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- [00:01]
BILT Host
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- [00:49]
Eric Ries
Hey
- [00:49]
Jeff Berman
folks, Jeff Berman here. Exciting news. Applications are now open for the Masters of Scale Summit. It's happening October 20th through October 22nd in San Francisco, and it is a really special event. Please join our curated community of founders, innovators and leaders shaping the future. Expect ideas that challenge your assumptions and connections that move your business and maybe even your life forward. It's an experience that can change literally everything. Apply now@mastersofscale.com apply26 that's mastersofscale.com apply26.
- [01:35]
Eric Ries
Are you open to the possibility that you were taught something in business school that was a lie? When the empirical evidence says that the theory is wrong, we have to be willing to say that not only is this a better way, but it also should call into doubt our conviction that our modern doctrines about value creation, about governance, about finance are correct. I think it's actually very clear that they are incorrect and that we've been taught, I would say, indoctrinated into a set of best practices that as a whole are value destroying. And it's time for us to just say no.
- [02:09]
Bob Safian
That's Eric Reiss, author of the iconic bestseller the Lean Startup. Eric is just out with a new book and it is, if anything, more revolutionary. It's called Incorruptible, and in it, Eric takes direct aim at some of the sacred cows of today's business, business and investing paradigm. Eric is a contrarian, but not just for the sake of being different. He relies on verified data and in depth stories to deliver lessons we all need to hear. This episode is a little longer than usual, but it's absolutely worth it. Challenging core business assumptions around value and trust, courage and impact within the trenches stories from anthropic to cloudflare to Novo Nordisk to Whole Foods. So let's get to it. I'm Bob Safian and this is Rapid Response. I'm Bob Safian. I'm here with Eric Reiss, founder of the Long Term Stock Exchange and answer AI, terrific podcast host and of course author of bestseller the Lean Startup and of the new book Incorruptible. Eric, thanks for being here.
- [03:20]
Eric Ries
No, thanks. You. Thanks for having me.
- [03:22]
Bob Safian
So the Lean Startup is an iconic resource for entrepreneurs and business folk, but the, the business landscape is very different than it was when the book was first published in 2011. Before we get to the new book, the main principles of the Lean Startup, do they hold the same way today? Are they more pertinent in an AI era?
- [03:43]
Eric Ries
You know, it's interesting. I talk to a lot of AI founders and people grappling with this new technology and this new business landscape, and I keep getting the question, do I feel vindicated? I forecasted that we would see a double trend. We would see an increase in the underlying speed at which things can be made and we would see an increase in the uncertainty in the business landscape. So fundamentally, in startup is a tool for grappling with high uncertainty environments using the tools of rapid experimentation. The stuff we called fast and uncertain when the book came out now seem very quaint by comparison, but the principles seem like they've held up pretty well.
- [04:17]
Bob Safian
So the new book, Incorruptible, it's a blueprint for companies to, to endure in this environment of change without losing their soul. What, what prompted you to take on this topic now?
- [04:33]
Eric Ries
You know, I started writing this book quite a few years ago and I didn't, I did not realize the issue of corruption would become quite so salient as it has in recent years. So I guess, I guess my timing is good. I guess we'll see. I have been frankly, you know, helpful to people creating untold wealth. I've literally had multiple friends of mine go from, you know, no wealth to, you know, multi billionaires. And I've played a bit part in all these different companies. I probably helped, I don't know, thousands of people start companies by now. So I'm very proud of that and I'm very proud of what we, as a, as a movement, the startup movement has achieved. No, I make no bones about that. But I've also been witness, firsthand, Forrest Gump style, witness to the dark side of this too. Like I've been there watching incredible companies be ruined, be taken over. I call it being surgically deboned. Like making compromise after compromise after compromise, like giving in to this temptation to be exploitative, to be extractive, to be selfish. We've all had the experience of a great brand that we love being ruined. The marketing guru Rory Sutherland tells a story about being in a restaurant, taking a bite. Like a favorite restaurant, takes one bite of the food, has to go on his phone to be like, did this come, this restaurant get taken over by private equity? He could taste it. And what's funny, I've been telling that story for a while now. 12 different people have come up to me and be like, I know what restaurant you mean. They've named 12 different restaurants. We've all had this experience. It's become completely ubiquitous. And I just, I didn't know what to call it. I couldn't even talk about it because like, mission drift sounds like a navigation error. Bureaucracy doesn't capture the gut punch of it. And I realized, I was thinking, what would our grandparents and great grandparents have called this? And it just, it occurred to me they would have called it corruption. Our modern sense of that word has become catastrophically narrow. Embezzlement or fraud. I want to reverse that trend. I think we go back to the old fashioned word corruption. We say that when people find ways to make money without creating any value, they have committed a corrupt act. And as builders, as board members, as leaders, as consumers, as employees, whatever our role in society, our aspiration should be to build things which are incorruptible.
- [06:42]
Bob Safian
You argue that this, this corporate corruption, it's not primarily ethical, like, it's more structural. Leaders are pushed toward outcomes they never wanted. And this is, this is by poorly designed systems like what are the, what are the structural failures that are, that are driving this?
- [07:01]
Eric Ries
It's, it's actually wild to me how controversial this point is, when in fact the science of it is quite settled. Human organizations are a category of thing we call emergent intelligences. Interestingly, so are the transformer architecture that powers LLMs. So we'll get to that, I'm sure. Organizations have an intelligence, but also a character which is not present in any of the individual people that make it up. In the same way that the intelligence of an ant colony is not contained in any individual ant. If you doubt this, I have an incredible video that I borrowed from a bunch of researchers who showed ants solving something called the piano mover's puzzle. And you can actually watch the video and you can see that for ants, the more ants you add to the puzzle, the better it does for humans. This is not True, by the way, because human beings require very specific coordinating infrastructure to work together effectively. And what's amazing to me is scientists have been able, in many studies, this is not just one study, in many studies, to show that human organizations have an emergent character, including, since you mentioned ethics, this is one of my favorite findings. You can measure how ethical an organization is, and that will help you predict whether that organization will commit crimes or ethical lapses in the future. That is not predicted by how ethical the individual people who work there are. So what's going on is we as human beings are much more susceptible to what I call forces, organizational force that unconsciously shapes our behavior. Then we realize that's why it's unconscious. And as a result, these failures, like, yes, they are ethical lapses. I don't want to take away from the fact that we're talking about corruption also has a moral dimension. But with organizations, we have this interesting middle ground where you can say about an organization that they did the right thing. And it's interesting, if you ask people that you saw an organization that did the right thing, does that mean you agree with what they did? Not necessarily. What I mean is they were true to their own values. They acted with consistency and predictability. They made a principled stand. And we admire and trust organizations that do that, even when we don't agree with them. And in fact, we have incredible data that organizations that are structured in a strong way, in a way that can resist outside pressure, that are, in fact, true to their own principles, they reap all these almost unbelievable forms of economic advantage.
- [09:24]
Bob Safian
In the book, you say that sort of success itself is a force that can. That can bend companies away from their purpose. So success isn't the goal. Like, what? What should companies be struggling? How could success be bad?
- [09:38]
Eric Ries
How could it be bad? How could success be bad? Okay, I give example after exam because this is hard for me to accept. And it is one of the most ubiquitous best practices taught to everybody in our society today, which is your leverage, your power comes from success. So if you feel like if you talk to someone who's setting out in their career or in their founding journey or whatever, and they're like, I'm worried about one day I might become a monster. Everyone's like, don't worry about it. It's not. They're not saying you won't. You don't need to worry about that now. You always worry about it later. First get product, market fit. Go get success. Go get rich. And then worry about it. As if the process of Becoming wealthy doesn't have a transformational effect on one's own character. Which like ancient sources are awfully clear about this. Religious sources, medieval sources, you can go to secular ancient sources like this is one of the oldest, most well established points of ancient philosophy. Modern every, it's like every gener generation has confronted the fact that money doesn't buy you happiness, but also the absolute power corrupts absolutely. And also that there are better and worse ways of making money. So there are lots of ways to make money without creating value. Even Aristotle was super clear that those ways are corrupt and you shouldn't pursue them. So somehow in our modern world, we've all been convinced that we have to pretend that we think all ways of making money are equally good. Even though I actually think nobody deep in their hearts actually does. So part of my goal with this book is just like, it's okay, you could say it out loud. People who make things for a living are better. It's all right, it's okay. That's actually something our grandparents were not really confused about. That was super clear to them. We could, it could be clear to us as well.
- [11:13]
Bob Safian
When you're in a system where people are striving to make money and succeed on something that's not really adding value, that, that will, by being in that proximity will diminish your, your own soul, your own ethics. You, you don't even see the ethics the same way.
- [11:32]
Eric Ries
Yeah, it's actually worse than that. What happens is. Okay, there's two, two things I would say. First, people say like, whatever happened to Sears, Whatever happened to Sunbeam? Remember Circuit City? Remember Polaroid? Like always come, you're like, oh yeah, they kind of, that's like an old fashioned company, you know, they didn't change with the times or whatever. And I went through and I researched all these stories with just hundreds of them because what you often find is that these companies experience what I call an unusual failure. So what's a usual failure? Typical failure is like technological disruption, didn't keep up with the times, product sucked new product came in, out, competed and became a, you know, being bureaucratic and stopped competing, whatever. You know, we all the companies fail. It happens all the time. But these companies are all companies that were failed because of their own success. Because the more successful a company is, the more tempting a target it becomes. And we all know the parable of the people who killed the golden goose, right? So the more golden the goose, the greater the temptation to butcher it. So what I see is over and over again people Build these incredible organizations and it's as if they're stockpiling an asset. I call it the most underrated asset in business today. Trustworthiness. And if you study the data, all of these superpowers that mission driven organizations benefit from are powered ultimately by trust. Trust is not some vague thing, okay? It is a financial asset of immense value. You stockpile this immense asset, well, someone is going to try to steal it from you. Have you met humans? Are you familiar with human nature? Of course they're going to try to steal it from you. And we're building these organizations to this weak ass plan that has no locks on the doors. The asset's not in a vault. So of course it can be very easily stolen.
- [13:13]
Bob Safian
So who's stealing it though? I mean, sometimes it's folks internally who are stealing it from you, right?
- [13:18]
Eric Ries
It's lying around for anybody to take. Anybody involved can wake up one day and say, oh, you know what? You know what could be good for me? Let me borrow against this incredible asset. Let me do something that makes the organization a little bit less trustworthy, but benefits me in a selfish way. And because we've made that so catastrophically easy, in fact, we live under a corporate governance regime in which we're teaching people, I think, catastrophically, that not only can they do that, but it's their fiduciary duty to shareholders to be as extractive and exploitative as humanly possible. Like, no wonder we are hollowing out organizations left, right and center. And then we sit around being like, why are we having this trust crisis? Why is trust in our institutions collapsing? Well, what do you expect?
- [13:59]
Bob Safian
So you go through in the book some positive case studies as well as cautionary tales. On the positive side. One of the ones you point to is Cloudflare. I recently chatted with their CEO Matthew Prince for this show. What specifically does cloud share do? What do they get right that other companies maybe don't?
- [14:19]
Eric Ries
When we start talking about mission driven companies, there's a lot of people who are reflexively skeptical. Me too. And Matthew was the most skeptical. So when he, I knew him when he started the company. And if you had gone to him in those days and been like, hey, what's your mission statement? He'd be like, don't give me your consultant bs. We don't have a mission statement. We don't have corporate values, like F off with that stuff. We're just trying to make a firewall in the cloud, man. It's real simple. And what's so funny about that is like sometimes when we talk about these things, it gets lofty. It's like, oh, if you're a mission driven, you must be trying to solve climate change or inequality or misinformation or listen, those are important problems. I'm glad people are working on them. But what I discovered in my career is that if you have even the most humble goal for your company, if it's anything other than to squeeze every frickin dollar out of this world to take for yourself whatever it is, you're already a business revolutionary, whether you know it or not, because you're so at odds with our dominant business culture. So a couple years in Cloudflare was having lunch. We have a small enough so of company, they can all just sit around the table and have lunch. And one of the engineers says, you know, the reason I like working here is this is just the only place I've ever worked where I feel like I'm really making a better Internet. And everyone else is like, oh yeah, I'm making a bit. I thought, sounds good. That was going to phrase that kind of. They all were like excited about. And someone asked Matthew, is that our mission statement? He was like, come on, I already told you, no mission statements. No. He was like, so against that stuff. But over time, he realized that it wasn't a mission statement, it was a mission. It was actually a description of what they were doing, what they're. What the emergent property of this thing was.
- [15:48]
Bob Safian
So they started articulated it himself.
- [15:51]
Eric Ries
Never said it out loud himself. He was the last one, as far as I could tell, in the organization to realize it's what they were doing. And people hear the story, they're like, oh, well, so what? Okay, so they adopted a mission statement. But it's like, no, no, the statement is not valuable. What's valuable is that once they had this realization, they were willing to defend it. So there's all these great stories of times when the mission required them to do some insanely difficult thing for no benefit. One of the very recurring themes of the book, it's a principle I call Harder is easier, where people intentionally do the more principled thing, making their life so much more difficult in ways that conventional business practice would always tell you not to do because it doesn't score well on any ROI analysis. And yet they reap phenomenal financial rewards that they could not have anticipated from doing it. This is not some high concept, highfalutin thing. It's so tangible. One day Matthew was talking to one of his engineers about the fact that the highest Performing feature that converted customers from the free plan of Cloudflare to the premium plan. The thing that actually got people to pay them money was web encryption, SSL encryption. Now today all, all websites are encrypted and this story is actually why. But at the time it was rare. Most, most sites were not encrypted. If you walk into a cyber cafe, go to Starbucks, you get up on your laptop man, not, not just like Chinese hackers, but everyone in the cafe could just read your email. Okay, that was, everything was completely insecure back then. So it was a premium feature that you had to pay for. And it made sense because encryption costs money. You have to buy the certificates from what are called the CAs, the certificate authorities, and you had to pay money to run the servers to do the encryption. Technology actually like has hard costs. So it's like a logical feature to be be paid feature. It was effective at getting people to upgrade. And so he's explaining this to engineering and she says, that sounds really interesting, but let me ask you this, isn't an encrypted Internet a better Internet? Uh huh. Isn't our mission to make a better Internet? Uh huh. Then why are we charging people for encryption? Should it be free for everybody? And I love this story because every middle manager I've ever talked to has had this experience where some dope of an employee walks into your office like basically like once a week, be like, hey boss, would it be a good idea to give our product away for free for no reason? And your job middle managers to be like, thank you, really happy to have your buy in, you know, good input. But let me redirect you to our strategic plan. Remember your job is actually to go make us money. So get out of like, it's like we're used to being this like condescending, patronizing form of management where input is just ignored. But that's not what happened in this case. Matthew was like, oh, that's a good point. And he told me later, he's like, once I saw it, I couldn't unsee it. This guy was right. So now here's a key part of the story. They didn't just say, okay, therefore give it, let's go bankrupt, give it away for free. They said no. They said the three critical words. Figure it out. We have to find a way. Our mission requires that we find a way to give this away for free and still make it economically sustainable. So they went on this like months long rampage of like working nights and weekends and like crazy hours to try to figure out how to make this work. They actually figured it out. They created these really complicated special deals with the certificate authorities called contra deals. And they did all this technical work to make the cost of serving the encryption a lot lower. So they did all this work to drive their own cost basis down. Now, keep in mind, they could have stopped there and just pocketed free margin. Just tons of free margin. In business, we teach people margin is good, get all the margin you can. But then we also teach them Jeff Bezos dictum that your margin is my opportunity. So actually, like, we're teaching a contradiction. Margin is a force of a form of vulnerability. It's a liability, not a strength. Anyway, they could have done that, but they didn't. They gave it away for free and they didn't know what was going to happen. They did it because it was the right thing to do and they were worried. They told their board, even we're worried that our conversion rates might go down a lot if we do this. And the conversion rates did go down because it was the number one premium feature. Most.
- [19:55]
Bob Safian
Yeah, I mean, it's like you said, it's like killing the golden goose, right? Here's, here's your, your best tool, best thing.
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Eric Ries
You're giving it away for free and giving it away. Most companies would have panicked when the conversion rates went down and reversed course, but they didn't. They were like, no, this is what, this is what we're about, is what we stand for. We're going to do it. And of course, I wouldn't be telling the story if you didn't have a happy ending. Yes, the conversion rates went down, but they had 10 times the top of funnel signups because all of a sudden they were the heroes of the whole Internet. It's like when Volvo gave the seatbelt patent away for free award, when Mike McClain gave gave away the patents on container dimensions. Like, there are these acts of corporate, corporate generosity that we study every once in a while. It's like, oh, isn't that funny that they did that thing that one time? Anyway, back to our normal exploitative playbook. But like, Cloudflare is worth 70 billion billion today because they did this. So like, was it an act of corporate generosity or is this actually the most effective business strategy on the planet? Business opportunities are powered fundamentally by positive externalities, which I think a lot of us have been trained to systematically overlook.
- [21:03]
Bob Safian
Let's just pause here for a moment. Eric is throwing a lot at us, but the story about Cloudflare is so resonant by doing what didn't make sense in a near term financial sense. They ended up with a competitive advantage in both product and reputation. A true win win born from playing a completely different game. So what are the trade offs for playing a game like this? And can we learn anything from failures as well as successes? We'll talk about that and more after the break. Stay with us.
- [21:44]
BILT Host
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- [22:26]
Jeff Berman
T.com scale the very best founders I know are brilliant at building systems. They connect teams, they remove bottlenecks, and they eliminate single points of failure. And yet, when it comes to their own wealth, most are running a disconnected stack. A tax accountant here and a state attorney there. A wealth manager who doesn't talk to either one of them. Creative planning was built to fix exactly that. One integrated team of tax professionals, estate planners, investment specialists, all coordinated by a dedicated wealth manager who sees your full financial picture and keeps every piece working together. Proactive tax efficiency, estate strategy, investments all under one roof. Creative planning where wealth works together. Learn more@creativeplanning.com Masters of scale Humans will
- [23:24]
Eric Ries
never be more intelligent than AI.
- [23:26]
Bob Safian
There's going to be two types of companies. Those who are great at AI and
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Eric Ries
those that went out of business because they weren't.
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BILT Host
How do we build a future that is human centered?
- [23:36]
Eric Ries
I'm Rana El Kalyubi, and on my
- [23:39]
BILT Host
podcast Pioneers of AI, we answer that question and so many more. As an AI scientist, entrepreneur and investor, I know what it takes to build AI that works for everyone. Every week I sit down with the pioneers shaping our future and we take you behind the scenes of the AI
- [23:58]
Eric Ries
that's transforming our lives.
- [24:01]
BILT Host
Find Pioneers of AI wherever you tune in.
- [24:07]
Bob Safian
Before the break, we heard Eric Reiss, author of the Lean Startup, describe the foundation of his new book, Incorruptible. Now he shares how being incorruptible helped novo Nordisk thrive over decades and how straying from that path crippled Whole Foods. Let's jump back in. What did you learn that might surprise us about. About Novo Nordisk.
- [24:33]
Eric Ries
I love. Oh, man, I love the Novo Nordisk story. This all started in the 1920s. Marie and August Crow are a husband, wife, team of physicians in Denmark. Okay. Marie Crow is actually an awesome person in her own right. She's like one of the first women to become a doctor and researcher in. In Denmark. Her husband is a Nobel Prize winner and she gets diagnosed with a fatal illness called diabetes. At the time, there's no cure for diabetes. It is an absolutely 100 fatal disease. But anyway, her husband's like, will you still nonetheless come with me on a tour of North America where I'm giving lectures for my Nobel Prize? She goes with him. They're having dinner one day, I think it was in Boston, and the person at the table is telling them about this new research that's being done in Canada. Someone has figured out how to synthesize insulin and that could be a cure for diabetes. They go and they meet the Canadians. They are blown away that this fatal disease is going to have a cure. And they asked the Canadians if they can license the technology and bring it back to Denmark and start producing insulin in Denmark. They had this fear that if you, if you were making medicine and charging people money for it, you might be in a situation where you'd be tempted to exploit them. Because if I have your life saving medicine, you'll do anything for it. I can make a fair profit if I sell it to you in a fair way. But if I wanted to, I could charge you 10 times. You know, like anticipating Martin Shkreli by a lot of years. I could turn 10.
- [25:50]
Bob Safian
That never happens, right?
- [25:51]
Eric Ries
What could you do? So they agreed that what they would do is they would create the Nordisk Insulin Laboratorium as a nonprofit foundation that would own a for profit subsidiary. And what's really interesting about it is that Novo Nordisk is still going 100 years later. The foundation they set up is now the largest foundation in the world. And Novo Nordisk is a publicly traded company. So I hear people tell me all the time, oh, man, once you get large, once there's investors involved, once you go public, once you this, once you that you're doomed. Corruption is inevitable. It's like, but if that's inevitable, how come it hasn't come for Novo Nordisk? I've been pitched founders who are like, I want to do drug discovery, do the Novo Nordisk thing. And I'm like, great. And tell me about the corporate structure. It's going to be a regular old Delaware C Corp. Shareholder primacy to the max. And I'm like, who told you that? I talked to this investor and I talked to this MBA and I talked to this lawyer and blah, blah. And I'm like, look, I'm sure those people all seem really smart, but before you go listening to them, I just want you ask me to answer me this one question. Are you sure you're smarter than a Nobel Laureate? Because Maria and August Crow worked this out 100 years ago, and it totally worked. And now this is not just one company, by the way. There's enough of these companies in the world that the great researcher Steen Thompson at Copenhagen Business School has actually built a data set of these companies to see if they perform economically better or worse than conventional companies. Everyone I talk to about this is always like, well, they're nonprofit owned. They probably are inefficient. They probably, you know, they can't raise. They're not disciplined by the market. They can't raise capital, attractive rates. They can't this, they can't that. Our modern finance theory, it's really important to understand this. Our modern finance theory makes very concrete and specific predictions about what should happen to these companies. And they're all wrong. Actually, these companies outperform. Actually, they have better financial performance. Actually, they don't need the market discipline. They actually create a lot of shareholder value that for profit companies, normal for profit companies can't, can't touch. They have better return on invested assets. They have better Tobin's Q, if you know what Tobin's Q is like, they're better in all of these.
- [27:49]
Bob Safian
But it sounds like heresy, right? Like it's so different.
- [27:52]
Eric Ries
100% heresy. It shouldn't. It shouldn't work. But it.
- [27:57]
Bob Safian
Except it does.
- [27:58]
Eric Ries
Except, does. Are you open to the possibility that you were taught something in business school that was a lie? It's actually very challenging for people. And again, it's not a. Like, the effect is not marginal. For example, one of the best stats about these companies is they're six times more likely to live to year 50. We're talking about 10% versus 60%. Like, it's a huge difference. So it's not just that, oh, there's this acute exception. How interesting. When the empirical evidence says that the theory is wrong, we have to be willing to say that not only is this a better way, but it also should call into doubt our conviction that our modern doctrines about value creation, about governance, about finance are correct. I think it's actually very clear that they are incorrect and that we've been taught, I would say, indoctrinated into a set of best practices that as a whole are value destroying. And it's time for us to just say, no, we're going to have our own better new best practices.
- [28:52]
Bob Safian
Among the cautionary tales in the book, you, you cite Whole Foods and you know, Whole Foods at least first came to me. It seemed like a sort of real mission driven company. So what, what went wrong or what?
- [29:07]
Eric Ries
Whole Foods is a very important story to study, not least of which is because John Mackey is awesome. I really like, I mean, I know him and he's, he's a really great entrepreneur and he had, I think, a tragic experience. And if you talk to him about it, he blames himself. But I think it's important to move the story away from the personal drama and start to focus on the structural aspects. People today know Whole Foods mostly as a gourmet grocery store, but it was originally not even really about gourmet food at all. It was really about health and environmental consciousness. The original store in Austin was like a community center. People loved that store. So much so that in the early days of Whole Foods, there was flooding in Austin and the store was completely saturated with mud. And like, the company would have absolutely gone bankrupt except that the whole community showed up with buckets to like bail them out. Their banker personally guaranteed them a loan to go buy new inventory. Like, this is at a time when, when John and his girl, then girlfriend, had to like live in the store. They were bathing in the, with the dishwasher hose. Okay. Like, this was an act of tremendous love. And that was his, that was his goal. He said, I want to buy. My goal is to make the best, the best workplace in America. I want to be a place that people love to work, they love to shop. So it was like a very mission driven company and it expanded and it raised money and it had a bunch of success. And Mackie kept talking about at each stage, if you look at his, his, what he wrote about, he said, like, When I got VCs involved, I felt like I'd taken on hitchhikers with credit cards. They were, as long as we were going where they wanted to go, they were willing to pay for gas, but they really weren't fundamentally aligned with us in the same way. And so he was actually, he was eager to take the company public to get those people off his board. And he talked about Going public was like the greatest day of his life. Not only because they had made a lot of people rich, but because, like now, he was moving on from those investors. But Whole Foods was a bad fit for the public markets from the beginning. They had high margins because it was a premium product that their margins would go down even a little bit, their stock would collapse as the market would punish them. And so they really got this strong message from the market that, like, you have to defend these margins at all costs. And they did. Now, here's what's really interesting about it. The whole time they're a public company, they are just obsessed with keeping the stock price up. But why? Normally we say, why is it important to have a high stock price? Well, you're greedy. You know, if you have stock options and you're greedy. But Mackey donated all his stock options to charity. He said he didn't want to work for money anymore. He wanted to work for the love of the thing itself. So that wasn't it. He said, well, it's important to have a high stock price because what if you need to raise money today? Like a lot of think about all the tech companies that go public. They're like money losing machines. Whole Foods during this whole period, never had an unprofitable year or an unprofitable quarter. So they never needed to raise money or really needed anything from the markets. And yet the psychological compulsive need to keep that stock price high drove all their decisions. And in particular, it drove the decision not to lower prices. They couldn't bear the trauma of the stock price going down. But this wasn't just like, oh, they're being like, weird. They understood that the cheaper the company would be, the cheaper it would be to buy up the shares and take control of the company, take it away,
- [32:10]
Bob Safian
which would make them vulnerable.
- [32:12]
Eric Ries
Which would make them vulnerable. So they felt like high stock price was the kind of success you needed to be successful. This is that same fallacy we talked about before. Be, have success. Success will give you power. Use that power to do what you want. But unfortunately, because they couldn't lower prices, eventually their foot traffic started to decline and now their stock price is going down anyway. Which allowed, in fact, allowed activists to come in, buy up a small percentage of the company, and force them to sell it. Mackie to thwart the activists, like, made a absolute Hail Mary of a phone call to Jeff Bezos and said, look, could I sell the company to you instead? Because you're more long term. And that's actually ultimately how the deal went down. The activists who did this, by the way, they made $500 million for six months of work applying the pressure campaign to force this sale to happen. There's a, I quote an article that's like, the greedy masters won. And they were like, look, Mackie wants to have it both ways. He wants to be this avatar of being mission driven and conscious capitalism and doing right. But he also wants to run a standard issue publicly traded company.
- [33:13]
Bob Safian
And is that what, when you say he blames himself, is that what he blames himself for?
- [33:18]
Eric Ries
Yeah, yeah. He, he, he feels like he should have been able to figure this out. I'm more sympathetic to his situation even than he is. I think he was caught in a trap that had no solution because it needed to have been solved years earlier.
- [33:31]
Bob Safian
Whenever he took those hitchhikers on with their credit cards, he was busted from that point on.
- [33:36]
Eric Ries
Absolutely. He, he definitely, he definitely had no idea what he was really signing up for then. And I wouldn't say it was too late because actually I've worked with companies that have adopted these structures at many different ages and structure like. But yes, one of the ideas in the book is that it's generally always too early until it's too late. So you, you talk to people about this and then you get this pat on the head. You go to your lawyers, like, I think I want to do this thing. I heard Eric was on this awesome podcast with Bob and he says I should do this thing like Novo Nordisk. Go try it. You will get the most condescending pat on the head you've ever had in your life. Which is like, oh, that's sweet that you think that, like, good for you. Don't worry about it. You don't have to do that now, you always do it later. It's absurd. It's just like, what are we doing when the evidence that these companies outperform is staring us all in the face? It's not just Novo Nordisk. Any have a Vanguard mutual fund. Anyone ever bought furniture at Ikea, you know Patagonia, you know Hershey, Hershey Chocolate, for God's sake, has this structure. It's very simple, very simple idea. Yet it is very difficult to adopt because there's all this gravitational pressure to conform, conform, conform to the so called best practices. And many board members, many investors, many founders for that matter, have become convinced to become more loyal to the best practices than to what actually would serve the organization's health.
- [34:50]
Bob Safian
If you're a business and you say, okay, I'm going to put my mission first. What are the frictions or the trade offs that I should expect if I
- [34:59]
Eric Ries
do that, I'm going to push back on your question a little bit because it was the most common piece of reader feedback I got while working on this book. Bar none is people were like, you're not being honest enough about the trade offs. So I went and I interviewed, re interviewed a whole bunch of the mission driven CEOs and I said, look, I need to know more about the trade offs. And they all looked at me like I was a total lunatic. They were like, the what? I'm like, the trade offs. They're like the trade offs of what? And it was as if I had asked them, like, what are the trade offs between eating food and eating poison? They're like, it's not a trade. Like you are foregoing the right to eat poison in the future. So you're taking options off the table. That's true, but that's not really a trade off. It's actually just. It's the thing that we do. We can't imagine doing it any other way. And I'll just, I'll give you another example. I was, I met a company called Grundfos. They're. They're a Danish water pump company, another Danish company. And they were like the first company I'd ever actually like gone to do a workshop with their executive team that had this structure. I didn't know they had this structure at the time. But I got there and it was like very weird. I was like, well, everything is different at this company. Why? They're like, look, you need to understand, we have this unusual structure. We're owned by a nonprofit company. And I was like, oh, I'm so sorry. You must be at such a competitive disadvantage. Nonprofit. Oh yeah. You must not be able to raise money. And I was just like, I'm giving them my condolences. And they were like, really offended. Like, what are you talking about? I was like, wouldn't you rather trade places with someone who follows all the best practices? And the room erupted in laughter. Like I just said the dumbest thing they'd ever heard. They nobody who works at one of these companies would ever trade. Really, the only trade off is that if you do this stuff or try to, people will incessantly try to talk you out of it. But those people do not have your interests at heart. They are talking their book, as we say in finance. They have their interests in mind. I tell the story in the book of a founder. I worked With. I tried really hard to get him to adopt these things. He came to me, like, 12 months, 18 months before his IPO, and he was worried about this kind of stuff. And I was like, yeah, you should be worried. You have a structure that is weak and rickety, and you are going to get absolutely screwed. Okay, so just. I was just giving him the history, him the data, and he was, like, alarmed. He's like, oh, man, this is terrible. I need to go do something about it. He calls me back and he's like, you know, I talked to my board, I talked to my investors, I talked to our investment bankers, I talked to our lawyers about it, and they were all just like, eric is such a downer. That guy. Really. If that guy really believed in your vision, he would understand. You're the. Huh? Yeah. It's like, such a joy.
- [37:34]
Bob Safian
Yeah.
- [37:34]
Eric Ries
Yeah. He was just like, you know, man, I hear you, but our company is special. We're unique. And I was like, listen, I. I hope you're right. And he was fired from his company five months after the ipo. He didn't even make it six months.
- [37:46]
Bob Safian
Those other players, you know, the. The investors and the board members and whatever, like, they are so invested in the idea of success for, like, it's defined them. So they.
- [37:57]
Eric Ries
Oh, sure. Yeah.
- [37:58]
Bob Safian
They see that as the framework of, like, well, this. This is good, because it's been good for me, so it must be good.
- [38:05]
Eric Ries
Oh, absolutely. No, that's absolutely right.
- [38:09]
Bob Safian
Hang on, everyone. Eric isn't done ripping into our assumptions. Coming up, he shares an insider's view on what happened between Anthropic and the US Government. And he explains what he thinks is necessary to reframe business and capitalism toward better outcomes. We'll be right back. Hey, listeners. Bob here. If you listen to Rapid Response on masses of scale, you may be missing half the show because every Friday, we release a second Rapid Response exclusively in the Rapid Response feed. The guests and topics are just as compelling and timely. From Ford CEO to NASA's administrator to the lessons from the Devil Wears Prada, it takes about 10 seconds to find. Just search Rapid Response wherever you listen to podcasts and hit follow to make sure you never miss an episode. I hope to see you there. So far, we've heard Eric Reiss talk about how the pursuit of every dollar can lead to unsavory outcomes. Now he applies that lens to the realm of AI, where he has an insider's view of anthropic versus OpenAI. And he offers his prescriptions for how to correct misplaced priorities in the investment world. And for each of us personally, let's get back to.
- [39:33]
Eric Ries
To it.
- [39:36]
Bob Safian
There's this declaration in the book where you say shareholder supremacy is over. And. And. And it doesn't feel that way to me. So what, what makes you feel like shareholder supremacy is over? Maybe it should be over.
- [39:52]
Eric Ries
But no, no, no. I think, I think it looks. My personal view is that this is actually. This fight has already been. Been lost. First of all, shareholder primacy was supposed to be for investors, but like I said, it's actually turned out to be really bad for investors. And I think we're actually kind of in a world of extraction primary primacy now.
- [40:09]
Bob Safian
Well, I always think which investors. The investors were, like, running for the
- [40:13]
Eric Ries
benefit of the shortest term. Most extractive.
- [40:16]
Bob Safian
Yes.
- [40:17]
Eric Ries
Secondly, there's a generational thing. The, the new generations that are coming to the workforce now have lived only under this idea. Okay? Like, this idea is very recent. I always tell people, if you can see a park with a tree in it, you're probably looking at something older than shareholder primacy. The key date of the adoption of shareholder primacy in Delaware is 1986. 1986. Not that long ago. Okay, we're talking about Depeche Mode, not monks in some monastery, right? Like, very recent occurrence. But we now have people entering the workforce who have lived under this idea their whole lives. So when I teach them about the collapse of trust, for example, and it's like, if you look at the data on trust, trust in governments, trust in big business, trust in doctors, trust in hospitals, trust in journalism, the graph is just straight down. They don't really understand how trust can have collapsed because they can't imagine living in a world where anybody trusted any institution for any reason. They're like, why? They're like, you would trust your doctor, you would trust your government, you would trust big business. And I'm like, look at the data. Like, 70% of Americans used to trust big business. Now it's like 20%, like 70%. They can't imagine it because all they've ever known is extraction, exploitation, and weakness. For all their power and all their, like, money that they're making, they are the most inconstant, pathetic organizations ever. Think about the people who've, like, succumbed to public pressure in just the last couple years. So when you talk to younger people about shareholder primacy, they're just like, so over it. It's unbelievable. So I think the. I think the argument is already lost. So we better get busy thinking about what comes after shareholder Primacy, what is the new thing that we're going to do? The number one protection that investors want the most is limited liability. Like, ultimately, our entire economic system is powered by the fact that investors are not liable for the actions of the companies that they invest in. We are putting that protection at risk. Our modern ideas of fiduciary duties rest on both trust law, the idea that a director is a trustee of the corporation, but also on what's called agency law. When you're my agent, your job is to maximize your outcomes for me, whereas if you're a trustee, your job is to protect the thing that is held to you in trust. So shareholder primacy is just basically taking out the trustee aspect of fiduciary duty and being all agency, all the time. The idea is that every corporation is obligated to maximize returns for its investors. But the most ancient legal traditions, the entire common law going back to the Roman era, is that if you are my agent, then I am liable for your actions. Because you walk into the marketplace and to maximize returns for me, you stab somebody. That's my responsibility, because I sent you as my agent to do that. It is intellectually incompatible to have both shareholder primacy and limited liability. We can't have completely unaccountable corporate behemoths accountable to no government, no process, no nothing, doing whatever they want, and investors saying, I wash my hands of this, but also I insist everything be done for my benefit. Sorry, it doesn't work that way.
- [43:10]
Bob Safian
In the context of all this, I have to ask you about. AI OpenAI and Anthropic have clashed over how they engage with the US Government, the Department of Defense, Department of War. Where do they fall in this sort of incorruptible lexicon between positive model and cautionary tale?
- [43:28]
Eric Ries
Oh, yeah, listen, I happen to know the Anthropic story better because I was involved, although I'm not an investor or anything, but I helped them set it up. The conflict between Anthropic and the dod. I think this is really instructive. Anthropic was put into an absolutely untenable situation by an unprecedented act of government overreach. Given that the government did this thing and you could debate whether they did the right thing or wrong thing, it's kind of irrelevant. I think, actually, for our analysis, it's unequivocal to me that Anthropic did the right thing in resisting. And we have to ask ourselves, in order to make a statement like that, what does it mean for an organization to do the right thing? We can say three things. One, they acted in a principled way in defense of their own values. Two, their values align with a notion of human flourishing. I think companies that have purely extractive values and wear it proudly on their sleeves can never be said to do the right thing. And the third thing is they had the courage, the institutional strength to resist outside pressure. That's what makes them trustworthy. When I talk to normal people, not the. Not the excessively online, you know, hyper posters who are, you know, trying to win a culture war every five seconds, normal people, they are perfectly capable of saying that they trust a company who did the right thing, even if they disagree with the decision. I know people are like, I don't agree with what Anthropic did. I personally think it would have been fine for them to sign that contract, but I respect that they had the courage, the strength, and the principled consistency to stand up for their own values. And I loathe the companies that rushed in to grab that contract again, even though I think it was perfectly fine thing to do, simply because the opportunism of it makes me suspicious of their motives that they would do this. If they'll betray their principles for $200 million, will they want to find the principal one day? Right.
- [45:16]
Bob Safian
Anthropic was consistent in its decision, in the way it approached this. And in some ways, OpenAI was consistent with its history and culture in. In jumping in.
- [45:29]
Eric Ries
Well, yeah, consistent with its behavior, but not with its stated principles. I think that's really the issue.
- [45:34]
Bob Safian
Its behavior really is. I mean, what you state is your principles. It's what you do that matters. Right?
- [45:41]
Eric Ries
Just think about, like, law firms, universities. I can't. How many big companies in the last two years you would have thought how Were, like, big enough and strong enough to resist outside pressure, have basically proven that they'll do anything for a dollar. It's pathetic. It's sad. And there's very few companies that are on the other side of that ledger. Now. Here's what really blew my mind. Anthropic did this, and I don't. I wasn't involved. They didn't consult me about it. Okay? I was not an insider to the decision. But I know for sure because I know the people they go to for advice. I'm sure a lot of people they went to for rights were like, don't make a stink. This is the US Government. Who are you? You just imagine the advice that they got. So I don't think there was any way they could have anticipated that, like, as soon as they did this, Claude would go to number one on the App Store people that night, their headquarters in San Francisco, the sidewalk was chalked up with thank you messages all around the office. They got very unanticipatable benefits. So much so that a couple people have argued that they cynically did this virtue, signaling knowing somehow would benefit us. Nobody could have predicted that this would go as well as it had. You stand for what you stand for. You think it through, you try to make the best decision you can, and you live for the consequences. And people respect that because they can trust that if you'll do it in this situation, you'll probably do it in the situation that affects them too.
- [46:53]
Bob Safian
Incorruptible is, is a rallying cry of sorts. And I'm curious what you hope listeners here, business leaders do differently. You know, I mean, you've spent your career in some ways arguing that the system matters more than the individual, but individual actions are required to change the system.
- [47:11]
Eric Ries
I mentioned very briefly this academic idea called structuration. Organizations shape your behavior, but you also shape their behavior at the same time. And I had this realization studying not just the good companies that we've talked about, but also the bad companies, the Philip Morris's, the Facebooks, you know, the, the companies that are creating addictive products. To me, that's like one of the darkest parts of modern capitalism. But what I realized in studying these organizations is that they're addicts too, in the modern world because of surveillance capitalism. Every decision you make, I don't care if you're an important person or just a regular old consumer citizen, board member, middle manager. Every decision you make is somebody's personality metrics. Target every decision. There's someone in the world whose job is to watch you very carefully to see if you'll do the thing they want you to do. And of course, there's probably multiple people whose job on multiple sides of that issue. Like, so every choice you make ripples out in gravitational waves through these organizations. And when you realize that, you realize that you feel so powerless with these huge, massive organizations. But like, they're obsessed with you. They're addicted to you, their algorithms, their analysis. I've been in the room, literally been in the room where this happens, where people are debating some arcane product management decision, like should we make it with a slightly healthier ingredient or should we go for the cheaper ingredients? It's like, well, it's going to add $0.03 to the unit cost. The bomb, the bill of materials will be increased by 3 cents. Someone else is like, well, but what about the willingness to pay? The most important phrase in business is actually willingness to pay. Will the customer pay the $0.03 or not? You can't imagine the amount of energy and time that is spent analyzing whether you will pay the 3 cents or you won't. So every time you cynically say, well, I guess it doesn't matter, you are actually lending your gravitational force to a system you hate, you are helping make it more powerful. And every time you resist and you do, just in your own small private way, the right thing, you are strengthening untold unknowable allies who think the way that you do. So I don't want to, I don't mean to say like, oh, good, we can solve climate change with recycling. Okay, Like, I'm not saying that individual power is everything, because of course, systematic forces are important too. But we have to remember that systems are made up of people. We are the people who make them up. We consent or not to their hegemony. And one of the biggest things I learned writing this book is that we all have far more power than we realize.
- [49:52]
Bob Safian
I got into business journalism because I believe that business can be a catalyst for positive societal change. But listening to you, sometimes I think, like, am I just being naive? How optimistic are you that business can truly be incorruptible?
- [50:13]
Eric Ries
If human civilization is going to endure on this planet, then it needs to be. The technologies that we have learned, that we are learning to harness, are now in the catastrophic range. I meet startups every day. There's like two guys in a garage with something that could, that could change the world. Like the anthropic co founders are wielding a force that could be civilization ending. I'm really optimistic about it because I think it's an existential necessity. And I think anybody who actually has a stake in the future survival of the species, like, ought to take it seriously. Anyone who's giving you a message about it's naive. You got to ask themselves, are they in fact committed to the future of our civilization? Now, it turns out that many of those people own a bunker in a remote desert. So I think they're actually telling on themselves quite, quite explicitly that they don't view that as their problem. And why you would listen to buy from, give your attention, energy or support in any way to such a person, like, I think is deeply anti human. So maybe don't do that.
- [51:06]
Bob Safian
Yeah, well, Eric, as always, talking to you is thought provoking. This was great. Thanks so much for doing it.
- [51:15]
Eric Ries
Oh man, it's such a pleasure. This was really fun.
- [51:20]
Bob Safian
It's hard to pick just one takeaway from Eric's stories. We could emphasize everything that's screwed up about the system, and there's plenty to point to. But Eric is ultimately upbeat because there's clear, dangerous data that what's good for society and fairness and trust is actually good for business too. That the shortcuts people are drawn to actually leave us shortchanged. Remember his early observation that the ultimate asset for any business or brand is trustworthiness? I totally agree. And the more we safeguard that trustworthiness, the more we lean into it without exploiting it, the more more value we actually create. I don't agree with everything Eric says, but this vision of business, this is what motivates me. And if I'm being naive sometimes, so be it. I'm Bob Safian. Thanks for listening. Rapid Response is a Wait. What? Original I'm Bob Safian. Our executive producer is Eve Trow, our senior producer is Alex Morris, and our associate producer is Masha Makutonina. Mixing and mastering by Aaron Bastinelli and Brian Pugh. Our theme music is by Ryan Holiday. Our head of podcasts is Lital Molad. For more, visit rapidresponseshow.com Sam.