← The Foundr Podcast with Nathan Chan
The Foundr Podcast with Nathan Chan
664: He Changed How the World Builds Startups. Now He's Warning You About What Comes Next | Eric Ries
00:56:51
Eric Ries wrote the book that changed how the entire world builds startups. Now he's back with a more urgent argument: the way we're taught to build companies is quietly turning them against everything that made them worth building in the first place.
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- [00:02]
A
Hey, founder fam. I want to talk to you about something super exciting. We're officially partnered with Omnisend, the email marketing and SMS platform built specifically for e commerce founders. We've been recommending Omnisend to founder students for a while now because it just works. Whether you're launching your first store or you're scaling to seven figures, it really helps you automate your marketing and get real results. Did you know on average, OMNISEND customers make $68 for every $1 they spend, which is an insanely good return. And because you're part of the founder community, you get 50% off your first three months with the code. Founder50. Just head to omnisend.com founder without the e to get started. All right, now let's jump back into the show. What if success itself is the thing that destroys everything that you've built? And the way most companies are structured practically guarantees it? Today's guest, Eric Rees, the creator of the Lean Startup, which is the framework that changed how the entire world builds startups, is back with a new bold book called Incorruptible and an urgent argument that the way we were taught to build companies is quietly turning them against the very people and principles that made them worth building in the first place. So in this conversation, you're going to discover why the loyalty of your best D2C customers is your most valuable and overlooked asset and how most brands are actively destroying it without realizing, you'll learn why the corporate structure your lawyer called best practice is designed to sound boring, so you'll ignore it and why ignoring it is exactly how founders lose control of everything they've built. And you'll also hear why success, scale and outside investment are the forces most likely to kill your mission and what you can do right now as an early stage founder to make sure they don't. This one is an absolute must. Listen. Now, let's get into it.
- [01:54]
B
Hear the stories, learn the proven methods and accelerate your growth and future through entrepreneurship. Welcome to the Founder podcast with Nathan Chan.
- [02:08]
A
So, Eric, welcome back to the Founder podcast. As I shared, I would have interviewed you. I think I said to you seven, eight years ago, might have been 10 years ago.
- [02:18]
B
Wow, okay. It's been a while. Well, I'm glad to be back. That's nice.
- [02:22]
A
For everyone that has doesn't have context about you, Your work at imvu, you were still early in shaping, you know, thinking around systems and experimentation, which would later become the foundation of the lean startup and, you know, really popularized approach on how to build businesses. Because one of the biggest mistakes that people make is they think they've got a great idea and they don't even go through the process of making it sure that it's something that people actually want to buy. So when that approach was later stress tested during the LTSC era, what did it teach you about the limits of trying to design your way out of chaos?
- [03:06]
B
So, okay, let's go back, rewind the tape a little bit because you're right that now lean startup techniques are very widely known. MVP pivot, continuous deployment, build, measure, learn. I mean those are all staples of the entrepreneurship canon. But what you have to remember is that when I first started talking about them, they were considered total heresy. And like, just to give you a taste of it, I remember the first time I told the engineers on my team that I wanted to use a B testing and they were like why? Like that's like a direct marketing thing. Why would we use it in software? Of what relevancy could that possibly have? And just so people get a sense of this, I had to hand roll, I wrote by hand my first AB testing library because there wasn't one to use. There was no Optimizely and KissMetrics and Google Analytics and all that stuff was still in the future. So the idea that we should bring scientific thinking into entrepreneurship was considered like fairly radical at those in those days. So I'm kind of used to advocating for things that other people do not understand or maybe even vigorously oppose. So I, I have some thick skin with that. I've been doing this now for, for a while, but building the LTSC was a whole different beast entirely. LTSC is a national securities exchange. So it's the first new listings venue for public companies. Like really since the creation of NASDAQ that has multiple listings and its own separate listings model. And I won't get into a whole boring story of how long it took me many, many, many years to figure out how to even start a new stock exchange. Because it's like people talk about how two sided marketplaces are really hard. Well, stock exchange is more like a five sided marketplace because you got to build a value prop that works for founders and VCs and investors and bankers and regulators all at the same time. It's not easy. So anyway, some number of years into that process, I'd probably be working on it six, seven years already. We were on the brink of having our first SEC application approved. And that's when I found out that there's a difference between building a company that people can Trust and using techniques to create value and having a company where you are threatening elements of the status quo and you are vigorously opposed. I'd never really been vigorously opposed before. I'm not talking about competition. I'm talking about something different. And right before we were have this success, there was a coalition of governance experts and hedge funds, and a bunch of people got together and decided they were going to end us. And so all of a sudden, our regulatory application in D.C. was like, hung up on some kind of inexcrutable bureaucratic snafu, you know, where we just couldn't get an answer to whether it was approved or not approved. And what's going on. And this was dragging on for months. And, you know, we're burning Runway. We've told everybody we're about to be approved. We're getting ready to do our first listing. It was like a pretty big deal. We were really in big trouble. And I get this call in the middle of the night, and they're like, hey, just want you to know that, you know, we've arranged it with all your partners that if you guys go forward with this, like, we're going to put all of you out of business. And a lot of we were, like, partnered with big, much bigger financial firms who are all like, we can't afford these people to be mad at us. We have other stuff. We need way more than this. And so we thought we were going to go out of business. But they said, look, they gave me this late night call. I said, look, you're about to get completely destroyed, but you know, there's a reprieve available if you would be willing to change your listing standards so that they're not different, they're the same as everybody else is. All this difficulty can be made to go away. It was like a classic offer you can't refuse, you know, sure would be a shame if something happened to your regulatory filing. And I remember I was in a different time zone, far from my team at the time. I was so vivid because it was the middle of the night, and I got my team on a call and we got on the zoom, and we're just like, hey, I'm like, here's the situation. Here's what we've been told. You know, we have to decide to capitulate or die. What do you think? And I was like, look, I. I would understand. I told everybody on the team, I would really understand if you guys want to capitulate here. Because, like, people had taken huge pay cuts to be part of this revolution. And to go and build this thing. You know, restoring long term thinking into our public markets is like a cause that people have talked about for decades, but it's rare to have an opportunity to do something about it. So we were talking and debating and I said, look, everyone around this, everyone on the call has to give me a yes or no answer. Give in or no. And we went on the tour one by one. Every person was like, no deal. Nope, we're not doing it. And it meant so much to me. It was really a profound experience for me. Of course I wanted to vomit. You know, I was like, oh, God. I really thought at that moment that we were going to put the company out of business. And in fact, we delivered the news that we were going to say no. I. I tell the story in the book of being curled up in the bathroom floor at 3am like, you know, my visionary leadership aside, like, I was just like, oh, God, we're going to die. And in fact, they carried through their threat. Our partners abandoned us, the application was withdrawn, and we were ruined. Except it turned out, in retrospect, that that was the best thing that ever happened to us. Because the tools that we had built at ltsc, we had imagined we were going to try to protect other companies from this force that ruins companies. We all know it. The force that no one controls, but everyone obeys. Our financial system causes companies to lose what makes them special as they get bigger, as they go public, as they take on investors. So we thought we could interrupt that dynamic. But ironically, the tools that we had built for others wound up saving us first. Because the cohesion and the structure that we had built for our own company allowed us to pull through that thing and take a second attempt. And on the second attempt, we did, in fact, get our application approved. Yeah.
- [08:47]
A
Wow. Crazy. So when it comes to, I guess, building at imvu, you spent six months building integrations with major messaging platforms, only to realize that users didn't want them at all.
- [09:03]
B
Yeah.
- [09:03]
A
What metric told you that work was worthless? And how did that lead to the idea of an mvp?
- [09:11]
B
You got to remember, in those days, six months was really fast. Okay, like, obviously by modern standards, you're like, you didn't lose your MVP for six months, but the previous company we had built together, we had spent five years working on before releasing anything. So six months is a big improvement. And I was the cto. Like, I literally hand wrote the code that you're talking about. I burned on it painstakingly for months, and I was terrified to release it because it had all kinds of bugs in it. And I still remember that feeling of we were going to release it tomorrow and I'm like, oh God, there's going to be some investigative journalist who's going to download the software, it's going to erase his hard drive and the headline and the local paper tomorrow is going to be like, idiots at IMVU release buggy software. Never hire this guy again. And like, there's my picture, you know, like that that was my fear. And it turned out that I didn't need to worry, nothing to be afraid of because nobody downloaded the software, so it didn't erase anybody's hard drive. Now at first I was like, well, dodged a bullet there. But then after a while I was like, wait a minute, this is not good. What do we got to do to get people to download it? So yeah, we spent months after that because like when you do an mvp, you can't just give up after the first try. Okay, that's not an mvp. Yeah, first thing you try, maybe it doesn't work. But we were like, okay, that's okay. We're going to make it better. Every day we practice continuous deployment at imvu, so we were shipping, shipping new versions every single day. And every day we're making the product better, we're fixing bugs, we're adding features, we're making the landing page better, improving conversion. We're doing everything right. And I remember we had this dashboard. You asked about the metrics. So we had what I still recommend to a lot of people, the simplest possible conversion dashboard. You can have an early stage company, especially if you're D and it's simply a cohort graph by period. So every day in those days, our marketing budget was $5 a day. That was in the early days of Google AdWords, where you could pay 5 cents a click. $5 a day bought us 100 clicks. Now everyone's like, a hundred clicks, that's nothing. But to me I was like, what are you talking about? That's a hundred human beings coming to our website. So of the hundred people who came every day, how many clicked on the website? How many clicked on the download button? How many people completed the download? How many people ran the software one time? How many people ran it five times? And how many people paid us for the, for the premium version? So it was a very simple graph. And you can look if you have your copy of Lean Startup, the graph, the actual graph we used is in there. And you can see, every day you can see this graph. And after a while I started to feel like I was, like, going crazy. So I was like, am I part of some, like, weird conspiracy going on here? How is it possible that every day, even though we made the software better, the exact same number of customers would buy as the day before? Our conversion rate during that period was always 1%. So we're making one sale a day, and after, like, 20 days in a row, you're like, did the people yesterday get on conference call with the people today and be like, hey, everybody, how many of you are gonna buy? Okay, one. Everyone. Like, it's. It's eerily consistent. This is what experimentation means. And yet it took us months to realize what was going on. After, I don't know, probably six months, you start to say, wait a second, if I'm making the product better every day, how come the metrics are the same? If the product actually was better, should the conversion percentages be increasing? Shouldn't people be more likely to buy it? And I was a very stubborn person, so it took me an exceptionally long time to realize that the data was telling us something very clear. Remember, not just because we ran for six months, but because we were constantly experimenting making the product better, better, better, better. And the thing I realized is that you've made the product better. I always ask people now, how do you know? Like, what do you mean, how do I know? I added features, I fixed bugs, I improved the design. I'm like, but how do you know? Says who? It's better. Says me. I'm the artiste. I'm like, okay, but do your customers agree that it's better? And I'll be like, oh, yeah. I showed it to some customers, and they said, it looks great, but the behavior's not changing. So one of the most important ideas in lean startup is that if you do not know who the customer is, you literally don't know what the word quality means. So you don't know if you made the product better or worse. Just because you added a feature is not an improvement. And we know this in our. In our normal lives, because think how many times a company you buy a product from, they send you a new version, and you're like, oh, God, what do they do this time? Right? New features, new version. That is not always an improvement, yet we act as if it is, because we spent time and energy on it. So eventually, our stubbornness. The data broke through our stubbornness, and we realized we had to pivot, and we made this famous change in strategy without a change in vision. And that new version, I'll never forget that feeling. I had to throw away tens of thousands of lines of code that I personally wrote by hand. So it was very painful to make the pivot. But I can still remember on the other side of the pivot, when all of a sudden it's not like it was overnight, like, okay, now we're in business. It was just after we made the pivot, our metrics got incrementally better for incremental effort. It was like, oh, this is what it feels like to be making a product better. Now when we improve something seems like customers respond. Okay, now we're getting somewhere.
- [14:19]
A
You took shipping, you were shipping code up to 50 times a day. Fast, far faster than most companies even today with AI at imvu. What systems made that speed possible without everything constantly breaking?
- [14:33]
B
Yeah. And when people hear that and this even then people heard it, they were like, God, that seems crazy. But I view this as table stakes now. I'm surprised it's not more popular. Honestly, I think people still are sleeping on this technique. And the reason people think it's crazy is they imagine running their existing release process more frequently. And like, if it takes you three days to do a release, then obviously you can't do it 50 times a day. Remember when we invented this system, it was still the era when people would put the year a product was released in the name of the product. Windows 95, Office 2000. Release times were very slow back then because we had a massive amount of QA you had to do. It was absurd. The solution to that is automation. So actually, in the age of AI, you should be able to do this way better even than we did. We had something we called the cluster immune system, which the idea was that they were like layers of defense to catch bugs in an automated way. We had unit tests, we had end to end tests. We had what are called smoke tests. We didn't have any manual qa. That's not what we're talking about. We're talking about automated test layers that you can run them all the time. But we didn't end just because you did an integration test and the test passed. It still didn't mean you were done even. We built a system where as the software was being deployed server by server, the deployment agent would watch the customer behavior and performance metrics. And if it noticed something wrong, we would have bugs. Sometimes where it's like we've deployed to 10% of the machines and now traffic is down 10%. So now we've deployed to 20% of the machines and now traffic Is down 20%. Like you could notice that a machine can notice a pattern like that and be like, I think we're going to roll back. So it's just the idea that you have a human being like making these like real time decisions about all this data and metrics. It seems silly to me. I was like, that should be automated. So we got ourselves to the point where it became actually difficult to break the system because in order to introduce a bug, you have to do something kind of subtle. Like, I remember one time somebody created a bug that was, they didn't break anything, they just changed the CSS so that a certain button that was very important in a checkout flow was white on white background, so human being couldn't see it, but it still passed all the tests because it was there. And like when that happened, we would like, every time something like that happened, we'd be like, okay. We did a process called five Whys, a root cause analysis idea from Toyota production system which was like, okay, whenever we encounter a new way of breaking the system, instead of getting mad at the engineer who did that and be like, you're fired, it's your fault. We're like, no, it's our fault that we made it so easy to break the system. Let's prevent that from happening again. And I remember the solution for that one. We realized that like, no matter how good the unit test and all the other tests were, at the end of the day, if someone makes a visual change, you won't be able to detect that. So we actually wrote a test that rendered the website, took a screenshot and like, this is before AI. Now with AI, you could do an amazing job with this. But we like rendered it down to a small thumbnail and we compared it to yesterday's thumbnail and just be like, does it roughly look the same? Okay, then it's okay. But if all of a sudden it's all white, there's no content on there, we could notice that kind of thing and automatically revert. I think all deployment should be done that way, even to this day.
- [17:35]
A
I agree, I agree. So you mentioned a couple of key things which I think will be really valuable for people. There will be people right now you talk about features and making the product better. There'll be people right now that haven't achieved product market fit with their, with their product. And most likely because they probably haven't done enough of the thing that they really need to do, which is speak to customers.
- [18:02]
B
It's very probably.
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A
Yeah, yeah, yeah. And it's very hypothesis driven. But hypothesis. Hold on to it. Don't want to accept that.
- [18:13]
B
I didn't want to accept it either. Okay, I'm going to tell you the truth. Okay. I'll never forget this because, yeah, people sometimes mistake Lean Startup as a pure quantitative method and that's not true. It combines both hypothesis generation and hypothesis validation. It's just we spent a lot more time on the validation side because most people are loaded with hypotheses. So even in, even at imvu, we did in person usability tests so we could like talk to customers. And I'll never forget this, my co founder arranges this usability test and they bring in a teenager to use our product and they were like paying them to be there. And they come into the lab and we're like, okay, here's how the product works, here's what it does, blah, blah, blah, blah, blah. You need to click here and download the software and then you can like log into your account. And the teenager's like thinking about it for a second. They're like, no thanks. I'm like, I'm sorry, you don't seem to understand how this works. We're paying you to be here. You need to download the software. And they'd be like, you keep your money not doing it. I remember, like, we dismissed them and I turned to my co founder, I'm like, you idiot. You found like the one person on planet earth we can't even pay to use our software. Like, get me. And that customer is fired. Get me another one. Second person comes in, same thing happens. Third person comes in, same thing happens. And now I'm like, but can we really say that's a statistically significant sample? You know, like, it's so obvious, but we really didn't want to believe it that we had like made a fundamental mistake about how customers perceive social capital. So in this case, the customer wouldn't download the software because before they knew if it was any good, we were going to have to have them use it with a friend. So they're like, I'm not going to risk that. You kidding me? If it sucks, my friend's going to think I suck. Like, I'm not doing it. So we like, there was like something so fundamental that appeared in no business plan that we never figured out. And of course, once we understood that issue, we were able to fix it, but it took us a lot of tries to figure it out. So, yeah, that if you're lacking in product market fit, often it's something really painfully obvious. In retrospect, that you just gotta be willing to find out.
- [20:13]
A
Yeah. And it's that stubbornness and then it's the famous pivot. So, like, for anyone watching, listening to this right now, and this applies to any product development, founders often hold on to failing ideas too long. For you, what's the clearest signal that it's time to pivot?
- [20:34]
B
Okay, I know that that is. That seems like the right framing for the question, but actually that's not the difficult part. And the reason is because when it's time to pivot, it's actually very obvious. If you, like, if you had a neutral third party come in, they'd be like, guys, what you doing? You know, like what it's. The problem is that, generally speaking, in a founding team, we can't agree on what the facts are. Everyone's got their own private facts. And it goes like this. Like, if you've ever worked in a team that has multiple departments, over time you will start to learn in your company that the things you do in your department tend to make the numbers go up. But the things those idiots in the other departments do tend to make the numbers go down. It's a bug in human psychology that when we do something and something good happens, we take responsibility for it. But when something bad happens, we always blame it on somebody else. So what happens is you get into a situation where you're co founders and you can't even agree on whether the current strategy is working or not. The only time you need to pivot is when you still believe in the vision, but the strategy has been shown to be flawed in some way. It has a leap of faith assumption that has been broken. That sounds so easy. And, and the reason we spend so much time in lean startup on metrics and dashboards and AB testing and scientific measurement, validated learning all that stuff is honestly just to create shared reality between the team so that you can all look each other in the eye and say, this is not working.
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A
What if you're a solo founder? You don't even have a founding team.
- [22:08]
B
And it's even worse. Nate Silver, I think, is the one who coined this joke. He said, the worst part of working for myself is I hate my boss. So now it's just you staring at a spreadsheet. And like, the person most likely to be deceived about the state of your company is you. So, yeah, it's very difficult. And listen, it's actually one of the. I think one of the useful uses of AI is just to use the AI as A thought partner to be like, here's my conclusion from this data. Am I crazy? And I'm not saying whatever it says will be true, but ask it to test your assumptions and ask you some tough questions. Like, some people, a lot of founders, are charismatic, and so they go through life without anyone ever actually really asking them the hard questions. And the questions investors ask are not hard questions, okay? That's just people being arrogant a holes, okay? They're just, they're just teasing you. It's a kind of hazing where they're like, well, what about the. What about the total available market? Or like, why haven't you made more pro. Those are not hard questions. Those are just questions that you, you literally can't win if you. Those are questions impossible to answer. Because if you say, like, oh, I've made a lot of progress. Look, I have 12 customers. I'm like, why don't you have more customers? And if you, if you have no customers, they'll be like, how come you have no customers? You're like, well, when I had 12 customers, that it wasn't enough. Like, it's just whatever you say is never enough. Because they're like, they're pressure testing to see if they want to invest in you. It's part of their process. The hard questions for an entrepreneur are things like, are we making progress? Because in a startup, who can really say how far you should have gotten? People would say, I have 12 customers. That doesn't seem like very many. Sometimes they're like, well, better than zero. Why would 12 human beings all voluntarily choose to be your customer? That's weird. 99.9% of the world's population chooses not to be your customer. So what's going on? So you can't. It's very difficult to do that by yourself because you're so busy. You're always trying to make progress. You're trying to get to the next milestone, next feature, next this, next this. It's going to be hard to, like, take a step back and be like, wait, am I making progress? And that's why it's really valuable to look at things like, instead of saying, like, just are the numbers up and to the right? Rather, we can look at, are my experiments getting more or less productive? Those are like, what's one of the top indicators that it's time to pivot? Or not. It's like, you just start to get to the point of diminishing returns and you're like, okay, I see what's going on here. I just can't I can't just do more of the same. I got to do something different.
- [24:25]
A
So one thing you talk about is this idea of founders get also focused on vanity metrics like total users, top line revenue that lead companies to essentially achieve failure. So what would you say to founders that are focused on some of these type of metrics and how can they shift that mindset, or even team mindset to focus on growth instead of focusing on growth, to focus on retention and real value?
- [24:58]
B
Yeah, but I had to say the tech journalists have gotten a little bit better on this point than, you know, than it was 10, 15 years ago. But you still see it a lot. When companies put out press releases, they put out these messages. Like, we launched this new messaging system and we've had 10 million messages sent. And you're just like, that sounds like a lot. But is it like, is it really, I don't know, maybe one person likes my product a lot or 10 million people tried it once. Right. Like, what's actually going on? So you just. Those are vanity metrics. I always felt like they're the metrics you would use to make your competitors want to kill themselves by just making whatever you're doing look as good as humanly possible. And of course, companies love to release vanity metrics because they don't give competitors any real information about what's actually going on. The antidote, and this is very common because people like, they want to feel like they're making progress. You saw Meta famously, they had this big, big scandal just the other day where they were holding people accountable for how many tokens they're using. And they were like bragging about how using 10 trillion tokens a day or whatever for AI. And it was like it was then revealed that a bunch of engineers were just leaving OpenClaw running on their desktop 24 hours a day to just consume tokens and not doing anything to hit the metric. So it's like, I don't care about how many tokens you're burning, tell me about the progress you're making. And that's really like, you know, obviously, let me start with this whole chapter about how to do how to set up these analytics properly. So I won't, I won't rehash all that information. But basically you need to be able to see a metric that has cause and effect, that is scientifically valid, and that people who are looking at the metric actually believe it says what it says it says, which in a lot of cases they don't when it comes
- [26:33]
A
to the D2C side of things. Oftentimes products are really a widget and lack that idea of repeat customer base. So it's, it's. Do you believe from a D2C site perspective you would still use a vandy metric of rep, top line revenue, new customers, or still if you are building like from a business model perspective, you want to, you always want to have subscription, you always want to have repeat customers. Like, what's your take with that?
- [27:02]
B
Yeah, I don't really understand in DTC why people love to drive their customers into channels where they'll encounter their competitors. Customers, Competitors, products. Like, why would you do that? But like, as a customer myself, like, I have so many brands where it's just, it's just more convenient to buy it from Amazon and to buy direct from them. I can't understand this. It's so baffling to me. And like so many D2C brands, I go to their website and it's like spamming me with like, sign up for our mailing list and you'll get 20% off your first order. And I'm like, I want to be your customer for life. I like your product and I have to buy it every month. Like, can we make it? I'm like, can we make a deal? No, it's like, I want you to do that. Jump through this hoop. Jump through that hoop. Sign up for this thing. Let me text you, let me do this. And it's just like, guys, now every day I get these stupid texts from you reminding me that this product exists, but I've already decided to be your customer. This texts are now just annoying me. I don't really want to see them because I've already made the decision. You should save your advertising for people who aren't sure. So I think a lot of DTC brands are not focusing on the real metric that matters, which is loyalty.
- [28:06]
A
Okay?
- [28:07]
B
If you can get me to trust you. And like a lot of DTC products are ingested or like I use them in my bed at night. Like, they're products that are like close to my physical family. So I'm literally trusting you with my life. Okay? So we have like a very deep trust relationship in the fact that I'm willing to buy it at all. If you're willing to go with that and cultivate that, you eventually can build a relationship with a consumer where you literally shrink the total available market for your competitors by one. This person is no longer available to be marketed to because they are a hundred percent loyal to me and my brand. I'LL tell you a funny story about Apple vs Dell back in the day. So I, I shared an office for many years with a good friend of mine who used to work at Dell. And you know, back in the day when they made PCs that were like the dominant laptops and Apple was like the upstart. And I'll never forget my sister called me one day. She just gave me the Life update and she's like, oh, good news, my laptop broke. I was like, why is that good news? She's like, oh, now I get to go to the Apple Store and buy a new one. And the. My friend from Dell overheard this and he was just like, what? So outrageous. Like, why are Apple people like this, man? We try to, we, we try to market to them and be like, we have lower price and we have better processors and better whatever, whatever. And like, this is so unfair. Not only does Apple not have to pay the cost of fixing her laptop because Dell has all these massive support costs because people love to complain. She's happy that she gets to spend money on a new laptop. That's loyalty. She loves the experience of going to the Apple Store. And I'd be like, well, what's the Dell purchasing process like? People love doing that. No, we gotta remember. Remember that. I don't remember people old enough to remember this. You said to go on their website and use like 97 different checkboxes and upsells and ads or whatever. Like, it wasn't designed for loyalty. It was designed for revenue maximizing. And I think that idea is extremely important in D2C. So, yeah, I like even something as simple as, how about this? A lot of products I buy that are D2C. I want them regularly, but they're not. My usage is not so predictable that I know how many units I need per month. Why is it my job to figure that out and keep track of it, for God's sake? Right? Like, you have a. We're a lifetime customer. You're my. I've. I'm gonna be your customer for life. Could you please help me figure this out? Or better yet, could you just give me a button I can push when I'm running low and you just send me a new one. Do we have to, like, do a transaction and do the stripe checkout and I have to do this and then like, and every time you make me do that, I'm like, do I want to use this product again? Like, it's absurd. It's like, imagine if, like, imagine if your cable company was like, hey, it's July. Still want to be a cable subscriber? You sure you want to do it? Like, it's, like, it's so dumb. So, yes, I think the metrics that we use in these product categories, like, often lead us in product directions that are really unappealing to the consumer.
- [31:03]
A
Let's talk about your new book. We talked a lot about a lot of your concepts, which have been popularized. Like, you.
- [31:10]
B
Like.
- [31:11]
A
We talked about kind of off air, which is kind of very, very popular. Com. Common thinking now.
- [31:18]
B
Yeah.
- [31:18]
A
You're launching a new book called Incorruptible. First and foremost, what compelled you to write that book and what can people come to expect?
- [31:29]
B
This is the COVID designed by Marcus Gosling, by the way, who designed the Lean Startup cover. He's a genius. Yeah. I'll tell you why I wanted to write it. So, thanks to Lean Startup, like, the privilege of my life is that pretty much every day somebody calls me and asks me for advice about how to start a company, how to raise money for a company, how to reform their management system, or, like, help them go public or whatever. I get these calls. So I get to work with founders all the time. It's like my daily martial arts practice, like a kata, you know, Like, I just, oh, here, isn't it? And so whenever I have a new idea, I have the privilege of being able to put it into practice with people. Because, like, people call me and I'm like, I remember the first time I told someone about vanity metrics. It was just someone called me one day and I was like, hey, I think you should try this. And, you know, sometimes people go, oh, I get it. That's great. And sometimes they're like, what? I don't understand. And so then I practice every day. Okay, let me try explaining it a different way. Okay, let me try to get, you know, does the cw. And then. And we put it to practice. Oops, it doesn't work. Okay, it does work. Here's the things you got to know. So I learn about these things as we go, and as a result, I've gotten to watch a lot of companies go through the process of becoming successful a lot. And I started to feel like there was something deeply wrong with the way we're teaching people to build companies. And it took me a long time to even be able to put my finger on it. Like, I can name so many companies, including many that you can name, too, that began with such idealism and such energy and such, like, a fervor to not just, like, make a product, but to really like help people make the world a better place. Like sometimes it's really lofty, like, oh, we're trying to fix climate change or whatever. But sometimes it's just like, I just want to make a great product. You ever hear Steve Jobs talk about his love of making a product for the thing itself? You know, like that was a love of craft, a love of quality, love of whatever, whatever the thing was, or just a little bit of beauty into people's lives. Whatever that spark was, it gets lost as these companies get bigger. And I started to feel like these companies were being surgically deboned. So I tell the story in the book of a university professor from a top end technical lab came to me for advice building an AI startup. I just call him the professor in the book to protect his privacy. And he was like, I'm trying to figure out how to convince people to join my startup and it's not working anymore. I was like, what do you mean? It's like in the old days, sort of a tech company, you're like, we're going to change the world. People are like, oh great. And they would just believe you. But now, like every scientist I talked about joining my lab is like, how do I know you're not going to use this for evil? What if this thing turns out like Facebook? What about this? What about don't be evil? What about like he was getting grilled on these questions, what's the technology going to be used for? And he was trying to give answers that nobody found satisfying because he's like, but I have such good intentions. And they're like, yeah, but what if you get fired? He's like, well, I'm not going to get fired, I'm the CEO. I was like, yeah, but what about your board? What about your investors? What if investors push us to do the wrong thing? All this kind of stuff. And he was like, I don't know what to say to them. But on the flip side, when I meet with investors, if I tell investors that I have these concerns, they treat me like I'm some kind of communist. Like, oh, you're not serious about business, then why don't you go start a non profit? So he felt like utterly stuck. And the irony of this conversation, I was on my way to a party for another founder who was like at the end of his journey. So this guy was just starting out. This other friend of mine had been a startup CEO for like 10 years, made an unbelievable amount of money, had created so much value for his shareholders. And one Day, his shareholders betrayed him and fired him from the company. And we were having this party to kind of like, it was almost like awake, like to mourn the loss. And it's funny, when I first started telling the story to people, they were like confused about the story because they're like, well, did somebody die? Why is it awake? And I'm like, no, he's life, he's fine. He's actually doing his next company. He's great now. Like, okay. Did the company go out of business? No, still, still around. Still doing fine. Then what are we mourning? And that was the question. Even in the building. I remember talking to employees. There were employees at this party who that founder had fired and they flew back at their own expense to be there in this party. Like that's how meaningful that company was to them. It was really cool. So I'm telling this story to the guy, to the guy who's building the new company, to the professor, he's like, oh man, respect. That's the kind of company I want to be. And I was like, no, no man, you don't understand it. He doesn't work there anymore. He's been fired. His investors are taking the company in a new direction. He's like, oh bleep. Is that going to be me one day? Are they going to do that to me? I was like, yes, that's what I'm telling you. If you don't take the right steps now, one day this will be you. And he was like, okay, well is this a solvable problem? Like, because he was like, I feel like this is corrupt. Can I really build a company that is incorruptible? I was like, good news, yes, it is possible. Bad news, you've already made some mistakes. So like I was like, I gotta go to this party. Let's talk again and I will help you, walk you through the steps of what you need to do if you actually want to build a mission driven, long term company that you actually can maintain control of and that can maintain its fidelity to principles you care about. So that's kind of what the book is about is like my experience, you know, I couldn't help that founder whose party it was. I had advised him, I had helped him, but he was crushed by forces that at the time I didn't understand. And in the years since, I've come to understand how our financial system really works, how investors actually think, and what the actual structural incentives are for how companies should be built. And thanks to financialization, we've taken these values of Our financial system, values of extraction and shareholder primacy. And we have put them into every aspect of modern life. Schools and hospitals and universities and political parties and sports teams. It's everywhere. It's totally pervasive. So this issue is not even just about founders and their boards and their investors, but like a whole. A whole threat to our civilization. That's how I feel about it. And so I wanted to understand, how do we get here? Why do the. Why do we have these best practices that we teach people, if they leave this, lead to such horrible outcomes? And then of course, more importantly, what is the new set of best practices that should replace them?
- [37:25]
A
Yeah. Okay, so a lot to unpack here. The first question that I think will be screaming at people that I have to ask you is obviously, you got to go check out the book. You know, we're recording this in, in, in April. It comes out in May. When exactly in May?
- [37:44]
B
May 26th is the release date. Everywhere books are sold.
- [37:48]
A
Yeah. But you can pre order your copy now.
- [37:49]
B
Yes, please, if you would be so kind, that would be great.
- [37:52]
A
Yeah, yeah. So what are the first basic things you need to do to protect your company? Because as founders, these are the. Our company is our baby. We put our blood, sweat and tears. If you absolutely, if you let it, it. It will take everything from you.
- [38:08]
B
One of the ideas in the book that I think is very underappreciated, but most founders find intuitive is that we do not. We actually, we birth companies. We do not own them. Okay. Making a company is a lot more like parenthood than it is like making a spreadsheet. And the thing that you birth is alive. It is a category of emergent intelligence that has its own moral compass, its own north star, like its own sense of what is right. And you can influence it. Just like if you're a parent, you can influence your child, but you can't command it. It. This is what a lot of founders misunderstand. They think, I could just tell my company what to do and it will do it. And this is a big, big misunderstanding. So if you respect the, like, the vitality of these beautiful things that we birth, then you can find your way to a solution to create what I call the architecture of institutional longevity. If you want to build an organization that is true to its values over periods of time and increasingly now, like, if you look at the average lifespan of companies, it's going down a lot in this country. By the way, a Harvard law study that I quote in the book found that among venture backed companies that Follow standard governance, only 20% of founders will still be the CEO three years after an IPO. Okay, so we are hemorrhaging out founders out of these companies at an alarming rate. Many if you, if you meet a company these days that has the name of the founder as the name of the product, like odds are, it's owned by private equity and the founder's not there anymore. It's like increasingly common. And I've met so many of these founders who are like bereft. Their baby was stolen from them and it's like it still bears their name. It's awful. So this like we're building these weak ass companies that are so easy to steal, to decapitate, to redirect, to control. And I just, I find it really frustrating. So if you want to do better, there's two dimensions of kind of work that you need to master. One is inner, one is outer. The first is what I call the path of ethos. Ethos is an old fashioned Greek word that means character. What is the character of your organization? Does it make principled decisions or is it opportunistic? Does it have a mission that is committed to human flourishing or is it out for itself? These are measurable emergent properties that an organization can have. And there are specific techniques we can use to codify and instill in our people a longing to achieve the mission. So for example, I'll tell you one story that I think is maybe the most important story in the book. There's a guy named Saul Price, and maybe a lot of your DTC founders will have heard of him, because in retail, he's like the father of modern retail. He's so prominent. He created a company called fedmart that is such a seminal company that when Sam Walton created Walmart, the reason it's called Walmart was as an homage to Saul Price. Okay? That's how important he was. He was a lawyer. And when he became an entrepreneur, he had this idea that he borrowed with him from his legal training in the law. If you're my client, I have what's called a fiduciary duty to you. That means I put your interests ahead of my own. So when he became a retailer, he's like, well, if I'm a retailer, a discount retailer, who's my client? He'd say, oh, the customer is my client. So he decided that business should have a fiduciary duty to the customer, not just to the investor. He built the company up over the course of 20 years. He took it public. He hated Being a public company because the investors were always on him to do more short term value extractive types of things and couldn't understand his ethos, his philosophy. Just to give you one example of these kind of conflicts, when competitors would try to undercut him on price to drive him out of business, he would post their ads inside his own store and tell customers, eggs are cheaper down the street. You should buy from them. Not me. Me. Okay, because he's, I'm the. They're. They have a fiduciary duty. If the price is cheaper elsewhere, don't buy it from me. Think about how many DTC brands, like how incredibly powerful it would be if I went to your website and you were like, honestly, it's cheapest at Amazon right now. Like the trust you would gain, it's inconceivable. What? But of course then I'm like, well, why would you ever let Amazon be the cheapest price? We'll talk about that. I'm sure it's a different, a different. But like if that's what the situation is, don't make me go shop around for it. Who cares about your product more than you do? Why do I have to research it? Why do I have to go figure this out? Like why are you not on my side? Saul Price was on your side. And so fedmart was a company that inspired unbelievable loyalty from its customers. They would drive miles out of their way to shop at fedmark. Saul Price gets fed up with being a public company and he arranges for a syndicate of retail investors to take it private. But it doesn't solve the problem. The new investors are still on him every day being like, come on man, if you do more conventional retail practices, we'll make more money, we'll grow faster. We want this, we want that. Perversely, they understood that because customers trust fedmart so much, if they can get Saul to portray those customers, they won't even notice. And if that doesn't sound familiar from certain DDC brands, I don't know what you been. Anyway, they're all comes to a head in 1975 when Saul Price comes to work one day and the locks on his doors have been changed and he doesn't work there anymore. Just like my friend at the party, they just kick him out. So what happened? Investors got their way. Within seven years, Fed Mart was bankrupt. Because by betraying the trust of customers, you can get away with it once, of course get away with it twice, but if you do it consistently, eventually you, you are destroying you're liquidating the most precious asset a company has trustworthy is. Saul Price learned his lesson. He licked his wounds. He took. This is my favorite tidbit of the story. He took two weeks off and then he leased the office upstairs from fedmart and started again. He started a new company called Price Club. Price Club eventually is the. Like the. The predecessor company for is now called Costco. So Saul Price's story has a happy ending because he learned that not only is it enough, not only do you need to have this path of ethos, this character, this engine of trustworthiness in your company, but you need a second thing, the thing I call path of integrity that at fedmart he didn't have. But at Costco, they got this right. If you build something worth protecting, eventually it will need protection. And I wish someone had told me this earlier in my entrepreneurial career. It took me a long, embarrassingly long time to figure this out. I thought, just like everybody thinks, if you get successful, then you'll have more power. So we always tell people, get product, market fit, worry about this other stuff later. When you're successful, when you're big, when you're rich, whatever, then you'll have freedom, then you'll have autonomy, then you can have things be the way you want. Except, duh. The more successful an organization, the more valuable it is as a target. If you build up this massive asset of trustworthiness, spoiler alert, people are going to try to steal it from you. And we are teaching entrepreneurs to build organizations that are so weak, it's like there's no locks on the door, the vault is wide open. Come steal from me whenever you want. So to build high integrity organizations, we have to create what Costco has. I call it a governance fortress that insulates the decision making, the skeleton of the company makes it strong enough to resist outside pressure. If you have these two things together, ethos of human flourishing and principal decision making and a strong structure that can prevent outside meddling and interference. You can build an organization that is truly built to last.
- [45:40]
A
So when you talk about the structure, it's somewhat around the business model. Repeat purchase. Just, just really, really strong indefensibility.
- [45:50]
B
No, no, no, no. Okay, so this is the other thing that I think a lot of entrepreneurs are blind to. We tend when we talk about entrepreneurship, Me too. To focus on the surface characteristics. Business model, culture, strategy, even vision, those things are important. But this book is about the underlying forces that act on organizations whether you want them to or not. So we're in now. We're leaving the Realm of management behind we are in the exotic domain that goes by the name of governance. Now, most founders have never given governance two seconds of thought because it kind of. They're like, oh, is it like a building permit? Who cares? In fact, most founders I meet, when I ask them if they understand how their own governance works, their. Their honest answer is, my what? Like, literally. In the HBO show Silicon Valley, there's a scene where somebody loses control of their company. And one of his own investors, he's like, you can't do that. You don't have the right to do xyz. And the guy's like, you don't know how your own effing company works. Like, no, Russ, he does not know. Most founders have no clue what is written in their actual constitution. When I tell them what it says, they often think I'm lying. They're like, no, that can't be right. No way. Who reads their corporate charter? My guy set it up for me. It's always some guy. My lawyer said it was great, I have the best practices. And I'm like, okay, well, do you know that this is like a document basically designed for you to lose control of your company? And I've actually had people be like, you're lying. That can't be right. My guy would never do that to me. And I'm always like, call him up. Ask him if what I said is true and call me back. And they call back and they're like, he says he did me a favor. That's the best practice. He betrayed me. And I'm like, no, he didn't. You just are too ignorant to know what to ask for. So we have to get way smarter about this stuff. Investor rights agreements, board structure. I know it sounds so boring, but it's actually designed to sound boring so that you'll ignore it so that you'll lose control. That's actually the whole scam. So I really believe that as operators, as builders, we have to learn to get smart about governance. And in the book I outline what I call the new governance that is actually way more interesting than the way we do governance today. Today, governance is like a compliance checklist, plus what's called shareholder primacy. Just make as much money for investors and don't break the law. But real governance, the right governance for a long term, mission driven company, has to include not just compliance, but purpose. Why does this company exist? What is that sacred spark that we're trying to protect? Coherence. Are we all actually on the same page? And our interests in Fact align to achieve that mission and integrity. What I was just talking about, are we protected? Can we resist outside forces? It's way more interesting on top of being more profitable.
- [48:26]
A
So we have to work towards wrapping up. We could talk about this all day. Where's. Where's the last place that you would like to leave our conversation? What would you like to leave us with?
- [48:39]
B
Oh, I was. I was in a restaurant the other day with a group of friends and someone who had been there before. He suggested we eat there. I was like, this place is great. And we sat down. The person took one bite, and he was like, hold on, I gotta go on my phone for a second. I was like, why? He's like, just one sec. It's like, yeah. He shows me the thing. I could tell that this restaurant had been bought by private equity. I could taste it in the food. And we were all like, oh, no, private. So that we ate this meal. It sucked. And then we went to dinner a different place the next night. Again, a different friend had recommended this is the place to go. And we sat down and someone was like, is it the same private equity firm? Like, we tasted it and I was like, I looked it up. I was like, nope, it's a different private equity firm. It tastes the same. You can taste private equity in the food. What are we doing here? It's insane. So I'm going to leave you with a story. Okay. One last story from the book that I love the story. So in the night in 1920, diabetes was a fatal diagnosis. Okay? There was no cure for diabetes. If you got it, you died. And there was a woman in Denmark, her name was Marie Crow. She was one of the first doctors actually in. In Denmark. She was a pioneer of women's medical education. And she was diagnosed with diabetes, Fatal diagnosis. But her husband was a Nobel laureate. He just won the Nobel Prize, and he was on his way to North America to give a lecture tour in the U.S. and she agreed, even though she was fatal disease, she would travel with him to the US and they're at dinner one night in one of his lectures, and she's sitting next to a scientist at one of the tables, and he tells her about this new technology that's been created in Canada to synthesize artificial insulin, could be a cure for diabetes. So she convinces her husband that they should extend their trip in North America. Go up, see these crazy Canadians and see the technology for themselves. They meet the Canadians, they see the technology, and they say, oh, my God. Not only could this save her life, they could save a lot of people's lives. So they want to take the technology back to Denmark and commercialize it. And they make an agreement with the Canadians to license the technology. But the four of them who were there that day, they had an instinctive fear that if you make a life saving medicine, there's no reason you shouldn't make a profit. That's fine, you can charge a fair price for life saving medicine. Everyone else, it's fine. The problem is, what about the temptation to abuse that power? If I need a life saving medicine from you, you can charge me anything you want. What can I do about it? I need it. So they viewed that as an abuse of power. Like decades before Martin Shkreli they foresaw this problem. And so they agreed with the Canadians that they would build a company that was first and foremost a non profit scientific research organization with a for profit company as its subsidiary. This is called an industrial foundation configuration, not that uncommon in the world. And they went back to Denmark, they created the Nordisk Insulin Laboratorium and started manufacturing insulin. That company, through a bunch of gyrations and other things happening, is the company we now know today as Novo Nordisk. The structure that they put together for Novo Nordisk has just lasted with high integrity for more than 100 years, including a time when a bunch of the board members of the for profit wanted to sell to another pharma company. And there's actually a great acquired podcast episode about this if you want to hear the all the ins and outs of it. But the long and short of it is the last step of the technical due diligence before this merger would be consummated was they had to go to the foundation trustees and get the merger approved. They thought it was a formality because they were going to make so much money. And the trustees said to them, what is the purpose of this transaction? And they were like, what the fuck? Do you see these dump trucks full of money? We're about to get so rich. What are you doing? Like, what kind of question is this? And they were like, sorry, what was the purpose again? They're like, oh, my favorite detail is they had to have a second meeting. They're like, we're going to come back with our bankers and explain it to you properly the second time. The second time is like, no, we're going to get so, so rich. The purpose of it was just to make a bunch of money. The foundation said no, blew up the deal, no dice. Everyone was super pissed. But we happened to know that the Board made a genius decision because two years later, a company that they were going to merge with themselves merged with Merck and all their R and D was shut down. And right after that, a woman in the R D lab of Novo Nordisk invented GLP1. She had been working on what eventually became Ozempic for 13 unsuccessful years until they finally had the breakthrough to make it work. Now, Ozempic is the most profitable pharmaceutical in the history of pharmaceuticals, like, by a lot. And it drove a Novo Nordisk valuation larger than the GDP of Denmark. And on the day, the thing I always want people to imagine is on the day when they crossed that threshold, the nonprofit trustees of this for profit company had created through their actions, $500 billion of shareholder value. Okay, so now the next time someone tells you that, you know, you got to do a Delaware C Corp. Standard incorporation, don't do anything unusual, man. You know when the next time some bold contrarian VC is like, you don't want to be too different from other companies, man, you might not be able to raise money. Whatever dumb excuse you hear, you have some super smart lawyer telling you this is the best practice, some lawyer, banker, whoever's advising you. I'm like, that's great. You listen to all the advice you want. But I want you to ask yourself this one question. Are you sure you are smarter than a Nobel laureate? Because August and Marie Crow figured this out and worked out this structure in the 1920s that's still going strong. And they're not alone. A lot of companies have this structure and have been able to resist the corruption that all our best practices enable. So I want founders, if I can leave them with one message, is just to open your mind to the possibility that there's a whole universe of corporate structures and forms and techniques that have been hidden from you. But they are your birthright to know these things. So go experiment not just with product, not just with design, not just with business model, but with the fundamental structure of what is this thing that you're making. You might find a way to not just make a lot of money, but to sleep really well at night too.
- [54:39]
A
Eric, thank you so much. Incredible conversation. Where's the best place people can find out more about this new most important
- [54:46]
B
thing, if you are willing, is to sign up for my mailing list, which you can do at Incorruptible Co. We have tons of bonus content guides and secret chapters and all kinds of cool. We tried to make it as, as, as rewarding as possible to come support the book, not just as A one time purchase. But to be part of the movement, you can buy the book incorruptible starting May 26th. Absolutely anywhere that books are sold. If you like Lean Startup or you feel like I've done anything good for you in your life, if you will pre order this book, you will return that favor. That's what if you know someone who's an author, what they need is for people to order and pre order their book. It's the thing that makes the book successful enough that then media and other people will take it seriously and pay attention to it. I know know it's like so crass to have to talk about this, but that's that is the reality of life as an author. You can get the book in hardcover, in ebook, and an audiobook. I personally narrated the audiobook. There's like cool bonus content in it. Actually the only get in the audiobook that I'm super proud of, so so do check that out and if you go to our website, not only can you find out that the book is for sale, we have a list of all of the local independent bookstores all over this country who are supporting the book by carrying it it. So if you want to, you could buy the book from a local independent bookstore. And then not only are you supporting me, you're supporting your own local community. Why not?
- [55:57]
A
Incredible. Eric, thank you so much for your time and I really enjoyed our conversation.
- [56:02]
B
Thank you so much. Appreciate it.
- [56:04]
A
Hey Founder fam. Thank you so much for tuning in today and if you enjoyed this episode, please take the time to leave us a review and let us know what you think. This podcast is 100% free. We work so hard to go out and find the most successful founders and entrepreneurs all around the globe. So your feedback helps us grow, improve, and even bring on more incredible guests and insights. So if you have a second, please take a moment and leave us a review. It really means a lot to me and the founder team. It makes so much of a difference. Thank you again for listening and I'll catch you on the next episode.