Anthropic, IKEA, and Costco All Broke The Same Rule | Eric Ries (Author of The Lean Startup)

1. 0:00 – 1:22

   Intro

   1. EREric Ries0:00

      My name is Eric Ries. Most people know me as the author of the book, The Lean Startup. I've been an entrepreneur now for something like 20 years, and have been working to help people build great companies and great organizations all over the world. I've recently built a company, an AI company, called Answer.AI, as well as the Long-Term Stock Exchange, or LTSE. So I'm always very active as a, as a builder and as a writer, uh, always on the shared mission of trying to create an environment where people can create great companies. I feel very blessed. I've been so fortunate in my life that so many great entrepreneurs have asked me to be part of their journey in hundreds of companies, in thousands of companies, I can't even count anymore. But I've also seen the dark side of this business. I can see how many of those companies failed to live up to their potential, how many of them were destroyed or harmed or driven away from that vital spark that made them worth creating in the first place. And in particular, quite a few of them have been murdered in the name of profit. And if you think carefully about that, it doesn't make sense. In our economic system, companies are supposed to compete to create the most value. That's how investors reap the most profit. So why would we do something immensely value destroying in the name of profit? And that has been the mystery that has driven me crazy. The book is my attempt to answer this mystery.

2. 1:22 – 7:05

   Why Great Companies Get Destroyed

   1. EREric Ries1:25

      I diagnosed long ago that having a philosophy of long-term thinking is really the foundation of company success. And when I talk about success, I mean financial success. Yes, companies do a lot of great things in the world. Yes, they are an important way to solve social problems, and many other wonderful things they can do, but just evaluate it on a purely financial basis. Sol Price is a legendary American entrepreneur. Sol is considered by many people in this country as the father of modern retail. You know, discount, American-style big box retailing. He was the first to figure out the formula. So FedMart was a company he started in the 1950s, and before Sol Price was an entrepreneur, he was a lawyer. And when he was a lawyer, he said, "I am a fiduciary to my client. That's how I was trained." Being a fiduciary means you put the client's interest before your own. So when you would shop in a FedMart, sometimes he would put up signs with his competitor's advertisements in them to let you know that you could get a certain product cheaper from somebody else. And every time he did that, people thought he was crazy. "He's giving up money. He's helping a competitor. Why would he do that?" He said, "Well, the most important thing is to win the trust of my customers." People really trusted him. People wanted to work there. The company grew and thrived for more than 20 years. He took the company public. He became a wealthy man. But his investors were never satisfied with the level of growth that he could provide. They always wanted more, and so he was always fighting with them. Why does he pay wages higher than he has to? Why does he charge prices lower than he has to? And he says, "Well, I don't pay low wages. I pay high wages, not because I have to, but because I want to. That's why my employees trust me. I believe in low prices, not because I have to, but because I want to. I want to take care of my customers and their communities." And there's a lot of legendary stories about him doing these kinds of things that his investors found frustrating. So one day in 1975, keep in mind that he's been running the company now for more than 20 years, he comes to work and he cannot enter his office anymore because they have changed the locks on his door because he doesn't work there anymore. Sol Price has been fired by his board. They wanted more profit. They got what they wanted. They were able to convert FedMart to more conventional retail practices, and the net result is that by 1982, so we're just talking about seven years it took them to liquidate the company, it was completely destroyed. It's much easier to destroy than it is to build, and FedMart was one of those casualties of this kind of greedy manipulation. But the reason why I like telling this story is 'cause although it is quite sad what happened to FedMart, the story has a bit of a happy ending because Sol Price wasn't done when he was fired from FedMart. He got right back on the horse. He got right back to work. He took a short vacation, and then he started a new company he called the Price Club, which today is not that well-known, but that's because one of his proteges also left FedMart in protest when he was fired. He started a company that when the two companies merged together, we call PriceCostco, which today is just called Costco, one of the largest retailers in the world, a $400 billion public company. And Costco maintains Sol Price's ethos, his beliefs about how customers and employees should be treated, even all these years later. Why would investors destroy a company in the name of profit? There is a psychological explanation. It's a force that I call financial gravity, and unfortunately, we have built an economic system that rewards people for short-term thinking. It rewards people for cost-cutting without ever holding them accountable for the consequences of those cuts to brand, to quality, to product, to the environment, what have you. So we have built this system that has this gravitational force. It exerts itself upon people who live in organizations who want to succeed, that it's their desire to succeed that our economic system latches onto to manipulate them to do what it wants. I don't think this is a very good way to build an economic system, but this is the reality of our highly financialized economy. So there's two things I wanna make super clear. The first is this is not the only way you could build a financial system. We obviously could build a financial system that transmitted different values than these. We just happen to have this one. And the second thing is, most people, when they hear about this force for the first time, or maybe they've suspected it in their own lives... You know, I meet a lot of people as I'm traveling around, people who have had a favorite brand be destroyed, a company that used to be great and now it's terrible. I mean, a lot of people have this feeling about food. A lot of food products have been taken over by private equity or taken over by a private company and then ruined, again, murdered in the name of profit. You ask them, "Why is this happening?" They say, "Well, it's inevitable. It's human nature, it's greed, it's our f- it's capitalism," whatever. But if this force was inevitable, there would be no exceptions. And yet everywhere in the world, everywhere you look, there are these exceptional companies. And if you gather up the dataset of all the companies that seem to have defied this force, just like we saw with Costco, they have something in common, and it's not what you'd expect. It's not culture, it's not strategy, it's not values. They don't come from the same count- country. They don't all come from the same decade. They're quite different from each other, but they have something in common. What they have in common is they all defy the so-called best practices of how we teach entrepreneurs to build and govern companies today. And the fact that they violate these standards is the proof that our modern finance-driven theory of business is wrong, and something better is possible.

3. 7:05 – 8:14

   Granola, the AI meeting assistant

   1. EHEO Studio Host7:06

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4. 8:14 – 16:30

   Built to Resist - Ethos + Integrity = Incorruptible

   1. EREric Ries8:15

      So why was FedMart destroyed while Costco endured? You have to look somewhere that most people never think to look. You have to look at the governance, the founding documents, the legal boring stuff that no one ever pays attention to. Most companies are built to a very weak governing structure. But Costco was built with what I call a governance fortress, a series of provisions that prevent outside meddling, prevent investors or anybody else from bullying Costco, and that is something that all these great companies have in common. They have a way to thwart this, uh, force which is trying to undermine the mission. I call them mission guardians. As a result, most of these companies are considered to have bad governance. They get criticized routinely. They are rated poorly by the ratings agencies whose job is to study these things. And yet, this is a funny fact that is in the book, since 2008, companies that have bad governance have outperformed companies that have good governance. When I meet with entrepreneurs, coaching them, helping them start a company especially, I always ask them about their governing documents, and honestly, most of them have never read it. They have no idea. They signed it, they filed it, but they didn't read it. They don't know what it means or what it says. So what I explain to them that according to the modern governance theory that we all live our lives under, the theory that is called shareholder primacy, according to this theory, companies must always be sold to the highest bidder. It's the law. This is a crazy idea, and it's a relatively new idea. This is a choice that people inadvertently choose when they start their company. And so when I tell people that, they kind of don't believe me. They think that sounds like an exaggeration. "Are you saying that if someone tried to buy my company for just a dollar per share more than it's worth, I would have to sell it to them?" Yes. Before you say I'm exaggerating, why don't you pay attention to this story? Vectura was a, a university spin-out of the University of Bath in the UK. It was a company designed by scientists to create inhaler therapeutics to, uh, treat diseases like asthma or COPD. So a science-driven healthcare company, very successful, was publicly listed on the London Stock Exchange, was doing very well. All of a sudden, the company that you would least want to buy an inhaler therapy healthcare company came to try and buy them. The company was Philip Morris International, the cigarette maker, and they made a bid to acquire Vectura for a hundred and sixty-five pence per share. A private equity firm at the same time bid a hundred and fifty-five pence. And so the board of directors of Vectura was faced with a very simple choice. Option one, do nothing. The company did not need to be sold. There's not a business problem that this is trying to solve. Option two, sell to the private equity firm and reap one hundred fifty-five pence, or sell to Philip Morris and receive a hundred and sixty-five pence per share. So everyone who looked at this said, "This, this is a terrible idea. We never would wanna see a cigarette company owning an, a, a lung health healthcare company. Absurd." But the board of directors of Vectura didn't care about any of that. They had, I think, two meetings, and they said, "Look, it's nothing we can do. It is our fiduciary duty to say yes to Philip Morris," and they did. Within three years, the company was completely destroyed. And what's so interesting about this story is, again, we see that pattern of a company being murdered in the name of profit. And some people did make some money. I wanna be clear, like they did pay a premium to buy the company. Some investors made money, for sure. But was the transaction overall profitable? Was there more value in the world after than before? No. Value was destroyed. And one of my arguments in the book is we have to stop calling these acts of immense value destruction profitable. They're not. There's a blueprint here, and yes, the blueprint has two dimensions. But I promise for anyone who's encountering this idea for the first time, this is not abstract. These techniques are very concrete and very specific. Ethos refers to a company's character. How often does it try to do the right thing? Is it consistent in its behaviors, and does it stand for something or not? Is it aligned to human flourishing or merely to financial extraction? Every company has a culture. Every company has a business model and a strategy, but only some companies have an ethos. If you want to be one of those companies, there are specific techniques we have to adopt. We have to build a business model such that the company can only make money when it is achieving its purpose. We have to develop what I call the virtuous cycle of performance, where the more successful we are at achieving our mission, the more money we make, and then that gives us more money to invest in the mission, and that cycle builds and builds and builds. And of course, we have to build a culture where every employee understands that their job is to pursue this mission, even if no managers are present. So that is the path of ethos, the techniques, the managerial techniques required to create a highly aligned mission-driven company. The path of integrity is also very important. What does it mean for a company to have integrity? I mean, like structural integrity, the ability to make and keep a promise. And it's important to understand that, to see a company is not a person. It is a huge collection of people. So if a person, even the CEO of a company, makes you a promise, you can't rely on it because the CEO might be replaced. So promises, corporate promises, organizational promises have to be rooted in something deeper than the good intentions of any individual person. And this is the dimension of things like the public benefit corporation, changing the legal charter of a company to reject shareholder primacy. This is the dimension where we enshrine proper relationships between the investors and the company itself, and this is where we establish what I mentioned before, the mission guardians. Who has the responsibility for making sure the company stays on track and to holding it accountable, including its board of directors accountable to achieving that goal? This is something that most founders struggle with because they just tell everybody what to do. I give an example in the book of a company in Texas called H-E-B Grocery Store. There's an ice storm in Texas, and the power goes out, and all the customers think they're gonna have to go home empty-handed. But the store manager gets up on a counter and yells to everybody, "Hey, listen, I know the power's out. It's okay. Take your shopping carts and just go home." People say, "How are we gonna pay you?" And the manager says, "You're not going to. It's okay." The customers were moved. They were in tears. But this was not the act of a lone rebel. This is something that the company instills and trains for. Not for ice storms in particular. That was hard to forecast, but rather to see the customer as the person that they are serving. So this ethos is drilled into employees in every way possible. And in the book, I give a lot of the techniques that require to do this, but they require extremely consistent action at every level of the company. It requires the board and the CEO and the managers to be insisting on this behavior and also to be rewarding this behavior. You hire people from the outside. They bring with them their past beliefs, how it worked in their previous company. They bring with them workplace traumas and all kinds of emotional upset. So if you want them to understand what your company truly stands for, you have to repeatedly over and over and over and over again demonstrate that you truly believe in these principles. In the book, I call this idea harder is easier. The famous story of Steve Jobs, he once got into a fight with his engineers. Fight about the layout, the visual layout of the cables and wires inside a computer whose case Steve did not believe customers should be allowed to open. And the engineers were just, "Steve, what does it matter? Nobody will ever see these cables. No one will ever know if it's ugly or sloppy or twisted or what. No one will ever know." But Steve would say, "But we will know." See, to him, design was an absolute. It wasn't something that you do when it's convenient or when you have to. It was like how Sol Price felt about being a fiduciary to the customer. So it's important to defend these values in small ways as well as in big ways, on Monday as well as on Sunday. On every day of the week, every month of the year, you have to do it over and over and over again. That is a lot of extra work. I don't want to sugarcoat it, but it makes every other problem the business will face in the future that much easier.

5. 16:30 – 21:24

   Build a Company That Outlives You

   1. EREric Ries16:30

      For the vast majority of time, I'm talking for hundreds of years. For the vast majority of time there have been joint stock corporations on Earth, it was considered quite obvious by everybody involved that corporations should exist to pursue a specific purpose, and that this purpose should be societally beneficial. So in the United States, for example, in the 19th century, every incorporation had to be approved by the local state legislature, and the company had to say in its corporate charter the specific thing it was going to do and why that was in the public interest. So that is how incorporation has been for the-- for a long time. And yet, in the-- over the course of the 20th century, industrialized countries, especially in the United States, but not only the United States, became under the sway of this new idea they called shareholder primacy, that corporations don't exist to make anything. They just exist to enrich their shareholders. It's very important for people to understand that what we now consider to be the best practice of, like, rich people can just take over companies whenever they want and change what they do just 'cause they're rich. That would have been considered a crime in 19th century America. The critical date in the US for the transition away from this purposeful incorporation, it happened in 1899. It's not really that long ago. And the shareholder primacy didn't take root until the 1980s. Very, very recently. This state of affairs is not working very well. You can see in the number of companies that are betraying their promises left and right and just how many of them are frankly collapsing. What's happened is a set of reformers in many countries. Reformers have been trying to, to restore this historical norm that companies should be allowed to declare in their corporate charter why they exist. What do they exist to pursue beyond just profits for shareholders? In the book, I lay out a goal which is to create constitutional governance, which is like taking ideas from political philosophy about checks and balances, about the appropriate role of the executive versus other branches to create what I call mission-controlled companies. That is, companies that have the architecture of institutional longevity, that have the ability to stay true to some specific purpose over long periods of time. That's our goal. And I've been talking to companies about this for many years. One of them, very famously, is Anthropic. They came to see me shortly after the founders had left OpenAI as they were thinking about starting the company. And it's funny, when I started writing this book, Anthropic was not a well-known company. The structures that we set up together have been tested, sorely tested, and so far, it's early, but so far have stood the test of time. When we say that a company is structured for longevity, it doesn't necessarily mean that you agree with everything that it does. It means that you can respect them for being consistent with their own values. When they are pressured to betray those values, they often choose to defy entities as powerful as the United States federal government. That's unusual for a for-profit company. It's enabled by this structure that they have. Now, in addition to being a public benefit corp like we've talked about, in addition to enshrining a defined public benefit into their corporate charter and, and therefore their AI safety mission is infused into everything that they do, they also are protected by a mission guardian entity, what they call the long-term benefit trust or LTBT. And this is a two-entity structure where, where a set of outside trustees have the role of appointing directors to the for-profit company's board. This is not a new idea that Anthropic invented, by the way. You know, Patagonia has the same structure. Very similar structure has existed for, for a very long time. The German optics company Zeiss had this structure in 1887, so this is not that new. It's actually so old that there's a whole branch of academic study devoted to these kinds of companies, these companies that have this mission guardian entity. And in one study, companies that had this structure were found to live on average five times longer than companies with a conventional structure. [instrumental music playing] So far we've been talking about institutional structures, and some people listening to this are gonna say that, "What does that have to do with me? I'm not a CEO. I don't sit on any boards. I'm not an investor. This seems like, uh, someone else's problem," but that's wrong. This is something that every one of us needs to master and understand. First of all, because we're all gonna have careers in which we will come into positions of power one day, and we will be tested to see if we can maintain our integrity or not. But even more importantly, all of us interact with these institutions every day as citizens, as consumers, as employees, as investors, as members of our community, and we have to learn to wield the power that we all have to shape the values of these companies. This is the biggest and most important lesson of the book, is that this gravitational force that draws companies towards other values, we are the generators of this force. We, the public, not the fancy CEOs on the board. They seem like they're in control of everything, but they actually operate at the mercy of what the public requires and demands. So we have to learn to wield that power for good and not for evil. [instrumental music playing]

6. 21:24 – 23:50

   Rethinking the Lean Startup

   1. EREric Ries21:25

      You know, it's been 15 years since I wrote The Lean Startup. In every generation, founders have approached me to ask how build-measure-learn changes. Number one thing they say to me is like, "Look, because of a new technology, because of a new outsourcing ability, because of a new culture, because something has happened, we can build so much faster. Does that mean that entrepreneurship can go faster?" And the answer is not necessarily, because although building and measuring can be dramatically accelerated through new technology and especially through AI, learning, we still have the same old wet wear between the ears of the people doing the learning. Learning is a hard thing to outsource. I use the tools quite a bit in the research and editing of my book. I didn't use AI to write my book, okay, just to be super clear, but I use it a lot to help me accomplish my goals better. When deep research first was invented, first by OpenAI and then by Google, the deep research was the ability to go and have a AI agent go out into the world and grab information for you. I thought that was gonna solve all my research problems, but of course it didn't because first of all, you get inaccuracies. But more importantly, like even if it didn't make any mistakes, just because I had a 10-page research report about something didn't mean that I myself understood what the research showed. So when I switched over to using this, the tool we call Solve It, uh, at Answer.AI, where I could load that research into a context where I could take a piece of my writing, I would take a chapter or a story or a section, and I would tell the AI, "Here are my goals to improve this section. Here's the research I have available. Let's brainstorm together." And I would use the tool to help me understand what the research says, help me understand what is available to be incorporated into that section of text, and then we would work on it together. Ultimately, I would have the final control over how that flowed into that section, which we would then commit back to the larger project. So instead of sending agents out to do the work en masse, it was more like taking a large project like a book and decomposing it down into human scale subtasks that I could do with the assistant, really outstanding editorial and research assistant. Not make me a website, but teach me how to make a website. Not make me a product, but teach me how to make a product. Not measure what customers think, but help me figure out what customers think. Once we learn to make this shift, we're able to see AI tools that are really designed to accelerate the rate at which we achieve validated learning. But in the meantime, I think people need to be careful and, and maybe would be better served by using the old methods that they understand better. [instrumental music playing]

7. 23:50 – 25:42

   Advice for Founders

   1. EREric Ries23:50

      So for founders in particular, I would just try to pick one thing to get started. So building an incorruptible company is not something you do overnight, like, "Ha, ta-da." No. Focus on-- Make yourself a checklist and work on that checklist over time. You can't just say, "Well, I ate a healthy meal today. Now I'll never get sick. Now I'm fit." No, that's not how it works. You can't say, "I went to the gym one time. Now I can be an Olympic athlete." No. If you want to achieve greatness, you have to train. You have to work at it. One thing I would ask founders to do, have like a quarterly meeting or every couple of months, doesn't have to be every day, where you sit down with your co-founders, with your board, with your executive team, whoever the right people are, and ask yourself, "Is our ethos intact?" Survey your employees. Ask them, "Do you know what we stand for? What do you think the mission of this company is? What do you think its values are? Are our governance protections adequate to what we're facing now, or do we start to see cracks in the structure forming?" And most importantly, look ahead. Are there new threats on the horizon? Are there tiny inconsistencies? Think of it like micro fractures in a bridge or in a submarine's hull. Before it collapses, there sometimes will be the indication of stress fractures that we could observe. So do that as a regular practice. Get outside support if you need it. I've helped start some companies that are trying to help and support startups in this, in this brave new world. But whether you get the support from me or anybody, but find somebody who can be your partner in helping you think through these issues, because I don't want your company to be on the new edition of this book on our list of the graveyard of good intentions. [instrumental music playing]

Episode duration: 25:42