook, in audiobook, I recorded the audiobook myself, audiobook, oh, cool bonus content, by the way, very proud of how it turned out, the most important thing on the website is we have a list of hundreds of local independent bookstores all across this country that are carrying the book, so if you want to help me out, please buy the book. Okay, just super clear. If you have a friend who’s an author, like, you can’t imagine how important it is, especially in the early days of a book, when it’s still getting out there, for people to take it into their hands, like, buy a copy, buy a couple copies, hand it to a friend, that means tremendous. Like, that is the reason why Lean Startup is such a big deal today, is because people in those early weeks and months, I took the time to do it. But if you want to be a hero, not just to me, but to someone in your own local community, why don’t you call up your local independent bookstore and tell them you need 10 copies of Incorruptible, like you’re going to make their day? You know, a hard disk to an independent bookstore is not easy. These companies are under tremendous pressure from Amazon and everybody else, and yet they’re so valuable. They’re such a beautiful part of your local community. So, don’t just do me a favor, do your local bookstore a favor, buy some copies there, or, of course, find out all the details@incorruptible.co
56:17
Amazing, he is Eric Ries. The book is Incorruptible. If you want to hear more from Eric, we did an episode many years ago, number 153 so check that out. Eric, you’re a legend. Thank you so much for doing this.
56:30
Thanks for saying so. Really appreciate the conversation, and congrats on all your success. Since I saw you, it’s episode whatever, 150 whatever it’s been. Congrats, it’s been great to see it.
56:38
Thank you, sir. All right. Alright, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social, or shoot them an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over prepare, choose carefully, and invest confidently. Thanks so much for listening.
