How Anthropic, Costco, and Patagonia all build incorruptible companies | Eric Ries

[00:00] all kinds of famous companies. The thing that destroyed them was not competition. Their very success became a liability. I want to hear the OpenAI versus Anthropic story. Dario was a first-time founder. It wasn't a hot company at all. The boom hadn't happened yet. ChatGPT hadn't been invented yet. Nonetheless, they were true believers in this safety mission. And so one of their investors suggested they come talk to me. I told them, look, if you don't get this right, here's what's going to happen. They were very determined to do something about it.

[00:30] who are appointed by and are accountable to an outside group of trustees who are AI safety experts, who do not have equity in Anthropic. Whenever you see Anthropic, do the right thing, like when they refuse to release a model because they think it's too dangerous. Think about how much that's costing them. This new book, Incorruptible, is about helping you protect what you've built. What is it that you need protection from? We all know this force. I call it the force that no one controls, but everyone obeys, that tends to drag organizations [01:00] control of them.

What's a broad stroke solution to this? Harder is easier. If you're willing to be principled in your decision making, you will get these unexpected rewards. But most leaders, when asked to defend their principles, can't do it because they've been taught ROI-based thinking, shareholder primacy. That's the path of maximum profitability. That's nuts. [01:22] Today, my guest is Eric Ries, author of the most influential and impactful book in startup history, [01:30] you [01:30] Today he is back. [01:31] with a new book, [01:32] 15 years later, [01:33] called "incorruptible: Why Good Companies Go Bad" and How Great Companies Stay Great.

[01:37] The way Eric describes the connection between these two books is that The Lean Startup was about helping you build a successful company, and this book is about helping you protect what you've built. Eric wrote this book because he's seen way too many founders lose control of their company and end up being very disappointed and depressed about how things turned out. This is not something that you hear a lot about, but it's a problem that basically every successful founder will face. Eric shares a ton of powerful stories and specific tactics and very specific advice for [02:07] to understand and do as a founder if you want to build something lasting.

Before we get into it, don't forget to check out Lenny's Product com for a year free of the hottest and most well-crafted AI products in the world, available exclusively to Lenny's newsletter subscribers. With that, I bring you Eric Ries. [02:26] Eric Rees [02:30] Thank you so much for being here and welcome back to the podcast. [02:34] Ah, it's an honor to be back. Congrats on everything that's happened since I was here last time. [02:38] Wow, thanks, Eric. [02:39] So for people that have been living under a rock, you... [02:42] famously wrote, [02:44] the Lean Startup, 15 years ago at this point, [02:48] Maybe the most impactful, successful founder startup book out there.

And it feels like over this 15 years, if you think about it, it's gone through all these waves of just like this is correct the way to do it. And it's completely wrong. Why would anyone build this way? This doesn't work anymore. [03:04] to, okay, this actually is right. I was actually just thinking about this as I was preparing for a chat. [03:09] It feels like the way the top AI companies are building now is actually [03:13] Exactly, Lean Startup. I just had the head of product of Cloud Code in the podcast, Cash.

Oh, yeah. The way they operate. Okay, we're going to ship the MVP. They don't call it that, but we're going to ship the MVP. [03:22] Research preview, get it out there, see if people care at all about this thing. We're going to tell you it's not ready for everyone, but it's out there. [03:28] and then they iterate and build. [03:29] I feel like people don't give you credit for like, this is actually the way AI companies are operating now. [03:33] I appreciate you saying that. And it is funny how... [03:37] every wave there's like a backlash and somebody writes the article like because of this and [03:41] you don't need to do lean startup anymore.

I remember when people wrote that about Quibi, they're like, "Quibi proves that you don't need lean startup." [03:47] And I was like, why don't we wait till the companies are successful and then see if it proves it? [03:51] But also, people forget this is not a religion. So what matters to me is not if people use the term minimum viable product or whatever. By the way, those aren't customer-facing terms. So a lot of companies that use these concepts... [04:02] They don't talk about how they use it. They just use it internally to them.

It's just, you know, the obviously right way to go. [04:08] And it's funny to me, one of the most important aspects of it that I think, you know, stands up really well, and it's been 15 years. [04:14] is that so many of these AI products that, leaving the models and the underlying technology aside, these specific products [04:22] that have taken the world by storm. You can really tell that the AI labs themselves did not know they were gonna be as popular as they turned out to be. Obviously, chat GPT, they had no idea.

[04:31] Cloud Code, co-work, like these were small experiments in the grand scheme of things. [04:35] They wanted the company like this is our big bet. Let's go. [04:38] And that's just so classic that that's a universal aspect of product development. [04:43] that you do not have the ability to predict the future. [04:46] And when you pretend you get yourself in trouble, you hold everything like a hypothesis. [04:51] You know, you get the benefits of the scientific method. It's pretty helpful. [04:55] This episode is brought to you by our season's presenting sponsor, WorkOS.

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[06:15] The way I've heard you describe the combination of The Lean Startup and this new book is The Lean Startup was about helping you build a successful company. [06:22] And incorruptible is about helping you protect what you've built [06:26] I want to start with that second part of [06:28] protecting what you've built. What is it that [06:31] you need protection from? What's this kind of corruption that you [06:34] talk about that [06:35] founders run into. [06:37] Yeah, we all know this force. In the book, I call it the force that no one controls, but everyone obeys.

[06:44] that tends to drag organizations down into mediocrity. [06:48] to the point that we lose control of them. Now, sometimes we lose control of them because we get fired. You know, we get ousted from our own company. [06:56] Sometimes it happens because we're like Frankenstein and his monster. It starts to become malign or bureaucratic or frankly evil. [07:03] And we can't figure out how to stop it. [07:06] And all kinds of other ways. I've been, I had a front row seat at this. I've been helping people build companies now for a long time.

I've helped people create. [07:13] unimaginable amounts of wealth for themselves and for society. And I'm really proud of the work that they've done. I'm really proud of my bit part that I played in so many of these companies. [07:22] And yet I've also seen this darkness. [07:25] And it's not just founders getting fired, although obviously we're going to talk about that. [07:28] But like the other day I was out to dinner with some friends. We were not at home. We were kind of, you know, away from our usual, uh, [07:35] our usual spots.

And so someone said, "Oh, there's this restaurant. I haven't been there in a couple years, but it's really good. Let's check it out." [07:40] We go sit down to dinner. [07:41] They take one bite of the food, [07:43] And then they're on their phone. And we're like, dude, you're being rude. Like, why are you on your phone? It's just one sec, one sec. Yep, I thought so. He turns it around. I could tell that this... [07:51] Restaurant got taken over by private equity. [07:53] I could taste it. [07:55] And [07:56] I've told that story a bunch of times now, and so many different people have told me, oh, yeah, I know what restaurant you're talking about.

And then they name like 12 different restaurants. [08:04] So what's going on that like you can taste [08:07] the ownership structure of a company in the food [08:10] How many people had a famous brand that they love get ruined? [08:14] I tell hundreds of years of these stories in the book, all kinds of famous companies where [08:19] The thing that destroyed them was not competition. [08:23] It was not someone else came up with a better product. No. [08:25] their very success became a liability. [08:29] Because the more golden the goose, the greater the temptation.

[08:33] to butcher. Wow, that's a very visceral example. [08:36] I think about Vital Eggs. [08:38] as a great example of this. It was in the news, I don't know, on Twitter, TikTok a while ago. It's [08:44] It's like pasture raised organic. I got in my fridge. OK, I don't know if you saw this, but everyone's complaining about it. Gotten worse. [08:51] and they're they have all like the highest level of toxins and then they're owned by blackrock now it turns out no i i was just wondering about that oh okay now that's my new favorite example that's really funny i didn't even know that but yeah like [09:03] It's so common.

It's the point now where I was doing an interview with someone who was telling me about a certain natural foods brand. [09:09] And the name of the product is the name of the founder. [09:13] It's like I can't remember her name now. It's just her name. That's what that's the name of the product. [09:18] and she gets ousted by investors. And he's about to tell me the story. I said, "Let me guess. [09:22] What happened next? [09:23] The board pushed her out in pursuit of higher growth. [09:26] higher margins, as a result we've seen lower quality, customers are super pissed, employees are pissed, and now it's starting to shrink market share.

He was like, "How did you know? I thought you said you didn't know this company." [09:36] This pattern is so pervasive, we don't even have a name for it. [09:39] We live it every day, but we don't know what to call it. Well, I know what to call it. [09:43] I know what our grandparents would have called it. They would have called this corruption. [09:47] None. [09:48] legal bribery or embezzlement. No, [09:51] This is like you're building a bridge. [09:54] and [09:54] If your bridge collapses and Lenny, I say you're an engineer and I say, Lenny, [09:58] Why did my bridge collapse?

If you're like, well, because of gravity. [10:02] I'm gonna be like dude, yeah. [10:03] Thank you for that genius insight, right? Like, I understand. [10:07] that that is correct in some very real way. Like we say, well, it's inevitable, it's greed, [10:11] I call it financial gravity. There's this kind of thing, human nature, when companies get big, whatever... [10:16] Yeah, but... [10:17] I want to know why did this bridge collapse? And more importantly, how come other bridges didn't collapse? And they say, oh, for that, we need to study the load, load factor, wind load, shearing tension.

And we go look up close. We say, oh, look. [10:28] All the metal bolts. [10:30] have been corroded. They're rusted. No wonder it collapsed. [10:34] And then if you say, well, I want to build a new bridge, but I don't want this one to collapse. What can I do? You will say, well, [10:38] Gravity, what can you do? No. [10:40] You say, why don't we use stainless steel next time on the bolts so they don't get corroded? Oh, yeah, good idea. So [10:45] This book is about what are the organizational equivalents?

[10:48] Of stainless steel. [10:50] And the book is kind of structured, not like a traditional business book, as you say, you've picked up on that. [10:54] It's much more like a mystery, a double mystery. First of all, why has this been going on for hundreds of years? [11:00] When we all think that the market selects for value creation, so this shouldn't happen, yet it happens all the time. [11:06] But secondly, if it's inevitable, if it's caused by greed or age or size, [11:11] Why are there exceptions? [11:13] You're actually going to give us answers and solutions because it sounds like, okay, this is impossible.

You actually have... [11:18] you have some answers for what founders can do real quick i'll just say on the vital x thing i'm not exactly sure if the toxins are real like there's a [11:25] Hull. [11:26] viral thing on it. I haven't looked into it super deeply. We both have homework to do now because I guess what you feed your kids, you care. I'm definitely worried. Definitely worried to hear that. I want to talk about two [11:36] Things that are probably in people's minds as they listen to this conversation and even think about buying your book.

[11:41] One is... [11:42] Okay. [11:43] I am not going to let this happen to my company. Like this is other people. They're weak. They're maybe they're loose values. The other is just like, [11:50] "Do I really need to do this? There's so many companies that are killing it. I don't think they've done any of this." [11:55] Why do I even need to pay attention to this? [11:58] So maybe let's start with that first one of this idea of [12:00] And this is a core thesis of your book. This is not like an ethical...

[12:04] values thing. This is a structural [12:06] element of building businesses in the S. I'm going to make a claim that's going to sound radical, but I'll back it up. [12:12] If you don't get this right, no other decision you make about your company will matter for the long term because you're not going to be the one making it. [12:21] Okay. [12:21] According to Harvard Law School, among venture-backed companies, [12:25] that have the standard best practices set up that you got from your lawyer. Okay? [12:30] Only 20% of founders are still the CEO three years after going public.

[12:36] Just statistically speaking, everyone's being told by their lawyers, their bankers, their VCs, everybody that you're the exception. It's not going to happen to you. [12:44] But statistically speaking, you're much more likely to be in the 80% than the 20%. [12:48] I'll tell you what story in particular. A very hot company came to see me. [12:52] like a year or two before their IPO. They were planning IPO and I built a long-term stock exchange. I've done a bunch of stuff that [12:57] People come to me for advice about these things.

[12:59] They wanted advice, how can we structure the IPO? We want to think long term, we really mission driven company, et cetera, et cetera. And I was going through their governance documents. I said, oh, good. [13:07] you have all the best practices. So you're totally like, I was like, the good news is you're so screwed. You're going to have to do something, right? Like you just, this is your, this is guaranteed to get this mess. [13:16] And I had all the data, just like I do in the book. Like, here are the examples.

Here are the case studies. Here's the data. You need to know about this. [13:23] And the founder was really concerned. He's like, okay, we're going to definitely do something about this. We're going to fix it up. But then he called me back a few months later. He's like, I said, well, what are you going to do? He's like, you know what? I talked to my bankers, talked to my lawyers, talked to my CFO, talked to my GC, talked to my VC, talked to my growth VCs. [13:38] You know what they all said?

They all said, man, [13:40] Eric is such a downer. [13:42] If he really believed in your vision, if he really saw how special you were, he wouldn't talk like that. [13:48] You're the exception. [13:49] I said, okay, man. [13:50] Good luck. [13:52] This... [13:53] Company went public, had a very successful IPO. A lot of people made a lot of money. [13:57] And then five months into their IPO, [14:00] a competitor gets acquired. [14:03] And the whole category, everyone freaks out. [14:05] Stock price collapses. [14:07] and the founder is ousted. [14:09] after five months as a public company.

[14:12] Now, if you read stories about the company, people will be like, oh, he made all these mistakes. Their business model sucked. The company, blah, blah, blah. [14:18] Did he make mistakes? I'm sure he did. Were there problems? I'm sure. [14:22] but how you really earned so little grace [14:24] That he only got five months? The same people saying that the business model is horribly flawed, they invested in the company five months ago. Had it really changed so much in five months? This is what's going on. [14:35] these [14:36] And collapses are all around us and we're being told it's normal.

This is just the way it has to be. But it's not. [14:42] These are choices about the specific structures, cultural practices, the management practices we do on the inside. [14:49] and the structural, the governance practices we do on the outside. [14:52] Both of them were being told to do things that are incredibly weak. [14:55] And again, if you think you're going to be the exception, think again. [14:58] I'm excited to talk about what to do with these governance elements, but let's talk about this other critique that I imagine [15:04] people have in their head of just like, [15:06] Is this like, you know, like...

[15:07] Okay. [15:08] I need to figure out product market fit first. - Yeah, yeah, worry about it later. - Exactly, there's so much more I need to do. Like the chances of this working are so low, why am I, I have no time for anything else. - Oh, totally. You said something interesting in the lead in, which you said like, well a lot of other companies seem to be killing it and they don't have these protections, so they're fine. [15:25] I would actually check your math. [15:27] So many times when people give me this argument, they were like, well, such and such company, you know, like I'm so it was like Cloudflare.

They are just a normal company. [15:34] They don't do this stuff. I'm like, [15:35] Check your math, buddy. Cloudflare does many of the things that we talk about. They're one of the examples in the book, so I picked that on purpose. [15:41] A lot of companies that you don't necessarily instantly think of is like do-gooder companies. [15:45] mission driven companies are actually very mission driven in terms of how they're structured. [15:49] And they are almost always protected by at least one of the governance structures from this book. [15:55] check your map.

People used to tell me Costco was an example that wasn't protected so much so that like I was surprised to learn that it was embodied in a governance fortress. [16:02] You'll be surprised if you do the math, if you look into it, you'll be surprised. But let's talk about the product market fit thing, because this one is really interesting to me. [16:10] Generally speaking, this is one of the most important ideas in the whole book. [16:13] The most important question about how to protect a product. [16:18] is not what protections it needs, [16:21] but when those protections need to be enacted.

[16:24] And it's basically like that old proverb about the best time to plant a tree was 40 years ago, but the next best time is now. [16:30] It is always too early until it's too late. [16:34] And I'll give you the example. [16:36] I've seen this hundreds of times myself personally. So I've like literally been in the room where this kind of stuff gets discussed. [16:43] And it starts like this. You're incorporating your company. You talk to your lawyer. Hey, I want to have these are called mission protective provisions in the law.

[16:50] I heard this guy on Lenny's podcast. And he was like, oh, not again. You know, another guy, right? Like, how many good ideas for Lenny's podcast are you going to tell me about? Okay, fine. What's this one? He told me I need to have mission protective provisions. He'll be like, he'll pat you on the head and be like, oh, that's sweet, honey. [17:03] That's great. Yeah. Get product market fit. [17:06] like get some success success is ultimately your source of leverage success will protect you don't worry about it you say okay good but just [17:13] Thanks for letting me know.

[17:14] Now you raise some money, you got these VCs on your board, say the same thing. [17:18] Yeah, I totally am with you. We're on the same page. We want the same thing you want. We invested because we believe in you as the founder. There's no need to do this now. Let's just do it later. Do it when it's the more appropriate time, okay? [17:27] You get a growth round. Now you've got these bold contrarian growth VCs on your board. [17:32] And they're like, [17:33] I don't know. [17:34] You might not want to be too different from everybody else.

[17:37] might make it hard to raise money. You're like, I thought you were a bold contrarian. What? Okay. [17:41] Don't worry about it now. We can always do it later. Now you're doing IPO prep. Now you've got bankers and lawyers and you've got a GC and you've got the [17:49] And they're all like, yep, yep, this is a great thing to bundle with the IPO itself. You don't need to worry about it now. First, we got to land the plane. Let's get our house in order, blah, blah, blah. [17:56] Anyway, I've actually been in the room where the founder sits with the CFO, and now it's like IPO planning roadshow.

Here we go. It's go time. We're about to file the papers. [18:05] the founders like hey whatever happened to those mission protective provisions like i wanted to really make sure we had our customers could participate in our ipo and i want broadly shared prosperity and i want this thing for our employees and [18:14] All those good stuff I want to do. [18:17] Do we do any of that stuff? I don't see it in the S1. [18:20] The CFO was like, oh, you were serious about that? [18:24] Oh, sorry, man. You should have said something.

Now it's too late. [18:27] You know, wait a minute, but I talked to you about it last year. You said it was too early. [18:31] Yeah, it was. [18:32] but now it's too late. Was it ever the right time? No, it is never the right time to do this. [18:38] If you put this off, you will eventually find yourself in a situation where you can no longer do it. You will have lost the leverage. Success will not protect you because success is what makes you a target. [18:48] That story I told you about the five months CEO got fired.

[18:52] that company, everyone who worked on that IPO, every banker, every lawyer, the CFO, everybody, [18:58] they profited from all the transaction volume that that company generated on the way up [19:03] and on the way down. [19:05] They're all fine. [19:07] They're all on to the next IPO. They're like, [19:10] carnivores, you know, they're on to the next thing to feed on. [19:13] meanwhile the customers the employees the people that cared about their company were not so lucky [19:18] Damn, that hit me right in the heart. [19:21] And it's so obvious just how personal and important this is to you.

[19:26] It's clear you've just seen this happen again and again. Oh, yeah. I've been in the room where it happens, the proverbial room. [19:31] Mm-hmm. [19:32] Okay, so let's talk about how to what people should do and we'll go [19:36] poke around in different directions. What's kind of like the broad stroke solution to this? And then what are some, say, three things, say, an early stage founder should do? [19:43] this week next week. [19:44] Yeah, yeah, yeah. Okay. So broadly speaking, there is a blueprint. I promised like [19:48] When we talk about the horrors of living in late-stage capitalism, it's easy to get depressed and just be like, I mean, literally part one of this book is called The Shape of the Abyss.

So, you know. [19:58] I'm not trying to sugarcoat it. This is quite grim and... [20:01] If you haven't studied these case studies, if you don't know the story of Whole Foods or what happened to it, if you don't know the story of Vectora, you don't know these stories – [20:08] They're really grim and it's important to grapple with what happened so that it doesn't happen to you, so that you're prepared. [20:14] But it can feel like we're so helpless. But as I said, this is a double mystery, not just why does this happen.

[20:20] But how can there be exceptions to a rule that's inevitable? [20:24] So let me just tell one more story and then we'll get really into the tactical details. Cause I want to really give, I want some stories that we can use as our facts at our database [20:32] to draw these principles out. [20:35] And so the blueprint, I'll give you the spoiler alert. I just mentioned before, ethos plus integrity. That's our formula. [20:41] Ethos meaning internal alignment, character choices, [20:44] integrity meaning the structure to resist to keep ourselves aligned with human version [20:48] Let's go back in time a little further this time.

We're going to go to 1920 Denmark. [20:53] Okay. [20:54] I want to tell you about a woman named Marie Krohm. [20:57] She was one of the first doctors to practice in Denmark, like a credentialed doctor. She was a big advocate for women's medical education, and she lived a very cool life in her own right. [21:06] but she's famous today mostly because of her husband, August. [21:10] who had just won the Nobel Prize. [21:12] who's a very famous scientist. [21:14] and [21:16] She, unfortunately, right around the same time got diagnosed with a fatal illness.

[21:20] an illness for which there was no known cure at that time. It was called diabetes. [21:24] Thank you. [21:24] So she gets this death sentence. [21:26] right as he's winning the Nobel Prize. And he asks her, would she come with him to North America for his lecture tour anyway? [21:32] And she says, yes. So the two of them travel to North America. He's going around talking to scientists about his Nobel Prize. [21:38] And one night at dinner, [21:41] Maria is sitting next to a scientist who tells her, hey, actually, in Canada, there are these researchers who have figured out a new technology to isolate a substance called insulin.

[21:50] a potential surer, [21:52] for diabetes. [21:53] So, [21:55] Marie convinces her husband we should send our trip, go to Canada, see this thing for themselves. They do. They are both scientists, so they instantly understand the implications. This could not only save Marie's life, but millions more. [22:06] So they talked to the Canadians, could we commercialize this technology? And the Canadians say they're open to it, but everyone involved has a concern. [22:14] We've been talking so far about the concern of [22:16] being forced out of your company or having it taken away from you.

That is one danger. [22:21] But there's also the temptation to harvest what others plant. [22:25] the temptation to exploit, to extract, instead of creating new value. They were worried about that. Now, Lenny, [22:30] I want you to imagine this scenario with me, okay? [22:33] imagine that i depend on you for a life-saving cure i have diabetes you're the only maker of insulin in the world [22:40] In that case, I would want you to charge me a fair price. [22:44] Like very much so. It's both morally right, fair, but also I want you to have every incentive possible to keep making the drug.

Otherwise I might die. [22:51] Okay. [22:52] But what if one day you wake up and you're like, wait a second, I don't have to charge Eric a fair price. [22:57] or you have investors whispering in your ear, Lenny, [23:00] you don't have to charge him a fair price. [23:02] You can charge him anything you want. [23:05] That's what I would live in fear of. So decades before Martin Screlli actually did this as a business strategy, [23:11] the crows and the Canadian scientists, they were worried that this might happen to their new company.

So when they went back to Denmark to create this company, which they called [23:18] the Nordisk Insulin Laboratorium, [23:22] they incorporated it using this very particular structure. It is a for-profit company. [23:27] It does have outside investors. [23:29] But it is owned by [23:30] governed by a nonprofit foundation, a two-tiered structure that's called an industrial foundation in the literature. [23:37] And if Nordisk Insulin Laboratorium sounds familiar, it should. This is the predecessor company to what we today call Novo Nordisk. [23:44] one of the largest companies in the world. [23:47] And what's so interesting to me about this story is this structure has endured [23:52] and protected the ethos of scientific integrity of nova nordisk [23:57] for more than 100 years.

[23:59] Meanwhile, so many of the best practices that your lawyers, your bankers, whoever advisors you have, [24:05] They're going to be pushing best practices on you that are younger than the trees in your local park. [24:10] And so what I want for everyone who's listening to this, founders, product managers, leaders, board members, I don't care. [24:15] the next time someone comes to you pushing a best practice. [24:18] And you're like, oh, I guess I have to do it this way because we live in an ROI dominated culture. We have to stack rank by ROI or whatever the practice is.

[24:26] I want you to be like, well, that person sounds very smart. They're very well credentialed. They went to business school or whatever, but ask yourself, [24:32] Are you sure? [24:34] They're smarter than a Nobel laureate. [24:36] Because August and Marie worked this out 100 years ago. [24:39] And it has held... [24:41] So many attacks. In fact, I tell a story in the book. And, Lonnie, I know you're going to think I'm exaggerating. Or at least some of your listeners are going to think, oh, Merrick is an exaggerator. I promise you.

[24:49] This is a 100% true story. [24:52] that [24:53] The trustees of the nonprofit foundation once had to intervene to protect the for-profit from this exact temptation to want to sell it out. [25:00] And I won't get into the whole story. They did the right thing in this case. [25:03] because they had the legal power to do so. [25:05] their intervention ultimately created [25:08] more than $500 billion of shareholder value. [25:13] I'm not [25:14] I didn't add an extra zero for emphasis, $500 billion. [25:18] So when people hear about these things for the first time, [25:21] It's natural to feel like we're talking just about business ethics or mission.

It's like some extra nice to have thing that after you do the real serious business, now you worry about this stuff. No. [25:30] This is one of the most powerful engines of value creation in the world. [25:34] And for a lot of people listening, this will be the first time you're hearing about it. But just because it's new to you, does it make it new? [25:39] The German optics company Zeiss who makes the lenses in my glasses and yours too. [25:45] They had this structure in 1885. [25:49] So I think it's really interesting that [25:52] We have enough of these examples to know that there's nothing inevitable about this financial gravity.

We actually have a data set that can be studied. There's a whole branch of academic research that has shown, for example, companies with that structure like Novo and Zeiss, [26:05] they are six times more likely to live to year 50. [26:08] compared to their conventional counterparts. They have superior return on invested capital. They make more money for investors. They're better in so many ways. [26:16] So it's kind of a bit of an open secret. [26:19] that these techniques exist. So I want us to kind of have these stories in our mind because it's gonna sound, as we get into the technique, some of them are gonna sound radical.

We wanna say, wait a second, is this really doable for me? I'm just a little startup. [26:30] I'm just doing, you know, [26:31] I'm just trying to get a product market fit. Why are we talking about this long off stuff, hundred year old companies? [26:36] August and Marie, they were a tiny startup too once. [26:39] Now that company is worth hundreds of billions of dollars. So before we get into that, let's remind people again why this is worth. [26:46] doing because it's going to sound like, oh, my God, this is so annoying.

I have to do all these weird things and no one else is doing. I have to convince all these people this is not going to limit us and not hurt us down the road. [26:56] Just let's remind people again just why this is important, why this is so painful if they don't do it right. [27:02] Gosh, there's so many... [27:03] things to choose from. [27:05] - So much pain. - So much pain. I'll tell another story. Like we've been telling kind of happy stories. Let me tell you what, not very happy story.

[27:12] So I've been doing this exercise for many years, where I would ask founders, [27:16] or leaders of really of any any seniority. I'm just like, listen, before we get into the details, first, tell me who you think is the most evil company in the world. [27:25] And people sometimes, sometimes they'd like instantly know who to say. They're like, oh, I know. But some people are like, what do you mean evil? And like the company where... [27:31] There's no amount of money they could offer you that you would go work there.

[27:35] You know they're up to no good. [27:37] Everybody has a company like that in their mind. I don't know if you want to say who is for you. I [27:41] Maybe I understand if you don't want to, it's okay. But like, I'll just for the sake of us having a hypothetical that we can do, I would always tell people we go around the room, I go on some of them on Zoom, everyone puts in the chat, right? And there'll be some will be like Halliburton and someone else will be like, increasingly like tech companies are showing up on these lists now, which one, [27:56] When I was younger, that would never have been the case.

But now you sometimes see tech companies there. Sometimes see Monsanto or you see, um, [28:03] you know, or some private equity fund. Like people are like mad about something [28:07] They can name a company usually. So it's not hard to find examples. Now, my father was a pulmonologist growing up. So [28:12] I was raised that Philip Morris is the most evil company in the world. So we'll just use that as our hypothetical just for the sake of argument today. If you think Philip Morris is great and you have different values, you know, whoever's listening, fine.

You pick the company you really would never, ever, ever want to have to work for no matter what. Now, I ask people to imagine the company they currently work at. If you're a founder of your company, if you're an employee, your company, but if you've [28:34] you know, the company you hold dear, just imagine. [28:38] Philip Morris shows up one day and says, I'd like to buy this company for you. [28:42] for $1 more per share than it's currently worth. [28:46] Yes, Ellen. [28:47] Most people are like hell no. [28:49] Hell no, I'm not selling.

[28:50] One person once asked me, well, what are they going to use it for? [28:54] Oh, sorry. To be clear, they're going to use it to sell cigarettes to children. Now you're selling? Yeah. No. No deal. Obviously, F no. I can't actually say on your podcast the kind of things people say when they were presented with this. Because there might be children listening. Okay. People get real upset at this idea. [29:09] And when we talk about, I'm like, okay, well, did you know? [29:14] That according to the legal documents you yourself sign your company's literal charter that you have right now, and this is some hypothetical future thing you've already put in motion.

[29:26] A rule that says you have a fiduciary duty to say yes. [29:30] In this situation, people are so outraged. They're like, that cannot be right. [29:36] My lawyer, my guy, he would never have done that to me. I'm like, call him up. [29:41] Ask him if what I say is true and call me back. And they're like... [29:44] He said he was doing me a favor. [29:47] by giving me the best practice documents to make it easier to raise money. Yeah. So occasionally, though, people will say, Eric, you are exaggerating.

[29:55] That is not [29:56] Yes, that can happen, but come on. Does that really happen in real life? Is that something I really need to do? I'm Johnny at Product Marketing. Do I have to worry about it? So before you tell me I'm exaggerating, I want you to consider this from the [30:06] perspective of the founder scientists of the Vectora Corporation. Now, Vectora was a UK company, a spin out from the University of Bath. [30:14] They made inhaler therapeutics like for asthma and COPD. You've seen inhalers, yeah? A medicine company.

[30:20] They were really successful. They raised money and they went public on the London Stock Exchange. And one day, [30:26] The actual Philip Morris. [30:28] tried to buy them. Okay. I only know this story because I've been using the Philip Morris example for years. And when I was researching the book, [30:36] I was like, [30:37] I wonder, I actually asked Claude, has anybody [30:40] "Has anyone ever actually been bought by Philip Morris?" I stashed out the hypothetical and it was like, "Are you asking me about Victura?" And I was like, "Tell me more."

[30:48] There's this company, this is what happened. [30:51] Fillmore said they wanted to diversify beyond nicotine. And they were like, oh, we know a lot about inhaling things. So having an inhaler company makes anyway. [30:59] normal people hearing about this were like, this doesn't make sense. Why would a [31:03] Why would big tobacco own a health company? That doesn't seem right. So here were the three choices that were facing the Vectora board. [31:10] They had this bid from Philip Morris for 165 pence per share. [31:15] They had a bid from an American private equity firm for 155 pence per share or in door number three, [31:21] they could just stay independent because there was really no problem.

The company's doing fine. [31:25] Thank you. [31:26] The public in the UK was super outraged. The British Thoracic Society begged them to say no. Like every person who thought about this for five seconds could see this is going to be a massively value destroying thing. [31:37] Error. [31:38] But the only people that mattered were the people on the board of directors of the Vectora Corporation. [31:42] They had, I think, two meetings about it. [31:44] And they just said, our hands are tied. [31:46] we have a fiduciary duty to accept [31:49] the highest bid, which they did.

So yes, if you think I was exaggerating, I was, I said it was a dollar per share in real life. It was more like 15 cents a share. [31:58] So let's find out what happened next, shall we? Can you guess? [32:01] Not great. Philip Morris spent 1.1 billion pounds to buy Vectora. [32:07] Within three years, they had taken a $900 million write down. [32:12] and disposed of the company for peace parts. It doesn't exist anymore to me. [32:16] These are the stakes. This is what happens. And I can't tell you, I feel like Perry Mason sometimes when like people like I would never do that.

I'm like, OK, I hear you have good intentions, but can I please see your signature on the document? Oh, look. [32:28] Delaware charters are public record, by the way. If you ever want to know, if a friend is a lawyer, just... [32:32] You want to know if a company has a mission. [32:34] or this is going to happen to them, just pull the charter. You can just read it. [32:38] "Read it for yourself." I'm like, "Is this your signature right here?" [32:40] You yourself signed this document and you don't even understand how your company works.

[32:45] Uh, this is the stakes I think are, are significantly existential, especially now that we're entering an age, the age of wonders. [32:51] the age of technologies that are incredibly powerful that have planet scale consequences to them [32:56] I think a lot of founders, a lot of product people, they want to build a product that they can be proud of. [33:02] that their grandkids will be like happy to hear that that's how the family fortune was made. [33:07] And I know a lot of people that are incredibly rich and so miserable.

[33:12] Because the thing, their baby, it got ruined. It got destroyed. Why are we doing that? [33:17] Okay. [33:18] Let's talk about what to actually do. And, you know, this is going to be a kind of a high-level overview. Obviously, buy the book if you really want to get serious about this stuff. Coming out May 26th. May 26th, yes, thank you. Anywhere you buy books. [33:30] Talk about what we should do. And I just want to plant the seed of open AIs probably on people's minds as they hear this idea of building a nonprofit.

Yeah, yeah, we'll get there. And obviously in the book, I tell the anthropic story where I played a bit part. So we'll get to all that. We'll get to all that. But let's start with the easy stuff first, because like. [33:46] AI is kind of like the humanities final exam. You've heard that joke. [33:52] these issues are so amplified in ai of course we have to get it right i think it's incredibly important and i've done my i've done what i can to to set us on that proper path but [34:01] But it's easier to see it, I think, in simpler businesses.

[34:04] OpenAI is insanely complicated. So let's look at it in some simpler examples first. Let's start with the principle I call harder is easier. [34:13] This is the... [34:14] This is the leadership principle that anybody can adopt. There is truly like there's nobody who's not you tell me you have no power whatsoever. Like everyone's got some influence. And if you have any influence at all, you can adopt this principle. [34:27] Like when I talk to people about business, I don't care if I'm talking to two guys in a garage, founders, you know, or I'm talking to super boards or CEO, C-suite, whatever.

Everyone always says to me, just what you were saying a minute ago. It's like, man, Eric. [34:39] Business is already so hard. [34:43] Now you want me to do extra? [34:45] Now I got to worry about the Vectora thing and this other stuff. Like, man, I'm already just trying to get through the day. Like, it's so hard. [34:52] But I think this is a basically backwards way of looking at it. [34:57] Because... [34:58] I ask people, [34:59] Could it be just consider the possibility that one of the reasons you're finding business so hard [35:05] is that nobody trusts you.

[35:08] If they trusted you, maybe it would be a little bit easier. Now, actually, this is not a supposition. We have really good evidence. Companies... [35:14] where their employees trust them, spend way less time on employee communications. They have much better alignment. Everyone's kind of rolling in the same directions when customers trust you. They are of course, you have way higher loyalty. Your cost of customer acquisition is lower, but also customers more likely to stick with you after you make a mistake, they're more likely to try your new product. Like so many people like God, customers are so fickle.

They have no loyalty. You know, they're just like they only care about the slick marketing from our competitors. But maybe [35:42] because you view these things as extra is part of the problem. So harder is easier is a principle that says, if you're willing to do the work up front, [35:51] to commit to quality, to design, to ethics, to integrity, to safety, whatever the thing. I don't want to tell you what your values are. You tell me what they are. If you're willing to be principled in your decision making. [36:01] you will get [36:02] these unexpected rewards.

Now you can't do it for the reward or it doesn't work. You have to do it for the thing itself. [36:10] Trustworthiness is the most underrated asset in all of business. [36:14] And the things that create trustworthiness, by definition, stack rank to the bottom. [36:20] if we do it by ROI. [36:22] Because doing the right thing has intangible rewards, but tangible costs. [36:28] So let me give you another story. 'Cause now we've been talking about lofty stuff. And I wanna talk about something super practical. And that's, I mentioned Cloudflare before.

So let me actually tell the Cloudflare story. I like Cloudflare because Matthew Prince [36:38] and his co-founders, they like [36:41] They were really anti-Its. [36:44] consulting BS talk [36:46] Like they didn't want, in the early days, they came out of Harvard Business School and so they were like traumatized. They were just like, no, I don't want to hear about mission statement. I don't want to hear about values. I don't want to just, we were making a firewall and putting it in the cloud. [36:57] It's not that complicated. [36:59] We don't want to hear it.

So for years, [37:01] They had no mission statement. And this is a critical point. [37:04] As leaders, we get so focused on value statement, mission statements, we forget the mission statement is not the mission. The map is not the territory. [37:12] Mission is an emergent property of the living superorganism of the thing we're birthing. Okay. It's not something you can slap on with a label. You have to build it in. You want to have a company that stands for quality. You've got to build quality in from the inside. Deming taught this in the 40s.

This is not some new idea. This is a critical idea. This is what craftsmanship really means. Okay. So we know that Cloudflare had a mission because quite often they would do this harder is easier stuff. [37:39] And without even really knowing why, like there's a very famous example in their history where [37:43] pro-democracy protesters. [37:46] I forget what nation state they were pissing off. [37:49] I better not say it because I get it wrong, pissing off some nation state. We're having their having like state sponsored hackers. [37:55] trying to take their websites down so they couldn't coordinate their pro-democracy protests.

They were going around Silicon Valley begging big tech companies to help them defend their websites. No one would do it. All these big mega companies, even like Google, were just like, I'm too scared. [38:09] And so Cloudflare, the tiny startup, is like, we'll do it. [38:12] These were like free tier customers and weren't even paying any money. And they're like, yes, we will incur the wrath of nation state level hackers to protect you. [38:21] because it's the right thing to do for no reward whatsoever. That was just the kind of company they were.

[38:25] So a couple of years in, they're having lunch and one of the engineers says, you know why I like working at this company? [38:31] I just feel like [38:33] It's the first place I've worked where we're just we're trying to make a better Internet. [38:37] And everyone on the table is like, yeah, make a better internet. [38:40] Someone asked Matthew, oh, is that our mission statement? Matt, no, we don't have a mission statement. What are you talking about? No. But it actually was. [38:48] Over time, the engineers, people who work there kept saying, make a better Internet.

That was how we talk about it. And eventually the founders had to be convinced, okay, let's adopt this as our mission statement, which they did. That is their mission statement to this day. They had to eventually adopt formal values. Like as you get bigger, these things really matter. It matters that you document those emergent properties. Otherwise, how are people supposed to know what they are? [39:08] Their number one. [39:09] Value, by the way, is be principled, which is the ultimate harder is easier move. [39:13] So, [39:14] This all sounds great.

It's fun to have values. It's fun to have a mission statement when it doesn't cost you anything. But sometimes it can be very expensive. [39:21] It can make your life a lot harder. That's why we call the principle harder is easier. One day, a junior engineer, not like some, [39:28] senior executive or anything, walks into Matthew Prince's office and he says, boss, [39:32] Is it all right? [39:33] Isn't our mission statement to make a better internet? [39:37] Uh-huh. You're a CEO. Any conversation that starts this way is definitely going to be extra work for you.

So you're like, what is it now? It's like what you were saying at the board meeting that our number one driver of revenue. [39:48] The thing that causes people to upgrade from our free to premium plans. This is a few years ago now. [39:53] is web encryption, SSL encryption. [39:57] Right. You said that makes sense because SSL encryption is expensive to offer. We can offer it for free. We have to get the certificates and pay for them. We have to do all this extra cryptographic stuff as compute. You know, we have scarce compute, da da da da da.

[40:08] Sure. [40:08] but boss, [40:11] wouldn't a better internet be an encrypted internet [40:15] And he's like, "Yes, so what's your point?" So like, "Why are, it would be better, why are we giving it away for free?" And so many people have heard this story [40:23] If you've ever been a middle manager in a company, okay, [40:26] you know this you're just like oh my god every day someone walks into your office it's like hey boss let's give our product away for free for no reason okay like your job as a middle manager is to be like no [40:36] We have a strategy.

Get back on the strategy, right? Redirect. Hey, thank you for your buy-in and your input, but [40:42] We have a job to do. So everyone's expecting Matthew to react that way. And we'd be the most normal thing in the world. This is our most profitable product. And you're saying we should give it away for free. Get lost. No. [40:53] Matthew told me, once I saw it, I couldn't unsee it. [40:57] and he [40:59] He uttered the three key words. He said, let's figure it out. [41:02] Figure it out. This is the leadership principle I think is so powerful, the figure it out principle.

[41:07] When you have, if you're committed to something, you stand for quality or whatever, it's going to make life harder. [41:13] The best leaders, the ones I really admire, [41:15] They revel in it. [41:17] They love the difficulty. [41:19] Because every time you have one of these impossible dilemmas, it's a chance to teach what you really stand for. So Matthew insisted the whole team rally to figure out how to give encryption away for free. Now, they couldn't just give it away for free. He's like bankrupting the company won't achieve the mission.

[41:33] We had to find a way to make it sustainable. And I won't go through all the technical details of like how they managed to get the cost. They had to hand roll their own software and assembly language. They had to do these complicated biz dev deals with certificate authorities. Like they figured out how to do it. [41:46] and they drove their own cost down now keep in mind that at any time first of all i could have used the difficulty as an excuse oh it's too hard we can't do it give up [41:54] Once they did it, they could have said, wait a minute, this is just free margin.

[41:57] We can make our costs lower and then we just get free money. [42:01] Yeah. [42:01] When they shipped it, [42:03] They had to report to their board on what happened. [42:05] the conversion rates for their for premium product went down. [42:09] So they could easily have bailed out at that point, but they didn't. They stuck with it because this is what we stand for. [42:14] Now, of course, it's a happy ending story. [42:17] the top of funnel increased by an order of magnitude. In fact, to this day, people still talk about how Cloudflare is like the reason you take for granted we have an encrypted internet.

The trust that they gained is the reason why they're a $70 billion company today. [42:30] But most leaders, [42:32] When asked to defend their principles, can't do it. [42:36] because they've been taught ROI based thinking, they've been taught shareholder primacy, [42:40] They've been taught that that's the path of maximum profitability. To give you like an easy contrast. [42:46] Andrew Mason, the founder of Groupon, once told me this story. Everyone remember Groupon? Maybe not now. It's kind of fallen out of public consciousness. But there was this time when Groupon was one of the fastest growing private companies in America.

[42:55] It was powered by a daily email. [42:58] with a cool deal. [43:00] And the whole thing was you got one email a day from Groupon. They went public on the one email a day. That's how successful it was. And I remember he told me this story. One day, you know, his executives and employees started coming into his office and they'd be like, you know, boss, we need to make the quarter. We need to make more money. We're a public company now. [43:17] We don't want to be better than one email.

[43:19] "Have you considered two emails?" And he was like, "No, one email a day." He's like, "That's our whole thing." But he said over time they ground him down and they kept saying they were using language. It sounds kind of lean startup-y. [43:30] Shouldn't we do an experiment? Shouldn't we look at the data? What about the ROI? [43:35] And so he's like, all right, fine, we'll run the experiment. They ran the experiment. [43:39] Two emails a day makes more money. [43:41] So he couldn't say no. And everything was fine for several months until someone came into his office and said, you know, boss, you know what would be better than to email?

[43:49] We should send three emails. [43:50] And next thing you know, they're sending eight emails. And this is not just Groupon. I have had so many CEOs tell me this exact story about email frequency. Email frequency is like, for some reason, the tip of the spear, where it's like, we don't really have any way to defend doing the right thing here. [44:06] So we do the wrong thing that destroyed the whole company. [44:11] But in the short term, we made a bunch of money. So if you can stick to the harder is easier principle, that is the first line of defense against losing whatever it is that makes a company special.

[44:21] Eric, you're such a wonderful storyteller. I'm just like sitting here just... [44:25] compelled. Well, thank you, man. I am so excited to tell you about this season's supporting sponsor, Vanta. Vanta helps over 15,000 companies like Cursor, Ramp, Duolingo, Snowflake, and Atlassian earn and prove trust with their customers. Teams are building and shipping products faster than ever thanks to AI. But as a result, the amount of risk being introduced into your product and [44:55] the increasing weight of protecting their organization their business and not to mention their customer data because things are moving so fast they are constantly reacting having to guess at priorities and having to make do with outdated solutions [45:10] Vanta automates compliance and risk management with over 35 security and privacy frameworks, including SOC 2, ISO 27001, and HIPAA.

This helps companies get compliant fast and stay compliant. More than ever before, trust has the power to make or break your business. [45:27] Learn more at com slash Lenny. And as a listener of this podcast, you get $1,000 off Vanta. [45:34] That's com/Lenny. [45:37] I want to talk through just like, what do you do? So there's write a mission statement. Values, is that a part of this? Just define your values. Talk about. Well, yeah. So again, no, writing the statement is not valuable. [45:48] Okay, the statement is not what it is.

The reason I would use the old fashioned word ethos, I tried to write this whole book without using any trendy consulting language at all. [45:56] So I try not to use the word stakeholder. I try not to use the word culture. [45:59] I tried to really go [46:01] old-fashioned that's why i started with salt price rather than talk about stakeholders and mission statement and values i want to know who are your fiduciaries [46:11] It's like a real old fashioned word for fiduciary. But to me, the question, [46:15] every leader has to answer.

And this is every product has to answer this question. What is its purpose? [46:21] Who would you rather die than betray? [46:26] Okay, so you tell me I want to have a high quality product. [46:30] That's what I would rather die than ship slot. Like think about how Steve Jobs was like he was. This is a guy who would fight with people over the layout of the wires inside a computer. He didn't want customers to be allowed to open and ever see. That's so classic. Harder is easier, right? Just it has to be a certain way.

If you know stories about Yvonne Chouinard, the founder of Patagonia. [46:49] Today, he's more famous for his environmental activism, but he was a quality zealot. [46:54] He believed that quality was an objective function and that every product had a quality level that it deserved. Most people think that's insane. [47:02] That's why Patagonia is such a success. That idea is powerful. [47:06] So whatever that thing is, that purpose, we have to find ways to encode it in our like management system so that there's no way for us to make money by betraying the principle.

[47:17] whatever it is. So this can happen both at the operational level and at the governance level. Both both are really important. [47:25] People hearing this, I know some people are gonna be like, [47:28] Is this some ESG nonsense? Like... [47:31] Okay. There's a very funny quote in the book, Unilever, the big food giant. [47:36] We went through a phase a couple of years ago where they were going to infuse purpose into all of their products. [47:40] and Wall Street investor was just like I've had it with this. [47:44] wrote this, wrote them a nasty letter.

It was like, look at the point that we're debating the purpose of Hellman's mayonnaise. [47:49] I think you've lost the plot. [47:50] And I love that quick because it's funny, but actually what's so funny about it to me is humble though it is. [47:56] Hellman's mayonnaise is food. [47:59] Its purpose is super clear. And again, if you think it doesn't matter what the product manager who runs Hellman's Mayonnaise thinks the purpose is, going back to our Vital Farms question. [48:09] Like think how easy it would be when an efficiency consultant shows up and says, you know, I think we could save three cents on the bill of materials if you just make the proof the thing carcinogenic.

[48:18] And you're like, oh, wouldn't that come back to bite us? Yeah, but long after your stock options are vested, buddy, what do you care? [48:24] If the product manager thinks their purpose is quality, that matters. If they think their purpose is extraction and exploitation, it matters. Again, if you think I'm exaggerating, the product managers at Johnson & Johnson [48:35] Put asbestos in the baby powder. [48:39] and covered it up. [48:40] Because although they said their purpose, their mission statement was patient health, [48:45] their actual mission had become [48:48] growth optimization quarterly targets.

So what we want to do is that's the first most important technique is like, what is the purpose? [48:55] Who would we rather die than betray? Like, you got to write it down. You got to say, as Saul Price did, customers first, employees second, shareholders last. Or the great Peter Drucker said it was actually, he said that that's backwards. It should be employees first, customers second, shareholders last. I don't care. [49:09] You tell me what you believe. [49:12] You got to write it down. And then we have to do a thing I call mission drive.

[49:17] Companies that claim to be mission driven, most of them are just mission hopeful. Okay. It's bullshit. It's just a candy coating on top of an extractive engine. Sorry, I don't buy it. [49:27] If you're serious about being mission driven, you have to show me that you cannot profit. [49:33] except by achieving the mission. That's the audit we have to do. We have to look at if we were if someone in the company got tempted [49:40] to cut quality. [49:41] to cut corners, to decrease performance, to deal with – like the things that tend to get cut first, safety, performance, quality, design.

[49:49] Those are always the most vulnerable innovation, I guess, is fit. So that's like the five horsemen of the apocalypse is like, [49:55] You can get rid of those things and nothing bad happens right away. [49:59] Because the whole point of trust is I can betray you and you wouldn't even notice. [50:03] So we have those are like the canary in the coal mine. Is there any way, is anyone's bonus target? Is our OKR system? Is there anyone in this team? [50:10] And again, you can do this at the company level, of course, but you're just a team, a team of five.

Is there anyone on this team who could profit? [50:17] by portraying one of our principles, is it possible?