Breaking the “Best Practice” Myth: Eric Ries on The Lean Startup to Incorruptible Companies

Eric Reece, thank you so much for joining me here on Breaking Precedent

It is my pleasure. So glad to see you

I know. So glad to see you. We do go way back. Funny connection actually with Anne at Floodgate, who was my first investor at TaskRabbit, right?

Yeah, that's right.

Yeah

I knew her when, before she was a big fancy investor, yeah

When she was investing in TaskRabbit, I think she called you and Steve Blank to meet me to, she says, convince me to let her invest. Which is sort of funny 'cause from my side I was like, "Oh my God, Ann Miraco's gonna invest in my company?"

You know, it's like, it's all relative, right?

Yeah. Well, it is. And it's just such a sign of the best investors is that they're focused on winning over founders, not on like

being evaluators and gatekeepers of

So

shout out to Anne. she's one of the best

she is one of the best. She's super competitive as well

That is true. I would not want to play a competitive game against her

She's gonna hate this story. I actually beat her once. You know how at the Lobby conference or Equity Summit, they have these, like, scavenger hunts, and they're really elaborate, and, like, Oh, no. Oh, no. Yeah.

I beat her. I came in first place. She came in second, and she- I gotta say, she was not happy

I mean, that's, that's so classic. Yeah. Well, good. Of your many credentials, that is one of them

I know. That is like my top one to definitely promote, for sure. So let's kick things off with a little icebreaker. I came up with an icebreaker for you, Eric,

because, you know, we both started companies during the economic crisis of 2008. The stock market was crashing, people were being laid off, and I'm curious if you had to build something entirely non-tech during a downturn like 2008 or maybe even today, something old school, something analog, what would it be and why?

This is a great icebreaker. I gotta break it down, so I'm like, okay, I gotta think now. So on the one hand, there's like, what do I actually want to do? Which is a very important entrepreneurial signal, as you well know.

And I've always had the fantasy that, like, building a really analog business that was super simple and was just, like, make something that people want and then sell it to them actually sounds so fun and appealing.

Like, no network effects,

no digital this, no Facebook that. Just, like, that really appeals to me. And of course, during a downturn, I think this actually was Sam Altman who taught this to me, of all people. In an economic crisis, the cost of raising money goes up, but all other costs go down, right? Because people are laid o- out of work, so labor costs are lower, cost of materials are lower, like, inflation is less.

So for starting something, a downturn is actually really a great time, so long as you have the capital that you need. So yeah, if you wanna open a semiconductor fab, of course, being unable to raise money is really difficult. I've always, like, wanted to make, consumer gadgets. That

really appeals to me.

On the other hand, it's one of the things I've never understood about the way people handle economic crises you have all these people who are out of work and are in need of financial support. So it's also a tremendous time for financial instrument building.

Mhm,

never understood why no one's ever tried to organize people who themselves are out of work to do entrepreneurial things in service of each other, even if you had to start almost on a barter basis or making microloans or micro-- But I just feel like they'd be able to create such a sense of loyalty and trust among the communities who are being most impacted.

You probably would come up with a lot of good stuff. So I don't think there's any-- I'm like, can I weave

these two things together? Probably not. Probably two independently really good ideas that I think would be

super fun during an economic downturn.

I love that. Have you seen on, I think it was like Craigslist, they had this movement and it was all around bartering and it was like everything was for free.

And people would start with like the tiniest little thing that they would trade, but then trades would keep happening, and you could follow the string from like, "I traded a pen," to like a car, right?

Like it's, it's pretty interesting actually, that domino effect of bartering, and that's pretty old school

It's extremely powerful, and I

think one of the problems in modern life is that we live under the shadow of an economic and governance system that, provides us so many invisible benefits we don't even really understand,

and therefore we're, we're willing to destroy it at will, you know, without really appreciating what we're doing.

And one of the magic tricks of modern economy is simply the power of voluntary exchange to leave both

Mhm.

better off. Like, we're now

in an age where there's so much exploitative and extractive, you know, stuff going on. You see in the data, like in the polling data, people have turned against the idea of making money almost, like, as a force for good, which is really, to me,

very sad because one of the most magical things is when two people voluntarily transact, they are both better off and wealth has been created, not stolen.

It's actually a magic trick. But what's fascinating to me is that in order for the magic trick to happen, you have to follow the rules. It has to be voluntary, uncoerced, fully informed transaction. Anything less,

the magic doesn't work. And yet we have started to build this

economic system where, uh, we take those preconditions out. So I actually think barter is one of the most incredible ways for people to learn simply how powerful this magic is. Yes, you literally can turn a pen into a car and nobody's worse off and nothing was stolen. That's not science fiction or magic. It's, it's completely 100% real. It's like the most obvious little bit of magic that we see in our lives, every day.

And yet I remember-- This is funny you're bringing me back to the financial crisis, 'cause we're about to experience financial pain that is gonna make those days seem pleasant by comparison, compared to what's coming. But anyway, at that time, it seemed like a really big deal to have so many people out of work and, you know, whatever. And it was bad. I don't mean to minimize it, but we're in really bad shape right now, so it's gonna be real interesting to see. But I remember going on C-SPAN, literally one of those C-SPAN call-in shows. I was in DC doing a book tour, and so I was being on-- I was on TV and doing all these programs, and I had this program and I was like, one of my, like, random things, they asked me for a policy idea that would relate to the recession.

I said, "Right now, we have people who are getting massive amounts of unemployment insurance and all these different kinds of government assistance. We should have a program where if you want, perfectly optional, you could convert your unemployment assistance into a small business loan and use it to start a company because you have all these people out of work, and so jumpstart entrepreneurial activity."

to me, it seems like one of the most obvious ideas in the world. I think at that time it was one of the European countries had pioneered something like that, so I'd heard of it, so I was like, "This has some precedent." Anyway, I thought it was, like, very simple and an idea every first caller is like, "But what if the people don't pay the money back?" And I'm like, "Well, you're giving them the money for free right now anyway. Like, you're not in any way..." But, like, people have such this zero-sum mentality and everyone's, like, so hyper-alert for the idea that they're being, gonna be ripped off and someone's gonna be stolen. And so, like, we have, like, vigilance for the less powerful and then, like, total impunity for the more powerful, and it should be the opposite. So it's like the reverse Spider-Man rule, right? Like with great power should come great responsibility, not the reverse. So I, I think that's part of why we're in such big trouble right now

Yeah. We're gonna dive into some more of that as we go along. It's hard to call you the godfather 'cause you're so young, but you were the godfather of the lean startup movement, right? You, created this global playbook for startups. You created the language. I wanna get into all of that too, but before we do, I kinda wanna go back to, like, you growing up as a curious kid.

I know you were always trying to figure out how things work, very scientific-driven. Can you just give us a sense what your childhood was like?

Sure. I grew up in San Diego, California, to a family of doctors.

So, you know, my grandparents were doctors and dentists, my parents were doctors, and my grandparents were Holocaust survivors. So to them, America was like the promised land. You know, they had lived-- endured unendurable horrors, and part of what allowed them to survive was that they were doctors.

Even my grandmother was like a, one of-- was a rare doctor back in Vilna in the pre-war era. She was an incredible pioneer, and she kept herself and her friends alive,

Hmm.

the concentration camps because she was a doctor. It's like, it's the most

incredible story. Anyway, so we had a reverence for professional degrees and medicine. My sisters, like when we would gather for Thanksgiving, as you know, I'm, I'm the only person without an advanced degree in the whole, in the whole table. Like, it just is a very education, very like med-- So that was really what was considered values, that we had growing up, being of service and, um, and, and knowledge and expertise was like kind of almost like the one thing they can't take away from you. That was very

much my grandparents' generation's idea. So anyway, we grew up completely insulated from all that, you know, in a really lovely, idyllic place of San Diego, you know, where it's not even cold,

let alone any other kind of suffering.

And so we had an awareness of all this background, but you know, I wish I could say that the advice that they gave me doesn't seem more relevant now than it did then, but it's actually turned out to be super useful, unfortunately.

Yeah, but isn't it interesting, like one generation removed, literally how much can change, but then also

around how it impacts you, right? And the advice they give you. I mean, they're giving you advice and insights with all of that history that you may not totally be able to, like, feel, right? But it's

Oh, yeah. As a kid, as a kid, I thought it was very old-fashioned, like this is America. That kind of stuff can't

happen here. And like stuff that they told me would happen one day has subsequently happened. So I, did not understand

what they were saying at the time, but now I'm very grateful for that wisdom.

It's, been really helpful in helping to understand what's happening now.

So I grew up wanting to program computers. from the first day that my father brought home from the office a beige gray IBM XT personal

computer with a five-and-a-quarter inch floppy disk. Now you know just how old I am. I thought that thing was total magic, and I remember

like reading the manual, the printed manual to learn how to do like basic programming

and, you know, teaching myself to make computer games and stuff. I thought it was pure magic. You know, I was one of those antisocial kids who spent way too much time in their parents' basement programming computers when my parents would probably have preferred I would be outdoors, you know, socializing with the other kids and playing sports

or whatever.

to their great credit, even though they did not understand or I think even approve,

they nonetheless allowed me to pursue this as like the thing that I was really passionate about. And through personal computers, I got onto the very, very early internet. You know, I learned to program multi-user games, MUDs for those that know what that is.

So we were doing like online role-playing games, and I remember that New Yorker cartoon, you know, "On the internet, no one knows you're a dog." That was so powerful to me. I did not

have the happiest childhood at school. I was bullied by other kids. Like you can imagine, I was not having a great time. But on the internet, I could be anybody.

So I was role-playing with adults.

Now it's actually very creepy if you think about it. Like we don't--

Now it's kind of scary, Eric,

Yeah, right, exactly. That was.

a much more innocent time. Nothing-- like no one did anything even remotely untoward or inappropriate.

Yeah. Right

And like they didn't know. I got to pretend to be an adult. You know, they didn't-- we were role-playing, uh, you know, in a fantasy setting of course, but

like they treated me like an equal, it was

extremely cool. Like, it's very hard to explain now what was so

magical about it because, of course, all we can see is

how primitive it was. But it's definitely the place where I learned that programming is magic. You can make something out of nothing with nothing more than the power of your mind and your ability to speak

the arcane language, and if that's not magic, I

don't know what is

It's definitely magic. Was there a moment where you had a project or you decided like, "Wow, I can use this to build something everyone could use or people can use"?

No, it didn't even occur to me that this would be an economically valuable thing

to do. I was completely oblivious. The first money I ever made from computer programming was like putting shareware onto the internet and just putting

like a donation thing, like, "Please send me money." I was so naive, I put my home address in the,

like, readme file, right?

Like we didn't have

any idea of cybersecurity, like extreme-- And like I remember the first time some

adult sent me a paper check in the mail

thanking me for creating, you know, Tetris for the TI-82 or whatever it was. It was extremely weird. But no, I didn't see it as a commercial venture at all, and in fact, it wasn't until much later that I understood that this is something you could do as a job. I didn't know. Uh, to me, being, having a career meant being a doctor or a lawyer. The idea that

a computer programmer could be a career... That's what I really remember, is that you can get paid to do this? Like I feel like I

won the lottery. It's like, what, what, what are the odds that my weird hobby is economically valuable?

But it wasn't till many years later that I had any idea that this could be used for mass market things, even for entrepreneurial things. I didn't have any of those kind of thoughts growing up.

You do go on to Yale. You major in computer science. What brought you to Yale? I mean, like, you're a kid in San Diego all the way across the country. What pulled you there?

Yeah, Yale's like as exotic and different as you can imagine from

San Diego. But it's like not really a fair story. My parents went to Yale.

So my parents were in the first generation after the Ivy Leagues were like opened up and democratized

Mhm.

so that you didn't have to come from family money and be a blue blood to be able to go to Yale, like the first wave of meritocratic.

So my mother was in the first graduating class of women at Yale.

It's incredible.

So they were like pioneers in their own way. So I grew up being

like, if there's any place I'm not going for sure, it's the place where my parents went. You know, like that was for sure I would do something different. So I thought for sure I would do something technical. I was sitting there at the mailbox. I had an envelope for MIT and an envelope for Yale, and I really couldn't decide.

But it was funny, like I went to visit Yale and just thought it was really magical. Like again, from a kid growing up in San Diego, the buildings and the oldness and the tradition and just like there was something really exotic about

it. It was almost like I got to be a, like a tourist in Western civilization. You know, California is so, so remote from all that history, and so it-- to be in a place with history, even if some of the history is fabricated, was pretty cool. And then, you know, my parents really strongly believed in the value of a liberal arts education.

So I was like almost determined not to have a liberal arts education despite, you know, like as a teenager, I'm like, "Ah, I don't want my parents to be right about anything." But they were right about that, and I think at

the end I was like, "You know what? This is actually like really exciting." But yeah, that's a very big what if for me if I had, uh, if I'd gone to MIT instead, probably be very different subsequent story.

Yeah. I mean, as you think back to childhood, as your time at Yale, is there one pivotal moment that you feel like may have planted the seed of this, this build, test, learn methodology? Is there anything that you can

No.

the opposite. I'm very stubborn, extremely stubborn, and in those days, like really, it was hard to teach me anything. So I had to

really mess it up badly before it could make sense to me. And the,

like again, just to date myself, I was in college during the dot com bubble. The dot com bubble

swept the nation while I was in school, and I was only dimly aware of it.

Like, it wasn't even a big deal to me. Like, I was like, "Oh, people in the mainstream are interested in technology. That's cool." I'd been on the

internet now a long time. I already had a cell phone. Like, I was in it, but I still at that time, I could never really imagine it as a mainstream thing. That's always

been the problem that I had as entering into technology.

To me, technology was this niche thing that you did for the love of it and, like, you get bullied for. And so, like, if you told me one day, like, "Everyone you know will have a cell phone, everyone you know will be on the internet, there will be billions of people playing these kinds of role-playing games," I would've just been like, "That's crazy talk.

That's impossible." I would've been the

most

like, "This is my little thing."

It's my little thing. Now listen, I

would've loved for it to be true, but I just, I was too

wounded to have been able to imagine such a thing. So yes, to me, like New Haven, Connecticut was the last stop on the dot com bubble express. So we did a startup. Like, if you've seen the movie "The Social Network,"

you only ignore the first half of it before anyone has to sue anybody because they make all this money. If you just look at the first part, we had that experience. A bunch of us dropped out of school, we did

this startup. We, you know,

could've been, should've been...

You know, we'd known anything about what we were doing, we could've had a great opportunity, but we didn't know the first thing about it and we completely failed. I think you asked what's the moment. This

is the moment I think people should visualize, 'cause in the movies, what's satisfying about these kind of stories when you consume them in the movies or in a Harvard Business School case study or something, the way we tell entrepreneurial stories is you have this plucky protagonist who's misunderstood. My favorite example of this in pop culture is, is "Ghostbusters." "Ghostbusters" is not a movie about the paranormal. "Ghostbusters" is a entrepreneurship movie. Okay, you have these guys in a university lab with a radical invention that's too radical, and they get kicked out of the university. They find an investor. They go start this business. They're trying to figure out how to commercialize the technology, and they're literally down to their last dollar when, good timing for them, Zuul invades Manhattan, and therefore

that thing is vindicated. So in the

movies, in the stories we love to consume, the good guy always wins.

The plucky protagonist is vindicated. So that means that the frustrating part of the movie is when everyone tells them it's never gonna work, and the satisfying part of the movie is when they go back to those people and say, "See, you were wrong, I was right. You should've believed in me." You know, whatever, and all the bad guys get their comeuppance.

In real life, that's not how it works. In real life, you have to go back to the people who said this was a bad idea and you should never drop out to do this thing, you have to go back to them and say, "Actually, you were right.

Hmm.

am back in school

Hmm.

ha-having gi-been given my comeuppance." Yeah, that's, it was humiliating and, and super painful.

In retrospect, I can say it's one of the best things that ever happened to me

Why is that?

Well, it was just an incredible learning experience.

I made catastrophic mistakes without having catastrophic personal harm for me. You know, like we had a company went bankrupt. In a lot of countries, that would be a terrible thing to have on your resume.

When I first showed up in Silicon Valley, it was like a badge of honor.

They're like, "Great, you've learned really important..." Yeah,

they were like, literally, I never forget, someone was like, "Uh, oh great, you learned important lessons on somebody else's

dime." That's like hundreds of thousand dollars we don't have to

waste on you. you.

already learned that stuff. And it was interesting, very cool, like West Coast, East Coast difference, 'cause I was applying for jobs. I, I went back to school, got my computer science degree, and I was applying for

jobs. I wasn't gonna be an entrepreneur anymore. I was like, "Enough, enough of that." And East Coast interviews, they'd be like suspicious.

You

had this failure. And I never forget, I did an interview where the person was like, "At the level of strategy, what have you learned? You know, if you could do it over again, what would you do differently? How, what have you learned about business strategy?" And I didn't even understand the question.

Hmm.

uh, you know, we thought customers wanted this, but actually they wanted that."

And he's like, "That's not strategy." I was like, "Oh." Uh, and I tried like three or four answers on him. I was like, "I don't--

I, I literally d- I don't... The an- true answer to the question is I haven't learned anything. I don't

Yeah, right,

I have no formal knowledge about this at all. I have this like lived experience that I'm still trying to figure out and process."

And not one person in Silicon Valley asked me that question. They were

just like, "Great, you've learned everything you need to know." They didn't have to ask me what I had learned. They knew what it was like to fail, and they knew what it was like to admit that you failed. That's like such a magical part of the Silicon Valley formula.

So yeah, so if it wasn't for that, I, you know, I don't know that I would've gotten the jobs that I did get, and I don't know that I would've been primed to be hungry for a new and better way to do

this. But like, yeah, the, the, the, the humiliation is a really important part of the story

Yeah. So let's jump into when The Lean Startup was really founded and came to mind. And so you did graduate from Yale, then you co-founded IMVU. This was a 3D avatar company, and you guys spent, what, like six months building what you thought people wanted, only to discover maybe that's not what they wanted.

So can you take me back to that moment at IMVU where everything broke?

It's hard for me even to imagine it now. It's such an unlikely series of events. But yes, like we had a five-person founding team for IMVU. I was the youngest by far, and they trusted me to be the CTO and to attempt to do this in a different way. Obviously, we had plenty of help and mentors. Those co-founders were my mentors, and Steve Blank and many others.

Like, we had a lot, a lot of help. But like at the end of the day, I, I had this intuition that we should do things in a different

way. They were willing to try it and also willing to stick with it not working, which like when I look back on that, I can't believe it. It's like, what, what-- how fortunate am I to have found such people to have, you know, to supported me at a time when they didn't-- they really had zero obligation to do so.

So yeah, we, we built this product, and I was like, "We gotta build it fast." Now, in those days, fast did not mean one day. We thought we could get it done in six months. Our previous product that we had worked on together took five years. Six months is a lot faster. Okay, now I know by modern standards it's not very fast.

But remember, this is in a time when we used to put the year that the product came out would be in the name of the product,

like Windows 2000, Windows 95. Like we used to launch products very slowly

in those days. Now it's very different. So we raced to get this thing done in six months, and we did do it. And I remember what I was thinking was, "Oh man, I'm gonna be in big trouble." Because in order to get it done so fast, we had to take a lot of shortcuts.

So the product was rickety and kinda janky, and it didn't work that well, and I was like, I remember having this fear like it was gonna erase somebody's hard drive, you know, by accident, and we're gonna launch this product, and there was gonna be like a big exposé.

You know, idiots at IMVU do not know what quality software is. Like never hire this guy again, like with my mugshot like right there in the papers. that tells you how unrealistic and ill-informed I was, 'cause like there's hardly any investigative journalism left. So certainly they're not gonna waste the few bullets they got on

this.

But anyway, I was really worried about my reputation, about what was gonna happen. So I actually can remember being relieved that we didn't erase anybody's hard drive

because nobody downloaded the software.

Mm-hmm. Mm.

And it's just like such the classic startup thing where you're worried about this. We were like gonna kill each other fighting about what happens in the third hour of the customer experience and what

happens on week two and what happens th- and it's like we didn't even get people to minute one.

Hmm.

it matter what's in minute 20? What does it even matter what's in minute 30, right? Like it didn't matter.

And so, you know, uh, to make a really long story short, we spent a lot of time trying to make the product better.

Mhm

is my first time that I learned if you don't know who the customer is, you literally don't know what the word quality means. So we're making the product better every day, but still customers aren't using it. So is it actually better? No. And eventually we figured out that the particular value prop of this product was wrong. It's just wrong. We made a mistake. We thought, you know, this is like, it was like a social product. We thought it was gonna be something that you use with your existing friends. It's like, oops, it's actually better for making new friends.

Hmm.

Good to know. Like, oops, that's kind of a big deal, right? That's like completely different value prop. And I was the most stubborn one of all, being like, "Yeah, but it-- we can't change it now. I've written thousands upon thousands of lines of code, beautiful code, elegant code, if I do say so myself, and you're gonna have...

To, to do the pivot, we would have to throw it away." Well, now keep in mind, we didn't even have the word pivot

Mm-hmm.

So we couldn't even talk about what we were talking about.

All we could talk about was killing my beautiful baby. You know?

Like, we didn't have a framework for this decision,

and so it was very difficult.

But eventually, we did do it, and we did the pivot. After the pivot, like, things started to work. And at first, I was depressed because my code got thrown away. I had to write new code.

Yeah.

Then I felt better.

Well, 'cause I said, "Well, what was the purpose of writing all that code that got thrown away? What was the purpose?"

Well, when you're scraping the bottom of the barrel of excuses,

Mhm.

the last one you'll go to is like, "Well, we learned so much

Mhm.

from having wr-- if we hadn't written that code, we wouldn't have learned, therefore we couldn't have done the pivot, therefore we..." And so I was like, "Oh, I feel better."

And then I started to feel bad again because, of course, I said, "Wait a second. If my goal the past year of my life was to learn this one and only one fact about customers, that they do want X and they don't want Y, why did it take so long?

Right.

Did it require twenty-five thousand lines of code or could it have been learned any faster?" So I started to do this mental calculation. What if we'd only written half as much code or half as much of that? And I started to work it down. I said, "What is the minimum that we would've been necessary to write to discover this one fact?" And of course, the answer is we could've just set up a landing page with a screenshot of the product we proposed to build and a Download button.

And what did I say before? I said that people wouldn't download, so they literally wouldn't have clicked the button.

We wouldn't have even had to make page two, where we apologize that the product's not available for download yet, because nobody would've gotten to page two. That's the whole problem.

And then I had basically an existential crisis because I was like, how can it be true that from a value perspective, creating value for this company, some web designer in one hour could have created the same amount of value as my almost year of work? It says right here on my business card that I'm an engineer, I'm someone who creates code. But if what the value is in what is learned, then the artifact is not the value. The value is in here, and

that just like really messes with you. So that was like the first time I really put the pieces together. And from that point on, I was on the hunt for a framework or theory that could explain this phenomenon, 'cause I was like, "This can't be right. Why did nobody tell me about this?" Like

I felt so betrayed , like wait a minute. How do I make sure this never happens to me again, and then how do I make sure it never happens to anybody? I was like, "This is, this is a huge deal." And so that's when I started to put together these pieces. Obviously, Steve Blank's customer development theory

was a critical building block.

Lean manufacturing was a critical build. Like I, I really worked hard to try to figure out like who's figured this out already.

And I actually, the first, I don't know, couple years of it, I wasn't trying to make my own theory. I was just like, "Oh, I must be too ignorant to know the answer to

Wow. Okay.

I better go read every business book that's ever been written until I find the one that has the answer in it." I remember reading a Steve Blank's original book, "The Four Steps Epiphany," which is still great even after all

these years, had this incredibly long bibliography. He was a very well-read guy.

And I'm like, "I'll just read every book in the bibliography. Just read them all

till I understand what's

here, right? Yeah.

took me a long time to realize that nobody had put

it together yet, and therefore something new was needed

So you put together this framework. You literally redefined how startups operate. When did you realize, though, it wasn't just going to help your company survive? You were like, "I need to spread this to the masses." What was that thinking like? 'Cause I think most people would be like, "Oh, I'm gonna implement this here, and I'm gonna get us back on track," and maybe not think about the opportunity to really shift the whole startup ecosystem.

Yeah, I didn't have any, uh, such aspirations at that time. You know, I

liked writing, but I didn't ever think of writing as a career, not even for a minute. I was a computer programmer. So here's kind of how it happened. First, I spent a lot of time those years explaining why everything we do at IMVU is different.

everybody needed it explained because I was the eng-- I was the head of the engineering department. I hired all these people, not a single one of whom did it make any sense to, and I had to be like, "Listen," I felt like it was like Green Eggs and Ham. "Try it. I think you'll like it, and before you complain to me about it, you do work for me, so you are gonna have to try it."

And like, I wish I could say everybody got on. Like, we, there were people, we had to let them go. This is not how I was taught. We would fail technical due diligence from investors who'd be like, "This isn't right. This doesn't make sense." People

today can't understand how controversial this was. It was a huge deal, and

again, my co-founder stuck with me. Founder malpractice is to fail tech due diligence at a VC. That was just incredible. So it was

very difficult. So I spent a lot of energy trying to explain this to people, and what I learned the hard way is that nobody wanted to see the evidence that it works better. one

cared. They wanted to understand why does it work.

It's counterintuitive. It doesn't make sense. why?

why, why? And that was actually very hard to figure out. I didn't know why. It just seemed intuitively correct to me. It was like a way to avoid this particular bit of very humiliating pain that, uh, that I was watching everybody. I was like, "You're complaining to me about why, why, why, but look around.

Look how bad what you're

doing is." And yet that's the thing about conventional wisdom. It's very difficult to unseat because it's an ideological commitment. They're committed to something they don't even know that they're committed to it

Right. That's really what precedents are too, right? They're these invisible commitments

100%. It was just this is, this is the pre- this is how it is. Everyone knows. Everyone knows. and all the incentives are a- aligned

Yeah. What gave you the conviction to, like, really keep going on this, even in the face of so much challenge?

I told you I was very stubborn.

I really-- I am very truth-oriented.

You know, I can put up with a lot, but I can't handle the untruth, you know? Like, I had to know myself the answer. I've never been able to accept a kind of convenient lie toe the party line. That's why I'm like-- I was a very difficult employee everywhere I've ever been. I'm not gonna

be rude about it, but I want

to know the truth. And so if you tell me that we're doing something and you tell me why, and that's not the real reason, we're gonna have a real hard time.

Yeah.

I was just very, very, very stubborn about this, and I didn't understand how controversial it was gonna be at all.

It was just like, "Oh, good."

Like, to me it was like we fixed a bug in management. We should probably just-- It's like, "There's a bug, we should fix it."

Everybody's doing everything wrong all the time. We should fix this.

We should probably fix that." And I

was like, "That just seemed very straightforward to me." So anyway, so it started out as just an intern, like a survival thing. Yeah, I was just like, how do I make my

company work and understand-- people will understand it and teach them about it and try to get them to buy into this idea. That's all it was for the longest time, was my own personal

theory about what was going on. We didn't even call it lean startup. I didn't

even know what to call it. And I tried a bunch of metaphorical systems and different-- I, I, it was like really practicing how do you convince people that the precedent is broken?

Yeah. And how did you come up with The Lean Startup?

It was just a blog post one day. I was like, "I think I'm gonna call it this." And I walked through, like, I tried this, it didn't really work. Tried this, it didn't really work. I think it's gonna work. To me, the most valuable precedent was lean manufacturing. That was really the thing that did it for me, um,

because lean manufacturing fought a very similar battle over the course of the 20th century to break people's misunderstanding about manufacturing.

And in fact, when I was taught software engineering professionally, I was taught what they called the manufacturing metaphor of software, that software works on an assembly line from stage to stage to stage to stage. And you can imagine how angry I was when I found out that we don't even do manufacturing that way anymore. So why are we applying this outdated metaphor to manufacturing? Made no sense to me. So I thought, look, the, uh, like the logic to me was airtight, that we could apply these concepts from lean manufacturing, but change the definition of progress from, um, the delivery of an object to what we called validated or scientific learning about the thing that we want to do. That intellectual insight has served me incredibly well now for 20 years, because what's powerful about it is it's a very general purpose tool. So people always argue with me about like, is lean startup correct, or is someone else's theory correct or whatever, and I just don't get into any of that stuff.

Like what matters is, is it useful? I have found it useful. It has allowed me to, to start multiple companies. It has allowed me to consult to hundreds of companies. It has allowed me to work with like big companies. I've worked on like deep sea oil drilling and like, you know, trying to, you know, invent like crazy biomedical cures and I've, I've just like worked on a wide range of projects now in every conceivable domain: nonprofit, for-profit, government, private sector, and it's just like, it's a tool.

I reach for this tool whenever it's useful, and it's useful in a lot, in a lot of places. So is it true

What about in this AI-driven world that we live in today where, like, everything is instant? You can test everything, right, instantly. Are there updates or are there, certain notions from The Lean Startup book or methodology that you would change in this world we live in today?

No, that's actually been very interesting to me is I think the principles have held up really well, and I see them playing out in AI all the time. And it's funny because I, I remember during Web 3.0, Web 3.0, there was like a whole movement to be like the dinosaurs of Web 2.0. What can they teach us? They don't know anything. And I had several people call me to be like, "I want you to like be a partner in my crypto fund. We're gonna do a whole big marketing thing about how like you've learned that Web 2.0 doesn't work and now you're gonna like teach the new..." And I was just like, "No, thanks." You know? " after you've shown that this has some value to customers, why don't you call me back?"

And none of those people

ever called me back. So yeah, I think the principles have held up really well. Now of course there are, there are tactical differences. You know, AB testing was like a new and controversial thing back then. Now it's pretty well established. So there's a bunch of tactical things. But like I think people still don't use the technology as much as they could.

mm-hmm.

With the AI, you should be able to generate tests much faster and you should be able to evaluate tests. The rate limiting step was always how many tests could you evaluate and understand? You ought to be able to far more. But like even now, like most people I talk to are still doing basically all the like critical steps by hand, trying to like... And, and using that as an excuse not to test that much instead of how do I maximize how much learning I could possibly get? We also have a separate danger, which is that if you try to outsource the learning to the machine, you're in big trouble. It just shows that you do not

understand where the

value in a startup is created.

But as long as you use the tool as a

form of human augmentation to learn faster, learn more, it's really good for that.

Well, I gotta tell you, Eric, I mean, even with TaskRabbit, we used so many pieces of the methodology and, and I can say that literally Lean Startup saved the company at one point. I don't know if I've ever gotten to tell you this story about how we threw away, like, our entire code base four years in, like, started from scratch.

I don't know if you've ever

tell me

It was devastating, and honestly, as I look back as a founder now, like, I don't know if I could do it all over again 'cause it was so hard, but we were, like, four years into building. We'd built up this, like, marketplace model based off of eBay, which was, like, the gold star system, right, at the time in, like, 2008, 2009, and then everything changed.

Everyone was building mobile first, mobile native, and so by, like, 2012, we were still stuck in this, like, marketplace bidding system, and all these new companies were shooting out of the gates, like mobile first, mobile only, like, complete booking platform like we're used to today, like with an Instacart or DoorDash, right, or Uber or Lyft, whatever.

So we made the really tough choice to pivot, pivot the entire product customer-based company, but the way we did it was we launched a very tiny, teeny-tiny MVP, ground zero, started from scratch code base in London because in the US we were, like, live in, I don't know, like 20 markets. We had, like, millions of customers.

We had, like, tens of thousands of taskers earning money on this old, old platform. And so we're like, "God, like, we can't, like, easily, like, test it here," and everybody, you know, knows us and expects a certain experience from us. So we tested in London, teeny-tiny MVP, mobile first, mobile only, and guess what? We saw the product take off, and we were measuring, you know, how often someone would post a task.

That was, like, the main thing is, like, if you could get someone to post, like, more than once a week, like, our whole business model took off. And so we saw all the numbers pop in London, and we're like, "Oh, crap. This is working." Now we need to, like, port it back to the US, and that was the painful part. That was so painful.

I remember. Brutal,

Ugh, but that was all based on going through the Lean Startup methodology, finding that MVP, putting it in London, comparing the

That's like a classic case of doing it properly, yeah

We would've died as a company, honestly, if we hadn't done that. I mean, I had to, like, lay off 30% of the team. I then had to hire all these mobile native engineers. I mean, it was, like, brutal.

These were not easy choices, right? But it saved the company, got us profitability, right, and then we sold to IKEA. So it was a happy ending. But I just think it's so... Like, you really have given everyone the tools right here to, the language, the tools, the framework to talk about how to build and how to test and, and how to succeed.

It's pretty amazing.

Well, thanks for saying that

No, I mean, honestly, I don't think I've ever gotten to share that story with you, so I wanted to share it. What's fascinating to me, Eric, is, like, you are this, you know, tech engineer guru. You've written "The Lean Startup." It's very successful, millions and millions of copies sold. You've shifted the way startups are built, and then your company that you launch, the Long Term Stock Exchange, I mean, goes on to tackle one of the oldest, stodgiest, like, just precedent-ridden industries ever in the world globally, Wall Street.

You built an entirely new stock exchange. So I wanna talk about you leaving this scrappy startup zone and then going into this very entrenched system, Wall Street, and tell us about LTSE and what precedents you were breaking there.

Oh my God, it's nothing but precedence.

It's like such an ossified environment that, yeah, that's-- it's really very structurally designed for outsiders not to be able to break in. That's kind of the idea. So was very countercultural. So here's how it started. And actually, this dates back to "The Lean Startup" itself.

When I was-- I really believed in testing the content of "The Lean Startup" when I was writing it. So I was traveling around a lot, doing workshops and speeches and working with companies and just trying out the different ideas to be like, "Do I, do I really know the answers to the people's questions here?"

And I would like, had like a running list of like questions I don't know the answer to. And I was like, "By the time I publish this book, I will know the answer to this." And I got pretty good at this. Like, I got to the point where I could anticipate all the questions people would ask, and I would have these meetings where people would be like, "How did you know that?"

Because they would tell me like, "Tell me something about your company and how it's structured." I used to be able to be like, "Tell me how you release software." And they would tell me something about the story. I'd be like, "Okay, let me tell you some things about your company." And they-- It was like a magic trick.

They'd be like, "How did you know?

How did you know? were you secretly in our board meeting yesterday?" I'm like, "No, I just, I understand now how these things work at a systems level, and I can make predictions. It's a scientific theory. Give me the inputs, I'll give you the outputs." So anyway, one of the questions I used to get, people would say, "Well, you're telling us to build the next Toyota because you studied lean manufacturing and you're talking about how they have this long philosophy of long-term thinking. But why are you also telling us to make a venture-backed company and take it public? That's the most short-term environment on the planet

Yeah. That's tough. Yeah

And I wasn't telling anybody to do that. I was like, "Build any kind of company you want." But I was like, "But that's the best practice. Everyone you're talking to..." I was always venture-- Like, Lisa's book is loaded up with venture-backed companies.

What's going on? And I was like, well, I was like, on one of my research items, I should really try to figure out the answer to this question. And I tried every kind of hand-wavy answer I could think of, like, "Actually, it's fine. Actually, it's not short term." Like, I tried all the, all the reasons why it's fine, I tried on people, and it was just like people were not going for it. It's,

it's one of these fascinating, like, emperor has no clothes situations where absolutely everybody knows that it's not fine, except for the people whose job it is to administer this system. You know? It's like when I'm anywhere in the country and I ask people about this, you know, um, I think I told this story before, but maybe not. I was, um, flying to DC to have all these me- a, a whole day of meetings with grand poobahs of every kind. Academics,

lawyers, government officials, politicians. You know, like, I was like, I remember it's a crazy day. I, like, had my entourage. This is back when we were actually trying to get the exchange going, and I'm, like, meeting with the SEC.

I met with a senator. I met with very important academic. I met with all these important... And the grand poobahs, after a day with the grand poobahs, I left the day, like, very confused because every person's

like, I'm like: Look, we have this, like, urgent hair-on-fire problem, and it's melting the planet. It's destroying companies.

Like, the number of co- public companies in this country has shrunk by more than 50% in the last, like, 25 years. Like, it's actually, like, got this really toxic set of things. Average holding company of stocks has gone from, like, a year, multiple years to, like, a ma- like, a couple of months on average. Um, the average holding period for some firms is, like, has crossed under 10 minutes. Um, you know, executive pay is way out of control. Um, the correlation between pay and performance is broken down. The, uh, longevity of companies is crashing. the symptoms are everywhere, and everyone knows it, except for the people who are the grand poobahs, who would be like,

"Is it a problem, though?" I remember people were like, "Eh, this is just an artifact of low interest rates. If, inter- whenever interest rates go up, it'll fix itself." It was just, like, amazing how they were so confused, and I left the meeting very, the

day very

think, what do you think... Yeah, what, what is the disconnect? Like, what is the disconnect, do you think,

Oh, I-- now I understand it very well. Yeah, it makes perfect sense to me. Um, let me finish the story and then I'll, I'll answer your question because it's really... They,

they're, they're very related. So I was a

big fan of an airline that's now gone called Virgin America. Richard Branson had

opened an American... Right? Everyone who was around at that time, it

was the air- For the San Francisco to New York or DC

long haul flight, everyone in Silicon Valley

was obsessed with Virgin America. It was awesome. And I happened to be in DC having these grand poobah meetings on the day it was announced that Alaska Airlines would acquire Virgin America.

I know. It's terrible.

And, you know, for those that know the story, like it was done over Richard Branson's,

um, express wishes, and it was kind of like they'd been forced to do it.

Anyway, I happened to be there. I happened to see the news as I was coming in. So the baggage handlers and the check-in counter and a few of the flight attendants were just hanging out at the counter.

It wasn't a busy day. And I'm checking in, and I'm just like, "Hey, everybody, how we feeling about the merger?"

And the baggage handler who's the guy pulling my suitcase is just like, "That's how it is. And you take your company public, shareholders don't care about the long term. You can't protect yourself."

And he gives me like a lecture

on the economic, social, and political consequences of our public markets that was like 10 times more cogent and more eloquent than any grand poobah I'd met with that day. And all-- again, and it was not like he was not some, some genius. Everybody sitting around was like, "Yep, everybody knows that.

Everybody..." I was like, "Wait a minute. You all know this?

just met with a member of Congress who doesn't know it. I just met with this incredible academic who doesn't know it, but you know it?" And it was like, that was really the emperor has no clothes moment for me. So why? Why is this going on?

Eventually, what I came to realize, like you'll, you'll I think understand this, having been a founder

Mhm

When you're building a company, you are focused on the mission and purpose of the thing that you are giving birth to. Like, I really believe companies are not owned, they are birthed. So like entrepreneurship is more like motherhood than it is like, um, you know,

playing the stock market game you played on that old computer, right? Like it is a thing, it has this like living thing that you are trying to create, and that is intrinsically grounded in community. It is necessarily long-term in nature, and it is necessarily connected to the human flourishing of every person that it touches. But

you go for advice outside of your little bubble to learn how the company should be structured. How do you raise money? How do you do this? How, uh, what should the legal terms be?

What should the financial terms be? What should-- And almost every person you go to for advice will give you the precedent that the way we build companies today is the only and best way. But it took me a long time to realize how contradictory this is. How can it be the only way and also the best way?

Sur-surely it should be one or the other. No, the only and best way. And what you realize if you've had this long enough is that every person you're getting advice from, the way that they make their money is from transaction volume.

So we are trying to create this long-term mission-driven thing that does not-- It itself is not the subject of very many transactions, but you're talking to people who make their money from deals and trades and shares and this and that.

And so there is this unconscious gravitational force which affects people's behavior in ways that they are not even aware of, as far as I can tell, that like when the economic system rewards transaction volume, everybody aligns themselves to the ideas that are gonna help everybody make more transaction volume.

So we live in a world where transactions rule everything around me, and here I am trying to make a company that's going to last. So that's, um, I think a big part of-- When people talk about like hyper-financialization of our society, like what, what is, what is it about? What it is, is moving every aspect of, of our society, art, family relations, work relations, every kind of relationship and every kind of social and political capital is being moved into this transactional framework where we reward those who generate the most transactions.

So if a company is utterly and completely destroyed, but it generates a lot of trades on the way up and on the way down, this is viewed as meritorious and maybe even efficient. Like people

have interpreted creative destruction as that activity, and therefore we've reached the apotheosis of this idea, which is now a large number of people in our economy have made absolutely unconscionable amounts of money

without creating any value at all.

Yeah.

like that's actually a really big problem. So that's-- I think that gravitational power is why these precedents are so strong and why they're so difficult to

break.

And so you start LTSE, you get it off the ground. Tell us, how it's set up differently, how the structure is different.

Yeah, yeah, yeah. Well, yeah, and, and, uh, you know, I say we, of course, but I don't run the company anymore, so I should be-- It's a re- it's a highly regulated entity, so I should let the company speak for itself now. I gotta train myself to do that. Um, yeah, it, it is, um, it's a very simple idea actually. It is an SEC-regulated national securities exchange, so it is in the same regulatory category as the New York Stock Exchange and Nasdaq.

No, we do not have a marble building where we trade stocks, but on the other hand, neither does the New York Stock Exchange. The marble building is a museum. The servers are in New Jersey. You know, the stocks are not traded there anymore, right? So part of this is about exchanges used to be these physical institutions that embodied a set of values, and they have all become electronic trading firms.

So our idea was to build a new exchange where our listing standards, our corporate governance standards would hold companies and investors to a higher standard and create something that is really for the, like, top 10% of the market, the companies that are really the good guys, the ones that are truly doing the right thing, who want to be able to be rewarded for that in the investment thesis of long-term investors.

And the fundamental problem we have is like a prisoner's dilemma issue in today's markets where you can't trust anything anybody says. So a company may say, "We plan to do the right thing," but tomorrow they might change their mind. And so every investor is highly incentivized to extract as much value as they can for themselves and get out before the next investor steals it from them, you know, first.

So you've got this kind of like race to the bottom, tragedy of the commons dynamic that is, um, causing investors to lose money. It's actually value-destroying the whole thing in aggregate. I think we have

pretty good evidence for that now.

Um, so anyway, anyway, so our idea was like, look, let's just bring the investors who think this way and the companies who think this way together for mutual benefit, and that's it.

That's our, our, we are, um, the abil- we have the ability to list companies and trade stocks, and we do. And like I said, and it does. I just gotta get outta the habit of saying we. Um, but yeah, and you know, it's not-- I think it's really important to understand that the duopoly, the Nasdaq-NYSE duopoly is 50 years old or more now.

Угу,

it's not something that's gonna be easily broken. And so people always ask me like, "How come LTSE is not growing faster?" Or, "How come it doesn't have more listings?" Or whatever their complaint of the day is. And I'm like, "No, no, no, you're

not, you're not getting this." Nobody has been able to do this at all for 50 years. The victory so far is just to be able to do it at all. So to get it approved, to get the first companies listed, to trade the stock, like to get to that status gives us

the, like the, you know, for all the 10 years of my life I spent on LTSE, that's just the pre-innings, like the, preseason, right? The warmup. The actual competition, you know, can begin in earnest once we get, we have one more approval to go through where we get the ability to do what's called primary listings. That will come, uh, hopefully in the future. Like, so at some--

One, one of these days we will get ourselves to an even playing field with the incumbents, and then we'll be able to begin the true, uh, the true competitive phase.

It'll be, it'll be very interesting to see what that looks like.

Well, I'm certainly seeing the thread here between the lean startup, long-term stock exchange, and then I really wanna talk about your book, your upcoming book. I've been lucky enough to be a test reader, I've read through versions of it. I've

read, It's, it's really incredible. Um, so, so what can you share about the upcoming book?

Because I hear a lot of these themes that you've just been discussing, I see it all coming together in this new book. So tell us about

yeah. No, I do think in some ways the book is a culmination of everything that I've been working on, you know, over this whole, the whole sweep. Yeah, the book is called "Incorruptible," and it's about how-- It's basically just like the manual that I wish I had had for how to create a mission-driven, long-term oriented company.

There just,

Mhm

there isn't one, which is kind of wild when you think about how important those companies are, how many people aspire to build them, and how many people long to buy from, invest in, and work at such a company.

and so as a result of us like not even having the vocabulary to talk about it, like if you ask people, "What is a mission-driven company?"

It doesn't even have a rigorous definition. ask people like, "What's your plan? What differentiate--" People would tell me, "I, I wanna be a mission-driven company." I'm like, "Mission-driven or mission hopeful?"

which is it? And most companies are mission hopeful. They're hoping for the best. They're gonna try their best, and then if they turn

into a malign bureaucratic nightmare, "Oops, sorry about that."

so I've been talking about this idea for a while now, trying to convince people to change the way that companies are structured. Here's what I mean by structured.

There's an operational side to it. How do we build culture, the management systems that we, choose, and how do we align business model and mission such that we can only profit if we're accomplishing the In order to do all those things, we have to understand that trustworthiness is an asset. So how do we build a trustworthy organization culture? I call it building something worth protecting, build something worthwhile. And then that's step one. The second half of it is how do we protect? If you build something worth protecting, people will try to steal it from you. So how do we protect it? How do we prevent it from being corrupted, both by outside forces who might wanna take it over, but also by the

inner temptation to go after the siren song of growth at all costs, making money by whatever means necessary, And when you bring those two things together, you can build a new kind of company that is designed for longevity and for integrity And when I talk to founders, that's what everybody wants. When I talk to

potential employees and people ask me to help them get a job in the tech industry, this is what they ask me for. "Can you find me one

where I won't have to be embarrassed

that I put it on my resume, that won't turn into the next

tobacco?" Right? Like, "I wanna have

something that I can be proud of."

And it's also, on the flip side, we have a lot of people trying to do social reforms of all kinds who are working in the nonprofit sector who are super frustrated at how ineffective so many nonprofits are. Like, get me

something that is both rigorous and, solid from a business model fundamentals perspective, and also has a mission that I can go to sleep, feeling good about.

I can tell my kids that this is what I worked on one day.

And that special com-- So, so, so one way of looking at the book is it's very complicated, bold, radical thing. Like, like kind of like the, you know, whatever, that's the, like, I can't remember the, the meme, right? That's like planet-sized brain version of it.

But the galaxy

brain understanding is actually, like, the stupidest and simplest idea I've ever had in my life, which is what if we just give

the people what they want? Every founder wants to build a company like this. Every investor claims this is what they want to invest in. Everybody wants to work at a company like this.

Like, the data is extremely strong. This is what people want, and our current market reality doesn't give them that option, which is

kind of crazy when you think about it. So, uh,

that's the book and, and it's, you know, it's both a manifesto about the, the why, going to your question before about like why does this happen?

Well, like Well, like Well, like I go into the history and the mechanics and like, you know, why do we live in the world that we live but much more important to me is the how. How do we build the kind of company that is designed to endure? And the good news is we have all the tools we need. We just have to have, find the courage to use them.

Yes, spoiler alert. There

Yeah. Right. Exactly. Oh, sorry, the spoiler is it is

possible, Well, no, but this is actually really important because most people that I tell the idea for this book to react the exact same way, and it's funny, I call them the question

mark people and the exclamation point people. And the only difference is they all say the same thing.

They all say, "But that's impossible, right?" And it's like sometimes they say it like as a question, like, "That's impossible, right?" Or they're like, "That's impossible, right?" Like they, they already know. And what's funny is that they don't say, "Well, what do you mean?" Everyone actually already-- This is what's so wild to me. Everyone already

has a sense. They already know.

what it would be to build an incorruptible

company. We're just debating whether it's possible

or desirable or whatever, but we know what it

is. the biggest breakthrough in the book for me is simply the idea that this is not some pie in the sky, like mushy idealism, but a like practical reality, a thing that can be done now.

And here's the even more crazy part. Every

person listening to this right now has seen the evidence that this can be done with their own eyes, and they didn't even realize it

like, what are some examples of companies that

You've ever eaten a Hershey's chocolate bar?

this? Ah, delicious. My kids love them. Yes.

Yeah

Um, the new, the new hotness is Tony's Chocolonely, by the way. Also

has this unusual structure if you see this in the store. Um, uh, if you've, like, bought a Patagonia vest, if you bought it

at an REI, if you have a Vanguard fund in your account, uh, if you've shopped

at an IKEA, if you know someone who's taken Ozempic, Novo Nordisk is structured in this way.

Like,

there's these incredible global scale companies basically

everywhere you look. If you, like, root for the Green Bay Packers, if you've watched Wallace and Gromit, if you-- Just like I could just go, like, so many

things and people are like, "Oh yeah, that one too. That one too. Oh, that one too. That one too." So here's what's crazy. Every one of the companies I just named has

a very unusual structure that today is not considered in line with our corporate best practices

Mm. Mhm.

Why? that's interesting. I thought they're the best practices. Well, are they actually the best if there are all these companies that don't follow them?

So I'll give you one example, one

of my favorites from the book. There is this, phenomenon of companies that have what's called an industrial foundation. So Novo Nordisk, Carlsberg, um, uh, uh, Bosch, if you know Bosch appliances. Patagonia has

this structure. Um, lots of companies have this structure. And if you have-- If you, if you, if your house has good water pressure, it's probably 'cause it has a Grundfos water pump that has this structure.

Anyway, Somasource has this structure. I could do this all day. So many

companies that have this structure. Um, the evidence shows that companies with that structure are six times more likely to live to 50 years old than companies with a conventional best practice structure

Mhm, mhm

Um, take Costco for example. Costco also has a bunch of non-standard governance, uh, things that they do and co-obviously cultural things, the strategy things they do. But they, they basically violate every best practice you can imagine, and it's one of the most profitable companies in the world. They're crossed $400 billion valuation the other day.

what's interesting to me-- So if you go and look at the people who advocate for best practices, they will say, "If you adopt these non-standard practices, then that's gonna lead to entrenchment and all kinds of poor performance." And I'm always like, it's, it's such a funny criticism of Costco to say that they have poor performance.

If you invested a dollar,

you know, a dollar in the stock market or a dollar in the Costco, in the Costco IPO and just held this whole time, like you wouldn't have made

something like th- 10,000 times more money

investing in Costco. So what's interesting is that these practices are defended as if they were on behalf of investors, when in fact we have really good research that shows that they are bad even for investors, and they're certainly bad for the planet and terrible for employees.

And like they're bad in so many other ways that are socially relevant,

but they're also bad simply on an, at an economic basis. So how can it be-- This is-- So this, I got an email from this the other day from a test reader who was like, "I hear you, but if what you were saying was true, that these companies out, have a competitive advantage over con- over conventional companies and outperform them," and

by the way, we have reams of evidence that this is true.

"But if it

was true, then Darwinian evolution would have caused them to outcompete their conventional counterparts, and they would be everywhere here."

So that is to me the crux of the book is why has this not happened? Now, first of all, I was like,

well, they do employ something like, uh, like 100 million people worldwide, so it's not

like they're not, it's not like they're not doing badly.

but

but anyway, how can you have a best pra-- And this to me is why it's so relevant to your precedent

question. How can it

be that there is a precedent in a highly competitive commercial environment that is supposed to be--

uh, capitalism is supposed to be all about the, you know, survival of the fittest and competitive pressure to create value. How can it be that a precedent could survive that ruthless environment if capitalism is really who can compete to create the most value? And the answer is that capitalism isn't about that. So like in fact, the criticism is already the answer. The person's answered their own question. We have

a financial theory that says doing these alternative things is impossible. See, that's what's so interesting. It doesn't say it's bad or like not as good. It sh-- The Darwinian argument should cut the other way. These companies, every one of them should have been outcompeted into the dust and none of them should exist. It should be impossible. The fact that there's so many of them that

we kind of like vaguely know are the exceptions that prove the rule, to me proves that the rule is flat out broken.

Yeah. Yeah. Well, it's so, it's so interesting too because when I think back about, uh, the, the moment we decided to sell TaskRabbit to IKEA,

Yeah, I did on purpose

It was ... Oh, you did? Oh, okay. Um, it was incredibly hard to get the deal done with IKEA. Harder. It was

Yeah, I'm sure

would have been with, and I won't name names, but there were two other companies that were competing as part of this process, right?

And I remember Stacy and I, and the board,

were like, "My God, why is this so hard? Why is this so difficult? Why can't they move faster? Why can't they decide this? Why can't they decide these things that the other competitive companies," which are probably not, you know, like, in

that realm, right? Like, of they're probably corrupted.

Um, w- why can't they compete? and now after reading your book and hearing you talk just now, like, it kinda clicked for me why it was so much harder to get the deal done. And the reason why we chose to go with IKEA was because we ultimately felt like our mission and values were aligned. And in the end, that's what drove the deal, but it was harder to get

Yeah. Yeah. Yeah, that's-- And you just, that is the whole idea in a microcosm because... And

listen, I'm not here to say that like Ikea is perfect or any company is perfect. You never put any company on a

pedestal. And large companies have bureaucracy issues and sl- like, like should they have gone faster? Like, I don't know.

I wasn't there. Probably, probably they could have gone faster. But at the end of

the day, mission alignment

is a trust thing. You trust someone, you have a competitive advantage that's like really, really

what probably the most underrated, asset in business today.

Because you told

that story, I'll tell the Novo Nordisk story,

which is my favorite

favorite current, my current favorite of these stories because,

um, Yeah

like in business, we, we lionize decisiveness, quick decisions,

um, you know, quantitative analysis, ROI.

And like, like I'm, I, I'm,

I'm a lean startup guy. Like I contributed to that as much as anybody. And yet there are

times when that mode of thinking is the wrong one. And so

the art of business is knowing which, what tool to apply in the right situation. So here's my favorite. This is just a completely insane story.

So Novo Nordisk was set up in the 1920s by a, uh, Nobel laureate in Denmark. His wife was one of the first doctors, uh, first women doctors in, uh, Denmark, and she contracted diabetes at a time when diabetes was a death sentence But she, not he, she had the one who'd done the research to find out that these researchers in Canada had figured out how to synthesize, uh, insulin.

And she convinces her husband, a famous Nobel laureate, to take-- go with her to Canada to go meet these people and find out about it. They go and they meet it, and they form an agreement with the Canadians to bring back the synthesis procedure to Denmark to sell insulin in Denmark for the first time. Uh, it-- that, that was what created the Nordisk Insulev... I can't pronounce it, the Insulevatorium, you know. Uh, it was basically, like, this

business that they set up, but they made an agreement with the Canadians and amongst themselves, and they had, like, six co-founders. Interestingly, until recently, his wife was not considered formally a co-founder and had been written out of the story, um, for

reasons we can't possibly imagine why.

Right, yeah.

uh, she-- it never happens. But anyway, he was the one who wrote the papers, and he wrote this, these essays, which are incredible to read now, about the agreement they made in Canada that this company would not be created in such a way that people would be denied a life-saving therapy of insulin because they couldn't afford it, because scientific research is a public

trust, and so a for-profit company shouldn't just be able to extract maximum rents out of a breakthrough like this. He had this idea 100 years ago, and

so he didn't say, "Therefore, let's make it a nonprofit," or, "Therefore, let's not do it," or, "Therefore, mo-money is evil," or, "Therefore," whatever. And he certainly-- people, I'm sure, called him naive and whatever, but he was like, "I, I don't care." So he decided they would create this, this really interesting structure.

Now, it wasn't the first. This has been, been done before. If you have Zeiss optical lenses in your glasses, they set up this structure in 1885, so it's not like some new thing.

Uh, but anyway, they would have this structure where there is a nonprofit foundation that would oversee the for-profit subsidiary. And so the for-profit subsidiary can be a normal for-profit company. It can take investments. Today, Novo Nordisk is a giant publicly traded company, but its mission would be overseen by what I call a spiritual holding company, a separate set of trustees who would be responsible for the spirit of the overall enterprise. What's fascinating to me about the story is they had typical co-founder drama in the years that followed. The two companies split. It split into two companies,

and for many years, there were two insulin providers in, in Denmark that fought head-to-head. One was called Novo, one was called Nordisk, and, um, both companies adopted the Nobel laureate structure.

So they had two companies that were both structured in this way, so they were basically like two immortals fighting, because when you have this structure, you become permanent. You cannot be acquired. You cannot be pushed around. It creates this thing. Anyway, when the c- when the founding generation eventually retired and when, uh, you know, the new, new leadership came into it, they eventually remerged back into one company, which

is the modern Novo Nordisk, overseen by what is now the world's largest charitable foundation.

So here's this-- here's where the story gets interesting. In the 2000s, there was a massive wave of pharma consolidation. So every banker was

telling every pharmaceutical company, "You need to merge or you're gonna get eaten." So there was

just like-- For those who were alive in the late '90s, uh, you'll remember this, this era. So at the time, the third-largest pharmaceutical company in the world was based in Switzerland, and they came and proposed a merger with Novo Nordisk, where they would merge with the Swiss company, move the headquarters to Switzerland, blow up this whole structure, and everyone would make bank, just make a ton of money. And so they actually, like, got Morgan Stanley to do the deal, and they had a si- as far as I understand, a completely signed merger agreement, like ready to go. The, the board of the subsidiary and the management of the subsidiary all were on board with this plan. And they had like a last checklist due diligence item to go to the nonprofit foundation and be like, "Can you quickly just sign off on this?"

And this is why your IKEA story made me think of it. Because instead

of signing off, the board asked this simple question: "What is the purpose of this transaction?" It's like a heretical question to ask these days. And I'm-- I just-- I wasn't there, but I can just imagine them being like, "But dude, we're gonna make so much effing money. What-- That, that is the pur-purpose of this transaction. We're about to sell the company for a massive premium and all get super rich." Anyway, they

said no, and they had to have a second meeting. I lo- the, my favorite detail is they had to have two meetings. They like got the bankers huddled together, said, "Oh, okay, we'll come back, we'll come back." And they were like, they had found in the first meeting, they had said, "Well, our charter requires us to... We can approve a merger of the company." Like, there's nothing wrong with selling your company if it's the right thing to do. "But our merger requires that we certify that this action is necessary for the survival of the mission." And they came back and they said, "Ah, ah, ah. See? It's a survival thing. You gotta eat or be eaten, bigger and blah, blah, blah, blah, blah." And the board was just like, "Listen, with all respect, we've been growing 20% a year profitably for 15 straight years. What problem are you trying to solve?" And they went back to like, "We're about to make so much money," and they just said no. They just said no, which is incredible to me. They said no to the merger.

W- I was-- They had the ironclad ability to do that, had a 100% veto. No one could do anything about it. Merger was off. Everyone was super pissed off. Now, the incredible thing about this story, the most unbelievable part of it, is that two years later, the Swiss company was itself bought by Merck and had all their, um, their headquarters were shut down, all their R&D projects were canceled.

That company is-- No one remembers their name anymore. Also two years later, the woman who had been working tirelessly for 13 straight years in the Novo R&D labs to invent what would become Ozempic, GLP-1,

finally had the breakthrough. Now, Ozempic, whatever you think of it, is objectively the most profitable pharmaceutical in the history of mankind.

And as a result of Ozempic, um, you know, Novo Nordisk went from a, like, $10 or $20 billion company to, like, I don't know, I think eventually they crossed $600 billion in valuation, although they're having a fight with the-- having a fight with the US market right now, so it's come down a little bit. But anyway, when they-- I, I like to think about the moment that they passed the GDP of Denmark in market cap. From that moment to then, these nonprofit trustees had created more than $500 billion of shareholder value

Wow.

that the actual representatives of the shareholders were ready to throw away for a quick buck.

Yep.

So whenever I meet people now who are starting a company and they're like, "Oh," they get my advice and I tell them these different ideas and structures, and they're like, "Okay." They're always excited at the first meeting, and then they call their guy, lawyer, whatever person, and the guy's, "Oh, he told me

it's not a good idea." I'm like, "Listen, I'm sure

your lawyer is very smart, but are you sure that you're smarter than a Nobel laureate? 'Cause this guy figured this out 100

years ago, and the thing's going strong 100 years later, and we have, like, a whole body of research now to support that he was prescient. Like, are you

sure that the person who's advising you actually has your own long-term interests at heart?" And again, not because they're a

bad person, but, like,

what are the incentives? Follow the money. And so I think there's a revolution to be had here where we start

structuring companies to, to have their legal formal purpose be the maximization of human flourishing as implemented in the mission of the company, and we put that at the center instead of just number go up at the center.

I think a lot of good things are gonna happen.

It's, it is really, really incredible. I, love the book. I highly recommend. I think that,

you know, the, the case studies, the thinking, it is certainly precedent-breaking, and I think it will shift. how people think about to structure their companies for the long term. So it's, it's really quite impactful.

Thank you. Thank you for saying so

Yes, absolutely. Last question. So you have challenged almost every rule on how companies are built, from the startup garage to Wall Street. What is one rule you still have not broken yet, but you plan to?

That I plan to. Ooh, man, that makes me sound like I have some kind

of

you on the record here.

Yes.

no. Yeah, yeah, exactly. A rule that I plan to. So, uh, if you'd asked me until very recently, I certainly would've said quarterly reporting This is incredible to me. We have tremendous research that forcing companies to report four times a year instead of two times a year costs them about 5% of their market cap on average.

It's way higher than the cost of the report itself, but it just, it's like, pushes companies to manage to the quarter. we have been working for many years to, at the LTSE, to bring a petition to the SEC to ask them to create an alternate reporting structure that companies should be able to, instead of reporting four times a year, report two times a year, but in exchange for greater transparency for investors.

It's not, it's not

enough just to cut it out, but you should have a more intelligent

reporting regime. You talk to anybody who's worked in a public company at any level, but certainly at the higher levels, they will all tell you this is obviously what needs to happen. it took us so many years to just, like, And I was just like, "Gosh, it's

taken us-- It took, have the courage to make the petition."

But we did, we did the other day, and then, like, it was, everything was going fine, and then, somebody took it to the president, who then

tweets that it's a good idea and they should do it. And so,

like, our petition has been long forgotten now. It's, like, turned into a political hot-- But, you know, you can imagine, like, no one

remembers even that we had anything to do with it.

It's been a, like,

fascinating thing. So hopefully by the

time you listen to this, something good will have come of

that.

Okay

So, like, so if you had to pick something that's-- We have-- So I'm, I'm already working on that one. But if you look at, in the book I have this chart, one of my favorite charts in the book, is a whole bunch of best practices that are, like, current.

Like, not only are the, um, set people say are really good, but, like, literally they, if you, like, have a, if you follow these practices, you will have a high governance score,

from the people that rate these things. There's, like, literally ratings agencies that rate how good your governance is, and in order to get a 10 out of 10 good score, you have to do these things. For every single one of the things, we have really strong academic evidence that they destroy value.

So it's not just that they're, like, misguided, but, like, just the very opposite of what you should do.

And so I to- I mentioned Costco before. Costco, because Costco is so different, they have been the subject of just innumerable attacks over the years against what I call their governance fortress. And there's this fascinating moment, there was something for a long time called the Harvard Shareholder Rights Project, which was like

an, uh, a project of the Stanford Law School to try to force companies to adopt what they called a more democratic, form of governance where shareholders would have more influence.

As if we lived in a world where, like, the, the main problem in our world is that shareholders have too little influence o- over companies. Like, I think most people would find that very surprising. But in academic circles, this

is what people believe. And

at the height of that, they ran these campaigns to, to get-- There was, they were fighting over a specific provision.

But anyway, two companies that got swept up in this mania were Kroger and Costco And in the, in like 2006 timeframe, I think, Kroger decided to go for it, and Costco refused. So Kroger got-- went for the best governance possible. Costco said, "No, we're keeping it the same way." And so we have this, like, beautiful natural experiment of like what's happened to Kroger versus Costco

since that time.

Co-Costco's had basically 400% superior performance in every dimension since then. And Kroger, Kroger's not a bad company. They've actually done a lot of good things, just they've really struggled with a bunch of stuff that you could just like... So it's just to me very obvious that they are feeling the gravitational pressure of these changes.

And if, you know, and, and it hasn't been long enough for it to go really bad, but like eventually they're gonna have this problem. So I always-- So this one, if I could like pick something to be like, we have to stop calling the Kroger-style governance good governance, and we have to start calling Costco good governance, because Costco is the thing that empirically actually delivers performance. So what I tell everybody now is the next time you're in a board meeting, okay, this is very important for every founder especially, but anyone who, anyone who would ever be in a board meeting or meeting with the board, discussing someone who's on a board, if anyone ever says to you, "We should do such and such a thing because it's a best practice," I need you in your mind to subtly just, you don't have to say anything, but in your mind, this is

somebody who wants me to be more like Kroger and less like Costco.

Hmm

instead of saying best practice, you have to hear Kroger practice. Yeah, that's,

that's, that's, that's the thing. If I could break one precedent is that best practice is Kroger

practice. And if you wanna do a Costco practice, you should copy what Costco actually does because they really are the true outlier in their industry.

And that's true for every one of the companies that I've named. It's so interesting to

me that we're, we allow there to be one outlier in every industry, but we don't try to copy them. But I thought capitalism was about perfect competition. So what are we doing? So

Read the book. Read the

read the book. Read the book and find out all about it.

exactly. That's great for you to

say.

the stories about Costco in the book too. So thank you so much, Eric, for being here. We're so excited about the book, Irrecorruptible, and we are excited to just, just, you know, hear about your whole journey. So thank you so much

thank you. I really appreciate it. It's always a pleasure and, It's fun to be able to reminisce about our long,

our long history together, so I'm, I'm I'm glad I'm glad to reconnect and glad to have this conversation, and I hope,

hope people will find the book and all these ideas helpful. thanks for helping me spread the word

Thank you.