119: Eric Ries, Author of The Lean Startup, The Corporate Governance Crisis No One Wants to Admit

The really great leaders just don't mind that their principles make life more difficult for everybody. In fact, they relish it. I used to think this because they were jerks. I'm like, why are you creating this difficulty for people? Why do you relish the difficulty? It's not because they like the pain, but rather the difficulty gives them an opportunity to teach the principle. Because when I say I care about quality, you don't really know if I'm serious about it. The only way you know I'm serious about it is there's actually a trade-off. Hey, we have a quality issue, it's gonna cost us a bunch of money to fix it. "but we don't have to, you're gonna pay the money anyway?" When I say, "Yes, there's no question about it, we're doing the right thing," then you're like, "Oh, I guess he's serious." But also these difficulties yield breakthroughs.

Welcome back. This is From Startup to Grownup. My name is Alisa Cohn, and today I'm thrilled to welcome Eric Ries to the podcast. Eric is the entrepreneur and bestselling author behind The Lean Startup, and now he's back with a fascinating new book called Incorruptible. In this conversation, we rift about why many so-called best practices are actually destroying companies from the inside out and the implications of that. Eric and I also dished about Anthropic, and we talked about why Costco is such a role model for so many entrepreneurs. This is a thought-provoking conversation about what it really takes to build a company that lasts. So please enjoy my fantastic conversation with Eric Ries. Eric, welcome to the show. I'm so excited to have you.

I'm so glad to be here. Thanks a lot.

I'm thrilled to talk with you about what you're up to these days. You know, when we last left our story, and this may not be true for you, Eric, but when your vast public left our story, You were really well known for "Lean Startup." What happened? Fill us in. What took you from "Lean Startup" to here in just a couple of sentences?

I've seen some things. I really thought of this new book as almost a report from the front lines, like I'm a soldier returned from the front. Let people know how it's going. The war is going really badly, okay? We're getting our butts kicked. It's not going very well. But the good news is I do think we know what to do to turn it around. So that's kind of a bit like the virtual war correspondent.

Wow. Very like George Washington reporting in from the front.

It's a little bit how it's felt, like the builders The world are under siege. The practices that we've been told are the best are leading us into ruin, and our economy is in shambles. But other than that, how was the play?

Yeah, that's right. Other things are going great. Well, let's talk about that. You talk about in your book called Incorruptible, we— you talk about so-called best practices, and we've all been schooled on the talk of best practices, right? So why are best practices as it relates to company building and maybe let's say governance building Yeah. Bad. Best practices are bad. Up is down.

Just having best practices is not bad. It's the particular ones that we've all been taught are good. They seem like they were like a reasonable thing to try, but we've run the Civilization Scale experiment and on both the leadership side and the governance side, they've been found extremely wanting. So I would say like the deep question of why I think has a lot to do with the financialization of our economy and the move away from building and making things as kind of the primary leadership virtue towards financial targets as the primary virtue. So what's interesting is we've built an economy in which so many leaders lose control of their company, like it's almost an epidemic. When they do lose it, quite often the mission, the spark, the purpose, the thing that made the company worth building and investing in in the first place gets lost. And quite often human consequences follow that are quite negative, but also quite often financial consequences follow that are quite negative. So we've been kind of teaching people a set of practices that in practice are value destroying.

Those are fighting words, right? So I guess—

Sure, let's do it, yeah.

I wanna get into it. So what are some tactical things that you actually mean by that? And can you really give us examples of— we're gonna definitely talk about Costco. I know it's one of your favorite examples, and we're definitely gonna talk about that, but I would even talk about what do you mean the past? Were things so much better in the past? I think we sometimes idealize it.

We should not romanticize the past at all.

Right.

What we can do is learn from the past. The past, that's where our data is. That's where the aggregate information we can study is. And what's interesting to me is There's so many ways in today's economy where we found ways to make money without creating any value. It's like all over the place, right? We have private equity companies that take companies over, suck out the value about them, leaving only the burned-out husk behind. They make money, but the company is destroyed. How many people trade stocks? You know, so many companies that go public are destroyed by the public markets, but lots of the people involved make plenty of money from the transaction volume that this carnage causes on the way up and on the way down. You know, of course, we have managers that enrich themselves without regard to the mission. We have so many ways. And yet those of us who build things for a living share what I call the builder's intuition, which is that the right way to make money is to create more value than you capture, in Tim O'Reilly's famous phrase. What's interesting to me is that is actually ancient wisdom. You can read it in Adam Smith, you can read it in Aristotle, you can read it in Thomas Aquinas. This is an old idea that there are better and worse ways of making money, and yet we've kind of forgotten that in our economy. So am I saying when I quote Aristotle that we should go back to to the days of the Greek city-states? Like, no, obviously not, but we can learn something from the past. So here's a really, really big difference. Many of these ways that we can now make money, our grandparents and great-grandparents would've seen them as corruption. They wouldn't have been pleased about it. They would've seen them as morally dubious, and many of them would've been crimes. Like stock buybacks were effectively illegal until the 1980s. This is not ancient history. This is relatively recent. And in the 19th century in America, if you were to take a company and try to convert it from making something specific to just enriching its shareholders, that would have been a crime. They would have voided the corporate charter and given it the corporate death penalty. That's how seriously we used to take the idea that corporations exist to do something specific.

Well, that's very interesting because I would love to hear a specific example from the past and what you mean by that. And here's why I'm asking. I've just spent personally, God help me, 26 hours reading the biography of John Adams, right, in honor of our 250th anniversary.

Sure. Very, very thematic.

Yep. And going down the deep dive of Ken Burns, The Revolution and whatnot. And my insight from reading biography of John Adams is actually human, as in the words of Charlie Munger, it's not that history repeats, it's that human nature doesn't change. Right.

Exactly.

And my experience of reading about our forefathers, the idealism, the Revolutionary War, the idealism really was so much. Everyone was trying to undermine George Washington when he became president. People deserted from the army even though we thought all those people, right? They went through a lot of stuff that actually— and the freedom of the press was completely expunged because of different reasons. And so to be honest with you, what I found from that time in our history, which we really idealize, is that people were— wait for it— corruptible. But you're saying— that in one way or the other, and it might be that our systems have changed, because I don't think people have changed.

Maybe that's wrong. You just said good examples. Yeah, let's get into it. Because people are not incorruptible. Institutions can be incorruptible, because to be incorruptible means to be long-lived. That's ultimately what it is. People use the word corruption, of course it has a moral connotation, but to me this is much closer to its original definition, which is more like what we mean by corrosion today, a kind of a rust in the gears that causes the thing to collapse. To eat itself alive from the inside. That's really the thing we're trying to protect against. And I think people forget when they become leaders that organizations are by design to— except for political campaigns, pretty much all other organizations are designed to outlive you. So if this immortal being that you are working on loses control of it, and you're like Frankenstein and his monster, and it becomes really, really terrible. So there's nothing new under the sun from a human nature perspective. What has happened is we have changed the systems that surround these organizations. We have built this pressure I call financial gravity. The book is a bit about the physics of organizations, like the forces that act on them from the outside and from the inside that determine which surface-level things we're allowed to do. What can we do from a business model, strategy, culture, leadership perspective? And I think most leaders are blind to these forces, so they don't realize how much their own choices are constrained. So you mentioned Costco. Can I give the Costco story?

Yeah.

But let me give you the deep cut prehistory. Most people know the Costco story, don't know this part of the story.

Okay. Pull up a chair, everybody.

Go ahead. Yeah. Here's the deep cut. I'm gonna tell you now, sit, everyone gather around. Let me tell you the legend of Saul Price.

Yeah.

Okay. Saul Price in his day was very famous, but I feel like he's kind of passed out of most awareness now.

Is that true? Unless you listen to Founders Podcast.

Yes, exactly. Every once in a while he'll get the due that he deserves. And the Acquired guys did do a whole episode on Costco, which is also very good. But we start with Sol because he is really the father of modern retail. And the way you know how influential he was, it's not just Costco. If you read a biography of Sam Walton, you will learn that he named his company Walmart as an intentional tribute to Sol's company, FedMart. FedMart was the original discount retailer. Now I have a personal connection to the Sol story because I grew up in San Diego where all this drama took place. So right here, you're ready for some tea. Here it goes.

Yeah.

So Sol, before he became a, a retailer, was a lawyer. Where he was trained to treat the client as his fiduciary, which is a word that just means he had to put the client's interest before his own. It's a very old-fashioned word which today we don't use very often except when we're talking about fiduciary duties to investors, which I think is very telling. But Saul, when he became an entrepreneur, he was like, my fiduciary duty is to the customer. That's my client. So for example, one of my favorite Saul stories, his competitors hated him. We're always trying to drive him out of business because he would, he capped his own margins. He wouldn't mark an item up more than 14% no matter what. So he was always the low-price leader, except when his competitors would try to undercut him on price by doing the loss leader strategy. Whenever they would do this, Saul would take their Sunday circular ads and paste them up all over his own store with signs that said, "Don't buy this product from me. You can get it cheaper down the street." Okay, that's the kind of person he was. So customers trusted him. They loved shopping at FedMart. People would drive miles out of their way. So the company thrived. He started in the 1950s, all the way through to the 1970s. It went public. He became a very wealthy man. His investors made ungodly amounts of money. Everyone should have been very happy, but nobody was. So human nature being what it was, the investors always wanted more, faster growth. They wanted him to raise prices because he could get away with it. They wanted him to cut wages because he could get away with it. And Saul was a stubborn SOB, never would do it. So as a public company, he was constantly fighting with investors, so much so that he brought in new investors to buy out the old investors, to take a controlling interest, to try to take the company private. He thought if he had a new board of hand-selected people, they would understand his model better, but it didn't work because they are subject to the same financial gravity that he was. All these so-called best practices— high prices, low wages, growth at all costs— you know the drill. It goes by the name of what we call shareholder primacy. We see today. All this culminated in a big, big fight in the year 1975. Saul had been building FedMart for more than 20 years. I think it had $400 million in sales. Now, it was a huge company. And one day he came into work and he couldn't get into his office because they had changed the locks on the doors and he didn't work there anymore. Now, it's one of these sad stories. It happens all the time. In the book, I have 200 years of these stories of founders losing control, of companies being redirected, decapitated, you name it. But this story is interesting because it provides us a really clear A/B split test of business. Because what happened to FedMart? Well, the new investors installed their own leadership, took the company away from its historical ethos of trustworthiness, and within 7 years they had bankrupted it. It was completely liquidated by 1982. And what's so interesting is they did this destruction in the name of profit. Mm. Profitable. It was profoundly unprofitable. So why did we pursue it in the name of profit? Well, if you understand human nature, If you have ever wondered how come human beings have been telling Aesop's fable of the goose that laid the golden egg for like how many thousands of years have we been telling that story? Because this is an endemic part of human nature. We can't help ourselves, we do this kind of thing. But Saul was not done. This is what's so interesting to me about the story. He took 2 weeks off and then he was back at work. He literally, I love this, he leased the office upstairs from FedMart and was back at work with a new company he called Price Club. Everyone's expecting, where's Costco in the story? We'll get there. We're almost there. When I was a kid, there was no Costco. There was only Price Club. That was where we shopped, where my family shopped. It was a very successful company. He replicated the success of FedMart in a new company that reflected his ethos. And one of the other people that worked with him at FedMart was a guy named Jim Senegal. Jim had worked his way up from stock boy to executive. Saul was a big believer in promoting from within. And with Saul's blessing, he also left to start his own company. And a few years after that, Jim's company and Sol's company merged to form a company that they called Price-Costco, but we just call Costco today. Today, Costco is a $400 billion public company. And yet the mystery of this whole book is how come if this is inevitable, this corruption we've been talking about, if what happened to FedMart is inevitable, all these other companies that have been destroyed, how come it hasn't happened to Costco. Costco's been public for like 40 years now.

Yep.

The reason is because Costco combines the two elements we need. There's the short— this is the short version of the whole blueprint of this book. We need the ethos of Saul Price, and we need something else. We need the integrity of Costco. What does integrity mean? Structural integrity. I mentioned before, corruption is like corrosion in the joints. So if a bridge collapses because the metal bolts are all rusted,. We don't just say, well, gravity makes it impossible to make a strong bridge. No, we build the next bridge with stainless steel. And Costco has what I call a governance fortress. It is built out of stronger stuff than most companies. So when Wall Street and markets attack it, try to pressure it to abandon its ethos, it has the structural strength to resist.

Before you lay this out, I, I have a different question. I wanna talk a little bit about financial gravity, but then I want you to lay out the principles for Costco And then I want to move actually to Anthropic because I know that they're replicating in some way, shape, or form this. And so I want to hear kind of how you think about that. But before we get there, I am curious, if human nature doesn't change, why do you think Sol Price was not subject to the laws of financial gravity as a human being?

Ah, okay. So this is really interesting. Financial gravity, it affects us all, but not to the same extent as individuals as it does when we are in an organizational context. So have you ever been around someone who's meeting a celebrity for the first time or meeting a billionaire for the first time? It's like really gross. Like when we have really acute differences of status, people behave so weird. We've all seen that happen. But generally speaking, most of us in our regular life, we don't encounter celebrities that often unless you live in LA. We don't encounter billionaires that often even if you live here in San Francisco. Like it's not that common unless you have a very particular kind of job. The problem is that organizations receive far more influence because all the people that make it up are like a receiving antenna for this gravitational pressure. So individual people quite often have the integrity and strength to resist. So Saul is not unique in that way. Think about the life work of John Mackey, or, you know, anything of any principled leader you admire over the years who's been able to stay true to their mission. Obviously Yvon Chouinard at Patagonia is a very famous example, but there's plenty of people who are these outliers. The difficulty comes when we try to embody that ethos in an organization, and it's a double difficulty. First, it's very difficult to get the company to reflect the principle in the first place. Sol was a classic example of this principle I call "harder is easier," where the really great leaders, they go out of their way to make life difficult for themselves by having these immutable principles that they simply won't compromise. The late, great Clay Christensen once said that it's easier to have a principle 100% of the time than 98% of the time. Like if you're completely uncompromising about it, then you never have to have any meetings about it and you can focus everyone's energy on how are we gonna make it work. The principle I call figure it out after a famous quote from Jim Senegal. But then even if you manage to do this at an organizational level, now you have the problem that the more you do this, the more you have this ethos, the more trustworthy your company will be. Everyone says, ooh, isn't that good? Yeah, it is good. Trustworthiness is by far the most underrated asset in all of business today. But if you start stockpiling this incredibly valuable asset, people will try to steal it from you. That's— I just feel like such an obvious thing that I didn't understand for so many years in my career. I used to think success will give me power, will give me freedom. But for organizations, success is a liability because the more successful you are, the more valuable you are as a target. As I say in the book, the more gold in the goot, the more tempting it is to butcher it. So that's why I think we see this pattern over and over again, that very few founders have both the integrity personally, the ethos personally to do this. But then even when they do, they tend to be very naive about how the market will react to what they've created.

Yeah, that's so well said and so well explained. And I guess I just want to say it's kind of a new— it's a nuanced and sophisticated view of how these things go. So lay it out for us again, using Costco as an example. How Costco created this governance fortress.

Yeah. So there are many different mechanisms to create this structural integrity. Costco's is actually one of the simpler ones. Costco simply has a series of rules that prevent investors from messing with their governance. So Costco's board, if you look at what they say, what their job is, they see themselves as a bulwark against outside pressure, not as these agents of shareholders to do whatever they want, which is a good thing because every couple of years Wall Street decides that they're going to try to bring Costco to heel and stop them them from being different from other companies. This is something I think we really have to grapple with as leaders, that there is this pressure to conform in our financial system. If you want to study solidarity, don't study unions, study banks, investment banks. And these people understand solidarity, they understand class warfare far better than any trade union ever has. So for example, like, I quote a Wall Street analyst who's complaining about Costco, and they say Costco takes money that rightfully belongs to shareholders and instead invested in improving the customer experience. This is like a criticism of Costco because the conception of shareholder primacy is that customers and employees are a resource to be mined for the benefit of shareholders. Well, Costco's board doesn't see it that way. So for example, if you want to have— you want to change the governing bylaws at Costco, you have to get a supermajority shareholder vote. I think it's 66% or 75%. You have a really high threshold bar to pass an amendment. But critically, it's not percentage of people who show up to vote. It's percentage of all shareholders. And Costco has millions upon millions of retail shareholders who are people who love Costco. So they are actually the hardest audience in the world to convince to change. They had a recent shareholder proposal. They were being pressured over their DEI policies. Even at a time when DEI is crazy unpopular, Costco got 98% of shareholders voting in favor of defending their policy. And you can't convince me that 98% of Costco shoppers are woke. Okay. Like the defense was not even about DEI, but simply who should get to decide because Costco's so well-performing. Its shareholders understand that the management has done a good job. They've earned the right to decide even if shareholders disagree.

Actually, that's a very good point. I want to hear the rest you have to say, but like, that's a very good point because that whole DEI thing was— DEI has gotten unpopular and then Costco held up their standards around DEI. And then to your point, I'm positive that was a lot of people who didn't necessarily believe in DEI per se were supporting that. Absolutely.

98%. It had to be just by logic. It had to be.

Then the flywheel about that was, and then people thought better about Costco and then flocked more to Costco, right? So they've set up this trusted flywheel.

You got the flywheel is exactly the right thing. If you look at the difference between Target and Costco, who both were on opposite sides of this DEI controversy, like the commercial results for Costco since then, and this happens every couple years to Costco. I, in the book, I was spoiled for choice. How many of these ridiculous things— like in 2006, like 20 years ago, there was a big fight to change a different element of Costco's governance. They have what's called a classified board, which is an arcane thing about if an activist wants to throw out all your directors, how quickly can they do so? The classified board makes them have to do the activism over the course of multiple years. And a declassified board means that if they win the vote, one vote, one time, it's over. So anyway, Costco and Kroger were both being attacked by the same group. Of analysts and governance experts and whatever. And it's so funny because if you read the briefs, they'll say this practice by Costco leads to management entrenchment, which leads to poor performance. I'm like, Costco is one of the best performing stocks, like, in the last 40 years on the public markets. Poor performance? What are you talking about? Like, this has become an ideological conviction totally divorced from reality. In fact, so much so that since 2008— I love this stat— 2008, companies that have been rated to have bad governance have outperformed companies rated to have good governance. So what are we doing here? Like, where does this good governance come from anyway? So Kroger and Costco were both attacked by the same group. Costco, because it had this supermajority provision, said basically, "Fuck you." And Kroger was very eager to rush into that void, just like Target was like, "Ooh, we can capitalize on this trend." So Kroger did all the things. They went from a low governance rating to high governance rating, whereas Costco's always had a low governance rating. They don't care. So what's funny is that like from the moment of this change, the fortunes of the two companies have diverged in a really profound way. I even found an analyst that was comparing the two companies, not even writing about corporate governance or anything. And they just said since this date, Kroger's performance has been like Costco in reverse. So I always tell founders that if you're ever in a board meeting and someone says to you, I think we should do something because it's a best practice, and just in your mind you have to substitute Kroger practice.

Okay.

Yeah. This is whoever's saying best practice to you. This is someone who thinks you should be more like Kroger and less like Costco. Now, Kroger's not a bad company. I don't mean to pick on them. There's a regular company, but Costco is a great company. Wouldn't you rather be more like that? Surely.

So Eric, and again, I'm gonna play devil's advocate. There was a company that I coached inside of a large public company, and here it was my observation. The executives on the whole were very focused on the most important thing, which was me, me, me, and my territory. Just being super honest about it. Okay. Me and my territory, my this and that and the other.. And the CEO was extremely focused on me, me, me, right? Just to say that. And I experienced that it was confusing to me. The results kept getting worse. And I thought to myself, I wonder why the board doesn't step in. And I thought that to myself as the years went by. And indeed they were ultimately bought by private equity. And I just wanna say that management entrenchment in that case was real and true and actually quite absolutely value destroying.

Totally.

So I can understand why people are concerned about management entrenchment.

Management entrenchment is one of the problems. But right now we're kind of locked into this zero-sum struggle where companies are either investor controlled or they're founder controlled or entrenched control. Like those are basically the two options, neither of which is any good. But what's funny is that if you reconceive corporations, like, if you think about them like they were little polities, like ancient Greek city-states, right? You're like, okay, it's like a— it's a nation-state, it's a political entity. Like, what is an organization? Like, it is a— it is a particular idea about how power should be shared between human beings, right? Like, this is a— this is a little bubble of utopia, like a little spaceship that carries its own environment within it. Somebody thought we should be ruthless, or we should be kind, we should be egalitarian, or we should be hierarchical, or whatever. It has a certain idea embedded within it. And you ask yourself these governance ideas, if I took them over to the poli sci department and decided to study them over there, what would they say? And I was like, hey guys, do we have two possibilities for companies? You can either be emperor for life, or we're going to have a system where the tourists can vote. Those are the only two options.

Yeah.

My professor would be like, oh honey, you've had it, you've taken out a bad trip. That's all you can think of? Nothing else? We've been working on this problem for a couple hundred years now. We've got some pretty good ideas. Have you heard of checks and balances? Huh? Have you heard of the idea that the citizens should be the ones who vote? Have you heard about— it just— have you heard of any of this stuff? Do you've heard that faction can balance faction? Have you read the Federalist Papers? Like, for some reason, these ideas have not penetrated into business. You can decide why. So yeah, I don't think we should have permanent emperors either. In fact, being the emperor is psychologically very destabilizing to the emperor. That's part of the problem. Like, if you study— everyone's obsessed with the Roman Empire, but like, did anyone pay attention? Why did it collapse? Ultimately, what we call hubris syndrome in the psychology research is what happens to you if you have this power. So in the book, I argue for what I call mission-controlled companies that are able to blend a proper role and appreciation for investors and outside feedback with a proper amount of autonomy and integrity on the part of the management structure. And there are lots of ways to achieve it. That's what's so cool to me studying I was really surprised because I was taught like everybody else that we have already worked out the only and best way to make a company, which already you can feel the contradiction because how can it be the best if it's the only? You gotta be a Delaware C-Corp, venture-backed, blah, blah, blah, the shareholder primacy, independent directors. I bought that stuff hook, line, and sinker. I was told it was the best by very smart people. And what surprised me is not only is it not the best, we have great research on this now, so we know that it's not the best by a lot. There are so many other forms that I never heard about when I was a founder, literally never heard of. And as I've become like a collector of these things, you know, some people collect baseball cards, but I've been collecting alternative structures for companies. There's so many, and they all reflect different values, different priorities, different ideas of what it means to be a human organization. I just think that's really beautiful, and I think that diversity of forms is something that's been lost in our age of monoculture that I'm excited to bring back.

Oh my gosh, that's so philosophical. I love it. I love it so much. So that brings us to Anthropic, because I know you've been involved with Anthropic and you've been advising them. And so paint the picture for us about what they're doing to try to handle what you're talking about and kind of force—

Yeah, look, Anthropic is under more pressure than any company in human history, as far as I can tell. First of all, to be super clear, I played only a very bit part, and I take no credit for their incredible success. Okay, the— all the credit is to Dario and Daniela. They have built an amazing company. So much so that people accuse it of being cult-like because the level of belief and intensity and alignment internally is so high. Now, people say cult-like, they mean it as a criticism, but those same people will be like, man, Anthropic has these advantages, like it has superior inference costs, more efficient AI systems, it's more focused, has more focus than these other companies, it's more this, but they have better product velocity. There's all these things that are positive over there. And for every single one of them, if you say, well, why do they have better product velocity? You're like, well, because they follow Lean Startup. And they're so— but why? Well, because they have better talent. But why? Because that's where the best people want to work. But why? Well, they think if they go work there, they're going to be the good guys. But why do they think that? Well, because everyone's so aligned. But why hasn't financial gravity ruined it? Oh, because there's a structure that protects it. So you always come back to ethos and integrity wherever you start. Why the superior inference cost? It's the same argument. Same for every one of the advantages. Now, what I really like about Anthropic— and look, are they perfect? No, for the record, they are not perfect. I can criticize them too. But what I think is really beautiful about what they've done is they took their own mission very seriously from the beginning. They tried really hard to make sure that everybody involved was a true believer about the need for AI safety and the need for this transformative technology to benefit all humanity. And instead of just letting that be like the frosting on the outside, that they just told everybody that while they just do the shareholder primacy thing on the inside, they really did the structural difference. So they have— they're a public benefit corp. Their legal corporate mission is not just to make money, but to do this corporate— this public benefit. They have something called the Long-Term Benefit Trust, which is like a two-entity scheme where you have an outside set of trustees who have the ability to appoint directors to the for-profit board. This is a very important, very well-studied structure that they— one of the first, like, modern tech companies to really embrace. And it's really the two different boards that gives it that checks and balances character, which is really powerful. So they've done a bunch of things right that I think is part of why they've been able to maintain their integrity despite being bullied and attacked by both the largest companies on Earth and the largest nation states on Earth. Like, it's been a pretty rough road, yet somehow they've been able to maintain their integrity so far.

So you would list that out as— I want to dive into the border in a second— the structure of that board, the two the two-part board, also probably clarity of mission. And then it sounds like especially the founding team all being focused on kind of safety and serving humanity. Is that— are those the elements that you would say are the most important for their success in terms of governance?

You got it exactly right. Basically, like in the lingo of corporate governance, it's purpose, coherence, integrity.

And tell us a little bit more about that two-part board. And then I want to ask you more about how Anthropic is faring now, because actually there's more shareholders in the loop. Right. But let's— why?

Quite a few. Quite a few. This is the hottest stock on the planet.

It's unreal. I know. I know.

You won't believe how many people I tried to get them into Anthropic when it was worth almost nothing are now calling me, begging me to get them in at $1 trillion valuation. I'm like, well, you could have just listened to me in the first place. You know, not a single person has said they're sorry.

You could have called me, Eric.

You know, if I honestly, if I had realized how big it was going to be, then like, yeah, I would have done a lot of things differently.

That makes sense. Okay, so they came to you. Well, actually, that's a really interesting point. They came to you, a tiny little company.

Yeah.

They had obviously broken off from OpenAI.

Yeah, they had. I met them when they had just left.

Okay. OpenAI was probably at that time a big deal, but like small B, right? Probably not as big a deal as it is now.

Is that correct? No, no. People thought, people thought this whole thing was a really petty internecine feud between AI safety researchers because this is before ChatGPT, like, Right. Yeah. Nope. Like people did not think this was going to be a big deal except inside a very narrow slice of the world that happened to include a bunch of friends of mine who had suggested that they talk. I mean, one of their earliest investors was a good friend of mine who said, look, you got to go talk to Eric about this governance structure. So like, I was very lucky, honestly, just to get to meet them and to get to be on the inside of this thing from a very early age. In the first 2 years of the company's life, this required a lot of work to review every term sheet and make sure that this thing was properly defended from investors. And in particular, They and their investors both, nobody wanted to do founder control. 'Cause part of their complaint about what had happened in OpenAI was simply that there had been a control issue. So they wanted to do something different. So they weren't gonna do dual class shares. They weren't gonna be emperor for life. So it's like, well, but then what are we gonna do? How can we still make promises that people can believe that no matter how much money this company's worth, it will still have integrity to this mission? So that really was the origin of what eventually became what they call the Long-Term Benefit Trust, which is technically a perpetual purpose trust under Delaware law. That's like a specific kind of thing you can make. And I don't want to get too much into the legalities here. There are quite a few of these structures that have this two or three-tiered system where you have a board that checks another board or holds another board accountable. And the research shows that those structures are a lot more stable over the long term than basically unicameral, right? Like single power structure, single point of failure organizations.

So two things. I experience the notion of checks and balances as getting in the way of moving fast. And I also think, and then, so you have to fill in the blanks here. OpenAI also had a weird board structure, right? Didn't seem to—

being weird. They said they laughed at Galileo, they laughed at Newton, but they also laughed at Bozo the Clown. Being weird is not good in itself. It's just that he currently perceives some of the good things as weird. So no, OpenAI never had a two-tiered structure, even though they had this weird for-profit nonprofit hybrid thing. And if you had to choose the weird OpenAI weird hybrid thing or the Anthropic one, you absolutely want to pick the Anthropic one. Like, 7 days of the week.

I mean, just— Take nothing else away.

Just pick that one. And listen, you shouldn't draw too much lessons from OpenAI because that story is so bizarre in so many ways and so unusual because it involves these big personality rich people. You got Elon versus Sam and you got whatever, and you got these dramas and clashes and whatever. But let me go back to the first thing you said, which is, yeah, checks and balances versus speed. This is something that is very commonly misunderstood, but like, I am a big advocate for corporate speed in decision-making.

Okay?

Like, speed is very important to me, and that's obviously been a key part of my work. And I think people didn't take away the right lesson from Lean Startup that I intended, which I take responsibility for. I wish if I could go back and do it again, I would've been more clear on this point. The speed that Lean Startup enables is made possible by a grant from, a gift from— the, the gift is from these immutable principles. That make it possible. So you have to have prior commitments to certain things that are not going fast in order to go fast.

Let's take a commercial break and talk about Lean Startup because it's not clear that everyone knows. So can you summarize the immutable principles and the key insights around Lean Startup and why it became such a phenom?

Sure. Well, you never really know why, but I'll do my best. The lean and lean, and Lean Startup comes from lean manufacturing. So I was trying to find a conceptual framework to answer this really difficult question, which is If most modern management techniques are based on planning and forecasting, what do we do in entrepreneurship when we have no idea what's going to happen in the future? So most business plans, in my experience as an entrepreneur, were like fiction writing. We were making these predictions about the future, but we had no idea if they were going to happen. And I remember once being in a startup, we had this incredible business plan with this beautiful hockey stick-shaped curve in the back, you know, and it said after 6 months after launch, we would have almost no customers and almost no revenue. And we were like, this plan is genius. Look, it's month 5 and we've got no customers. That's like the plan foretold. The hockey must be about to commence. But of course we stayed on the long flat part indefinitely, right? So how do we prevent that from happening? So the core insight is to take the scientific method, which, you know, has been around for a little while. Seems like it's worked out pretty well here to stay maybe. So let's apply that to what we call the leap of faith assumptions, the hypotheses that drive the business. So by doing that, we can be more systematic in our business decision-making. We can build business experiments that are called minimum viable products, or MVPs. And when a series of those experiments shows that one of our assumptions is wrong, instead of the company going out of business, instead we do a pivot, a change in strategy without a change in vision. And this mechanism, we have a kind of fundamental cycle time by which we do this over and over again. We call that the build, measure, learn feedback loop. So one way to think about it is like borrowing ideas from lean manufacturing, from customer development, from DevOps, from Agile, and all over the business, from design thinking, putting them in a blender and saying, here's a more scientific, more humane, more long-term orientation, like, way to do innovation in a business context.

I love it. And so you're, you're saying basically, you're like, don't tell me I don't like fast. I invented Lean Startup. I like fast. And so it's like fast iterations And then talk about how checks and balances you're talking about don't get in the way of that, of the right kind of speed.

Yeah.

Yeah.

So this requires, I, I think a deeper understanding of like, how are corporate decisions actually made? And for people who have never been on the inside of like a super growth company or a big co— like this could be confusing. So if you actually stand for something in a company, whether that's speed or scientific decision making or whatever, you will have this problem. You will live your life under siege. From people wielding spreadsheets, okay? And you're like, look, I think we should keep our customers alive. And someone's like, but I have a spreadsheet here that says there's an ROI, the ROI of like using a slightly more carcinogenic ingredient. We could, as long as we get away with it, we could like save 3 cents on the bill of materials and no one will ever know, right? Like those kinds of trade-off decisions actually are like sand in the gears. To do anything great, you have to have millions of these meetings. The whole point of Lean Startup was to say, look, we're going to use scientific decision-making. But just making that statement means we have to be prepared to defend scientific decision-making itself from someone saying, look, how about this time we just be a little bit deceptive? Why bother testing and experimenting when we can make the thing addictive? Why bother being transparent and disclosing to our customers when we can get away with cheating them? That kind of constant ROI-based thinking, it just like, it's It's exhausting, it wastes a lot of time, and actually makes it difficult to get anything done. Similarly, the focus benefit. So if we are clear on what our purpose is, then we don't have to have 100 meetings cascading down the exact instructions for everybody to do. We can just say, listen, this is the purpose, this is your goal, run and go. I was just on Lenny's podcast, and he was talking about, he's been going this thing where he's going and interviewing all the product managers who work at Anthropic, who are working on Claude code and all the key people. And he was like, this is the most Lean Startup-aligned organization ever, even though they don't use that language publicly because it's not— you're not designed to be used publicly. Like, minimum viable product is an internal term of art. It doesn't— it's not something you tell to customers, but they have this extremely rapid iteration. Why? Why is it so fast? It's because everyone there understands what the company stands for. So there's no question about whether the company would want you to do the right thing if you had the opportunity to do so. You don't have to waste time getting a meeting with a manager to get their permission to do whatever. This is actually an idea that goes back to Colonel John Boyd and what's called the OODA loop in maneuver warfare, that when you're in a competitive situation, the speed with which you can observe, orient, decide, and act— it was a special look— that the speed with which you can process information is your most vital resource. It's actually, in a war context, more valuable than armaments, munition, training, anything. It's like the most valuable thing is how fast can you process what's happening. And so when we talk about checks and balances, an aligned structure creates a container within which speed is very, very, very fast. And occasionally we will have to break out of the container to consider a big picture question. Like, think about, you know, the recent intervention from the Pentagon trying to destroy Anthropic. I'm sure that required them to like gather everybody to be like, no, this, this requires a meeting because we're in exceptional uncharted territory here. But most of the time, most decisions can be made relatively autonomously because everyone clearly understands the company stands for, and this clarity aligns with what's in their heart. I think this is overlooked in a lot of strategy contexts where we teach people that leadership is about clear communication, which is true. But if the thing you're communicating makes no sense to people, it doesn't matter how clearly you do it. And if the thing is malign, then the more clarity you bring to it, the worse it will be because people will be in revolt. So a lot of corporate communication, like best practices, are just institutionalized lying. Because the company does not want to admit what is really going on. Leaving the moral consequences of this aside, just the efficiency loss of all this bullshit actually makes it hard to get anything done. Ask your friend who's a middle manager, they'll tell you.

Wow, Eric, you just said so many things. And what I'm really processing is how many people implement Lean Startup and especially MVP without doing all the hard work you just talked about in terms of purpose. And especially, I mean, there's a lot there, but like especially purpose and alignment. And purpose and alignment is a— it's almost like the shorthand for purpose and alignment is like what's in your heart. And finding people also who are aligned with what's in your heart and doing the hard work of actually finding the right partners and the right employees.

Very difficult. I've messed that up so many times.

So that everybody can like move together.

So many times.

Yeah. And that's so, that's like the, like to do, what is it? Hard choices, easy life. Easy choices, hard life. Same is true here.

Amen. Yeah. There's a whole section of the book called Harder Is Easier.

Yeah.

I've observed it in the great leaders, the people who are way better at this than me, by the way. I'm not, I find this very difficult because I'm conflict averse. I don't like to get into fights with people. Like, I don't wanna have a big brouhaha about it. I want us to all just get along, right? The really great leaders just don't mind that their principles make life more difficult for everybody. In fact, they relish it. I used to think it's 'cause they were jerks. I'm like, why are you creating this difficulty for people? Why do you relish the difficulty? It's not because they like the pain, but rather the difficulty gives them an opportunity to teach the principle. Because when I say, "I care about quality," you don't really know if I'm serious about it. The only way you know I'm serious about it is if there's actually a trade-off. "Hey, we have a quality issue and it's gonna cost us a bunch of money to fix it, but we don't have to. You gonna pay the money anyway?" When I say, "Yes, there's no question about it. We're doing the right thing," then you're like, "Oh, I guess he's serious." but also these difficulties yield breakthroughs. There's all these stories in the book of times when someone did something really difficult, like by pushing on something difficult. Like I tell this story about Cloudflare, and I won't tell the whole story now unless you want, but they did this thing that was really like incredible extra difficulty required to make a certain one of their systems more efficient in order so they could give it away for free.

Yeah.

Now they could have just pocketed the savings because they just— they made— they had the product that made them a bunch of money and they made it cheaper to operate. They could just increase their own margins. But the really great leaders, most of them know that margin is actually a source of liability. So they weren't that excited about that. They wanted to give it away for free. And what's so funny about this story, of course, Cloudflare today is a $70 billion company. So this, giving this thing away for free turned out to be very profitable. But I was talking to Matthew Prince about it the other day, and he's the founder.

He's the founder and CEO.

He was like, this story is like 14 years old now. He was like, I realized the other day that one of the systems we invented is still the technical state of the art in the industry because nobody has ever been able to do it better than we did at that time. And he was just like, oh, that's just— he was mentioning that by the way. And I'm like, yeah, that makes perfect sense to me. No one else would be crazy enough to feel like they need to figure it out. So you get these breakthroughs that you wouldn't otherwise get because you're breaking people out of their either-or compromise thinking and saying, no, we have to find a both-and solution. And if you've read any of the books like, you know, Good to Great or Built to Last, like the both-and That's such a critical stimulus to human creativity, and yet most businesses, when we encounter a constraint, we just compromise around it to avoid having to have the hard conversation of what do we really stand for, what is right here.

Yeah, that's very powerful. I mean, also, constraints unlock innovation, which we see over and over and over again.

Over and over and over again, yeah.

Over and over again. If that sort of making the hard decision is so meaningful, and if even, let's say, being difficult in this way— by the way, there are a lot of difficult people, I love it.

Someone's difficult doesn't mean they're doing this principle in the same way that they laughed at Bozo the Clown. Don't get confused. I—

right, don't get confused. And when you, when you clip this part, like, oh, Eric, we said I can be difficult, do not take it that way, right?

Yes, you can be principled. Be principled.

Better to say principle. Eric, if that's true, and you know that's true, and that's in your heart, to use your word, why haven't you built the skill to be principled in that difficult way?

Well, I appreciate you asking. No, that's something that I have really consciously worked on a lot in my own leadership, and I've gotten a lot better at it because I used to be like, I just want everyone to like treat each other with good faith and like figure out the right solution. Like, I— every time I would be called on as a manager to intervene to like solve some dispute between people who are squabbling, I felt like, gosh, this is such a failure that like I would be ashamed about it. And then I would— so it's taken me a long time to just be like, no, we We have certain principles that are simply non-negotiable. And if someone violates the principle, sorry, this is not the place for you. And you have to be very clear about what those principles are, but also very parsimonious in it. You have to choose. Not everything can be your principle. You can't stand for everything. You gotta pick the select things. Now, the other thing that I wish someone had told me earlier is that this works a lot better if the principles you're choosing are also aligned with human flourishing, because now we're tapping into that deep magnetic alignment you get when people feel like they are contributing to others flourishing, like they're being of service to the world in a way that feels very meaningful. That is just such a great feeling for most people.

Wow. So can you give us an example of you personally, how you sort of, you know, when you turned the corner and you had difficult conversations or wade into conflict or even like let someone go where it was maybe hard for you, but you did that? What words did you use? How did you talk to yourself about that? My last few questions.

Go ahead. Sure. Listen, I have had a lot of unfortunate experience with this because I tried to build something called the Long-Term Stock Exchange that was vigorously tremendously opposed. So I had a lot of moments where I was like, okay, gotta stand for something or not. And I will say the biggest thing for me was, I tell the story in the book, there was a moment when people much bigger and more powerful than us decided that they wanted us to go out of business. And they brought pressure to bear, gravitational pressure, not just on us, but all our partners. And then they just came to me with a classic offer you can't refuse. In the middle of the night, I was like, hey, if you will capitulate here, you can have everything you've ever wanted. You just have to, you know, just change your principles a little bit to align with our principles, and then all this difficulty you're having can be made to go away.

Yeah.

Remember gathering my team and being like, look, what are we gonna do here? Like, we could compromise. If we don't compromise, we're probably going outta business. And if we do compromise, like we'll have, it'll be like a resume achievement. We'll have gotten a new stock exchange approved. That's pretty cool. No one will care that we had to compromise this principle. Like no one will even know, but we'll know. What do we do? And I remember that was one of the hardest decisions I ever had to make. I did it with my team, you know, we, we decided that we would say no, we wouldn't compromise, and we'd accept whatever the consequences of that turned out to be. Now, it turned out we didn't go out of business, and the company's still doing great to this day, but we did not know that at the time we made the choice. Earlier in my life, that would have been impossible for me. I would have been the one, first one, saying we have to give in, you know, discretion is the better part of valor, we can always come back and fix it later. But now I'm so glad that I've learned. And it wasn't so much that I had gotten stronger, because like I talk about in the book, I was literally curled up in the bathroom floor that night, like barely functional because I was so upset. What happened was we had built the company in a structurally strong way, and we had committed ourselves to these principles like in a deeper way. It wasn't just about me and my leadership, it was about the integrity of the whole. And though we had conceived of that project mostly to help other companies because we wanted to be a place where those kinds of companies would list, it wound up saving us first.

Wow, that's so powerful. I think it goes, I think it goes to show for everybody the power of growth and the utility, the practical value of growth.

That's how I think so. I think it is very, very useful.

Yeah. Eric, just a couple more questions. What do you wish you had known earlier on your journey?

Well, I mentioned before the idea that success is a liability. Gosh, I wish someone had explained that to me. That was, that was a really big one. And I wish that I had realized the extent to which so many of the companies, especially in the tech sector, have principles that are just paper thin. And that when, as soon as it was in their advantage to abandon everything they said they stood for, they would leap at the opportunity. That I should have been able to foresee that, but it took me by surprise. It's been very dispiriting.

Yeah, I can imagine. What advice do you have for other founders as they embark on their journeys to grow into leaders?

Well, The Lean Startup is full of it. I would think with the new book, I especially think people need to be much less naive. Believe about what's coming for you and think much earlier about how to build the kind of company you truly want to have, the kind of company that, like, if this works, you want your grandkids to be proud to be related to you, you know, and not, like, embarrassed that that's how the family fortune was made. And you have a choice. Simple choices made now will have ramifications with you for the rest of your corporate life, so may as well get it right.

I love it. So powerful. Eric, thank you so much for joining me, and thank you so much for all your contributions to the startup ecosystem. As you know, they've been very meaningful.

Thank you. I really, I appreciate you making time and for giving people a chance to learn about the book. It is Incorruptible.

You see, Incorruptible.

Here it is. Just came back from the printer. You can see the shiny cover and everything by my friend Marcus Gosling.

Yeah.

Just appreciate everybody who has been supportive of this in all my work, but especially this new one, helping to, to put it into the hands of people that need it. So if you have a friend who you know this will benefit, get 'em a copy. You'll be doing me a huge favor. Thank you.

It's a very meaningful book and an important book and a, and a, and a good read actually. Lots of stories in the—

Oh, good. I'm glad you liked it. Thank you. Thank you. Thank you for saying that. Appreciate it.

Thanks for listening to From Startup to Grownup. If you like what you heard, give it a review on Apple Podcasts so other people can find it. And if you know of a founder or someone else who is meant to be on this podcast, drop me a line through my website, alisacohn.com.