#2307 Eric Ries: Why Anthropic Won and How To Build Incurruptible companies

0:00I met the Anthropic team when they first left OpenAI. They were really committed to the idea that this new generative AI should be used and commercialized for the benefit of all humanity. The irony of this whole situation is one of their early backers was FTX. Vibe coding era is going to be remembered for a Chernobyl style disaster is my prediction. The transformer technology that is the basis of all modern LLMs was invented at Google. If you look at the co-authors of that paper, they all, every single one had to leave. and do it elsewhere. I know, when someone sends me an AI generated thing, I always know it instantly.

0:35It's always garbage. Too many people are excited about using AI to replace human creativity instead of augmenting it. Eric Ries, who helped so many entrepreneurs build phenomenally successful businesses based on his lean startup philosophy, is back with a new book called Incorruptible, where he talks about why some companies succeed, do well over the longterm, and others just keep dwindling. And that's what we're here to talk about today, specifically related to AI startups to see what's working, what's not, and also what he's building himself. Let's get into it. Presented by Zapier, the AI automation company.

1:09What's Anthropik's mission and how have they been able to do well because of it? I met the Anthropik team when they first left OpenAI. And they left over a dispute with OpenAI over exactly how to pursue the question of AI safety. So they were really committed to the idea that this new generative AI should be used and commercialized for the benefit of all humanity. And they were very worried about certain specific safety scenarios that at the time seemed like far out science fiction. I remember being like, whoa, are we really imminent? Is this imminent or is this like a law? And they were like, no, man, it's imminent.

1:43We need to be working on this right now. So they were farsighted in caring about that stuff. And again, everyone wants to be like, okay, AI safety is now a super polarized debate. And of course, I have my own opinions about AI safety. I'm happy to talk about that. But I would ask for the purpose of this conversation, like put that aside for a second. They were committed to it. So my position with them was like, let me help you encode these commitments into your company structure. Because that's really what they were worried about. It's like, well, we're going to raise all this money. And I remember they first were like, we think the solution would be to raise money from really, really values aligned people, which they did.

2:17They were in a position to really curate their initial cap table. They were very selective about who they took money from. But I remember we had this conversation about, but what if you're wrong? What if somebody who seemed really values aligned turns out not to be? And what if investors who are aligned naturally, when the amount of money we're talking about, because they were talking about AGI before that was in the news every single day. We're talking about technology that could be worth trillions of dollars, but maybe hundreds of trillions of dollars. And I was like, are you really so confident that these people will be able to maintain their principles even in the face of this overwhelming temptation?

2:50And, you know, they were they took it really seriously. OK, we need to figure out how we're going to build the structure that is resilient, even if even if someone tries to betray the values, even if someone turns out to be on a line. Now, the irony of this whole situation is one of their early backers was FTX. So they thought those guys were super aligned because of their supposed commitment to effective altruism. And it actually turned out to be a total disaster when that company imploded. Huge chunks of Anthropic stock were sold at auction to any investor who wanted them, including people who are super, super un-online.

3:22So it actually turned out to be extremely important. And we can talk about the structural stuff, the elements of building a company that can be truly strong. Did you help them do that? Did you help them actually codify? You did. Yeah, but I mean I don't want to take credit for what they've accomplished. I played a very bit part in this whole story. So you helped them codify their beliefs. They then said, we only want investors who align with what we stand for. They ended up with an investor who said he did, Sam Bankman-Fried, very famously. Turns out he didn't. And then random people were able to buy his shares.

3:57Why were they still able to maintain their – I mean, why were they able to still continue standing for what they meant, for what they did before? Yeah, so there's two components to it. I would think of the inner part of it and the outer part of it. And I know, again, it's so natural that now people see Anthropic as this mega company. I totally get it. And so it can seem inaccessible. But remember, to me, they're just a couple guys in a garage. Like I met them when they were like, it was not a big deal except to people who are very, very in the know about this inside baseball stuff related to AI.

4:29And they did. They made the critical commitments then before billions and hundreds of billions of dollars were at stake, which is a really important part of it. So the inner part of it is really about alignment, coherence. Can we get everyone in the organization really committed to some set of principles or some kind of thing, some kind of vision? And then the second part is what I call integrity, which is not some vague thing. I know people hear these languages like they're worried we're going to talk about morality. What I mean is more like structural integrity, the ability to make and keep promises and the ability to be trusted by employees, by customers, by partners, and even by investors.

5:04So Anthropic structure is not your typical investors run the show, what's called shareholder primacy set of practices. Their company is governed by something called the long-term benefit trust, which is an outside set of trustees that are not like a vague advisory board or like remember the trust and safety council that Facebook famously had and totally ignored. The LTBT has the actual power to appoint members of the directors of the board of the for-profit entity of Anthropic. So they have real effectively veto power over things Anthropic does. And their job is to act as guardians. They call them mission guardians to make sure that Anthropic never deviates from that mission.

5:44And so that's why when the government asked for carte blanche over their technology, they said, we can't. This just goes against what we believe. Yeah. And, you know, it's people now that now we know how it turned out. Obviously, look, the district district court or the district court just gave a preliminary injunction in which they absolutely demolished the government's case, same as was a case of overreach. And not only that, but like they they've reaped already, even though they gave up 200 million, 200 million dollar contract, even for a big company like a vent. It's actually really a lot of money.

6:17And you can tell because our competitors all race to go get this contract as soon as they gave it up. But like Claude went to number one the next day. Like that was a huge boost. I saw a video. Some friend of mine sent me a video. People had come out to chalk up the sidewalk outside of their headquarters thanking them for doing this. And believe me, like that is not typical for tech companies in San Francisco right now. If you're being chalked up, it is not usually in a positive way. Like when you do the right thing, it causes the positive ripples sometimes which were down to your commercial advantage.

6:46But the key to the whole thing is you have to be willing to do what's right whether or not you know that you're going to be rewarded for it. You do the right thing for its own sake and you trust that the chips will fall where they may. And I think that kind of strength is only made possible if you're not always looking over your shoulder like, oh, I'm worried I could be fired. Oh, I'm worried investors might not like it. I'm worried about the next activist campaign or whatever. So I think that that courageous stand that they took, again, leaving aside the politics of it, just looking at it from a pure business perspective, is an example of a very savvy business strategy that sees trustworthiness as an asset, like a business asset that can be intentionally cultivated and acquired.

7:27And in fact, I write in the book, I think it's one of the most underrated assets in the world today. But are they doing well because of that or are they doing well because Cloud Code is good because they kept shipping Cloud Cowork and so many other tools? Honestly, does that even really matter? Isn't it just is the product good at the best price possible? And the rest is just we like you. Yes, you can say that it's because they have the best product. But the question you got to ask I think is a deeper question. Why do they have their best product? You look at who chose to work for them. Like part of the reason they have such good products is because they've been able to attract such incredible talent.

8:03Why? And especially at the beginning, they've been the – they were behind, widely perceived by a lot of people as being behind OpenAI for a really long time. And even in some cases, I've heard people say that they've been behind Google, behind Grock, behind whoever. They were not the odds-on favorite to win this race. And part of the reason they've been able to do such a good job is simply because they've been able to attract capital and employees. But then the other question you're going to ask is they're ahead in enterprise. Why? People always say, well, they have the best product. But is it your experience that enterprise procurement departments have a history of being really able to meritocratically judge the best product and it's so reliable.

8:43We overlook sometimes the facts that are staring us right in the face. I think it's extremely obvious if you look at the data that's been published so far, that part of the reason they have an enterprise advantage is because they have a trust advantage. If you are worried about the liability of adopting a platform like that, it matters who your vendor is. And the ones that have a kind of cowboy kamikaze ethos, that's very scary for enterprise companies. But let me give you let me give you a counter example from your book. You talk about Google. Yeah, this is the real. Yeah, this is not my like personal judgment of Google.

9:14And listen, Google is a great company that that's not again, it's not about absolute right, absolute wrong. I made a study of people who have blogged about what it was like to work at Google, who had been there for 10 years or more and who left. So there's like there's so many of these blog posts out there. Google people are very prolific in their blog posts after they leave. So it's a unique only insofar as we have this beautiful glimpse into what it was like And a very recurring theme of those blog posts is people talk about this creeping mediocrity and kind of loss of something that made the company special.

9:45They talk about it like a grief, like something precious was lost, and they can't figure out where it went. Like they don't say Google's leadership sucks. They don't say Google's a bad company. They said Google had great culture, great leadership, great intentions. And yet despite all of those advantages, plus Larry and Sergey have dual class shares, remember, despite all those advantages, this thing was lost. one of the former employees put it this way. He said, over my tenure, and he'd been there like 13 years, decisions went from being made for the benefit of the customer to being made for the benefit of Google to being made for the benefit of whoever's making the decision.

10:19So yes, Google's still around. They're doing fine. But over time, this kind of corruption is corrosive to their ability to create value. And of course, we're talking about Anthropic and opening on these guys. Don't forget that the transformer technology that is the basis of all modern LLMs was invented at Google. And if you look at the co-authors of that paper, it has a ton of co-authors, not a single one commercialized the transformer at Google. They all, every single one had to leave and do it elsewhere. So this is not just a matter of morality or virtue signaling. It has real tangible business consequences.

10:54The reason I was going to use them is that Gemini is not a bad product. It's a good product. Notebook LM is something we use on a regular basis. I could keep on going through all their products that are good. Oh, yeah. Listen, I use Google products every day. I guess Google's a great company. Now, you have to ask the counterfactuals. Since we're saying, oh, it doesn't matter, we have to ask, what would Google be today if they had been the leaders in this category instead of allowing their own employees to leave and do it elsewhere? So how much was that head start that they gave to the rest of the industry?

11:26How much was that head start worth. Now, I think if you do the math, that's a bigger corporate debacle from a value creation, value loss perspective than Kodak's inability to commercialize a digital camera. Just because the opportunity cost of that is so immense, we're talking about companies with hundreds of billions of dollars of valuation that were created by ex-Google people that could have been created at Google, but had to be created elsewhere. So again, we can't know for sure. It's hypothetical. You can never know with a hypothetical. But the good news is the book is not about hypotheticals.

11:57We have so many examples, practically in every industry, of companies that have bucked this trend. And yet when you study those companies, you'll notice they all pretty much, every single one, violate many of today's supposed best practices about how companies are supposed to be run, created, and governed. And I basically think today's best practices are a value-destroying mess. And part of my goal right in the book is to replace them with better best practices. So we mentioned Costco. Costco was repeatedly attacked over its decades of life by activist campaigns that have accused them of having bad governance.

12:32But you also have companies like Patagonia and Vanguard and Nova Nordisk and Ikea and John Lewis Partnership in the UK. These companies that a lot of them have been around for 40, 50, 60, 80, 100 years and are still basically true to the ethos that remained, even though we're living at a time when average corporate lifetimes are collapsing. So what else? What else goes into this? So we talk about an organization that does the right thing. We're talking about an organization whose character is consistent and aligned with human flourishing. So a big part of the book is how do you create such a thing?

13:01How do you instill that deep down into the bones of a company? And what you have to realize is that for the vast majority of the history of time, there have been joint stock corporations. It was seen as completely obvious that corporations should be incorporated to do a specific thing. And in fact, in the 19th century, to convert a company from a mission of doing any specific thing to just I'm just going to enrich my shareholders would have been seen as a crime and your corporate charter would be voided. Like this is not this is not actually what is the foundation of capitalism. So anyway, because of the shareholder primacy thing, Federal Brides basically says anyone who's rich enough can take over any company they want at any time.

13:37And most founders are hopelessly naive about this point. They think that they're in control of the company and they're always so betrayed when they find out that their own founding documents basically say that they can be removed at any time. And they don't realize that that's a choice. But rule by the richest would be bad enough. This is actually kind of more like rule by whoever can borrow the most money. You don't actually have to be that rich to take over a company if banks will loan you the money. And we've seen lots of examples in recent years of people borrowing a lot of money, taking over a company and doing whatever they want with it.

14:10And, you know, there are people who defend that on the basis of free market, free markets, and you should be allowed to do any crazy thing that you want. OK, this is not a book about policy and politics. To me, the question is we who build organizations of all sizes, do we think that's a good idea? Do we think that's actually value creating? And almost every person I know who works for a living, who builds things for a living has an intuitive sense that that cannot be right. And I think we have to adjust our formal categories, our formal definitions, to bring them more in line with this intuitive understanding that all builders share.

14:44All right. Can I talk about minimum viable product for a moment? Sure. Yeah. OK. It was the most exciting idea in the startup world for a long time because you basically brought us down from trying to build too much to simple. The thing that I wonder, though, Eric, is we talked about Claude. Is Claude going to take over every little MVP? Is the idea of an MVP still possible? Will it still be possible a year from now to be able to do that? Or are we going to now every turn be competing with Claude Code and OpenAI and customers who are expecting perfection because that's what they're getting already?

15:19Well, I have a real contrarian view here. I know this is not the hotness at this exact moment, but I think too many people are excited about using AI to replace human creativity instead of augmenting it. And I don't think that's going to work very well. Like this, the vibe coding era is going to be remembered for a Chernobyl style disaster is my prediction. People are Vibe coding software that they do not understand. And it's only a matter of time with all the hype that's being poured into this right now. It is only a matter of time before somebody deploys a Vibe coded solution to a mission critical system that not only wasn't reviewed, cannot be reviewed because nobody there's no human being who could possibly understand what the code does.

16:00I've had a lot of experience with Vibe coding. I've done a lot of stuff in cloud code and in other tools. So I know what I'm talking about. So the fallacy, the error that people are making, and this is a really important thing for people who want to use these tools for MVPs. If you focus your energy with these tools on artifacts, if you see like, oh, Cloud Code is awesome because it can make me a perfect artifact, then you're making a double mistake. First of all, you don't know how good the artifact is. We have a lot of good evidence now that when people get enamored with their own creations, they way overrate how valuable they are.

16:31So you don't really know what you're talking about. So the part of MVP that is about getting feedback from human beings is more important than ever. Don't delude yourself. We talk about the research that's been done in this area. But the second, I think, even more important part is when you're using Cloud Code to create artifacts, you are actually causing skill atrophy in yourself. You have gone from the flow state of building stuff into what we call dark flow, which is the state you get into when you're using a slot machine. And you just see it. Like I have apps where I'm just like, I'm hitting next, next, next on Cloud Code.

17:02And I'm like, ah, just whatever you do, whatever. Yeah, it sounds good. Sounds good. Sounds good. And I notice over time, Cloud will start to make design suggestions. Hey, I think this would be a good design. And you're like, oh yeah, it sounds pretty good. And like when I review, where did the design end up compared to what I originally envisioned? I'm like, wait a minute. That's not the app I was even trying to create. So I think we have to be much more careful about how we use these technologies and especially for MVPs. Now, I think it's not the underlying models that are the problem. It's the way that there's the harnesses that they're being embedded into.

17:32Now, I'm talking my own book here because I helped start an AI research lab around this contrarian thesis. So obviously, I'm a believer in that thesis. But I think we have really good evidence that it's right. Because we're disconnecting ourselves from the final customer and we're getting stuff that we feel we made. And anything we make, we feel more love for. And so we're twice delusional. The ones for having made it. I don't know if you've ever seen this. This psychology research is incredible. They put people in an MRI machine and scan their brain. And they ask them to do various tasks to see what lights up.

18:04And they'll have them do something like read their favorite poem. People who love poetry and they read your favorite poem that you ever read in your life. And they'll have them read it in the MRI. And you'll see the pleasure centers of the brain just go whoosh. You know, it's like your favorite. You're remembering your favorite thing. You're reading your favorite poem. And they'll be like, great. Can you take two minutes and write a poem yourself? And the person will be like, I suck at poetry. I can't just like just anything, just whatever you can do. Write a poem. And they'll be OK. They'll take two minutes writing the crappiest poem you ever heard.

18:31They'll put them back in the MRI machine. I'll be like, now read the poem you just wrote. And the brain centers light up just the same as if we're reading Keats or whoever else. You can't imagine how addicted you are to the feeling of the thing is your precious thing that you created. It is causes such incredible delusion. I find that myself, too. You're right. Like if I create it, I design it. There's some beauty in it. Like a Suno song that I made is just going to hit me so hard and emotional. It might even make me cry. I thought part of it is because it's tapping into my own use. You're saying in addition to that, the fact that I created it makes me love it.

19:09Yeah, the fact that you yourself created it, it makes it so much more valuable to you. And fortunately, vibe coding gives you the simulacrum of having created it. So you feel the same sense of ownership over it. So it lights up the same pleasure centers in the brain, even though in a lot of cases you don't even understand what you've created. And how many of us have received a vibe-coded proposal or email? I know the Claude co-work. I know all the major tools. I know their house style of how they like to style things. So I know – when someone sends me an AI-generated thing, I always know it instantly.

19:42And it's always garbage. So think about it this way. How can the things that other people are vibe-coding be garbage and the things that you're vibe-coding are great? What are the odds, right? Like what's happening is you're using different parts of your brain to evaluate. So like, so at Answer.ai, we've built these tools that are human in the loop that are designed to help you learn how to produce the artifact. And this has always been the insight of Lean Startup going back many, many years. We called it validated learning. The learning is the asset, not the artifact. So this has been like one of the biggest, you know, like crusades of my career is starting to get people to value actual scientific learning.

20:20And what's cool about LLMs, I think, is not that they're artifact-generating machines. They're okay at that. But, like, take them out of their distribution, and all of a sudden, you're in big trouble. But they're incredibly good teaching machines. They're maybe the best teaching technology we've ever developed in history. And so if you just get into the habit – and, of course, if your tools are designed for learning primacy, it's better. But any tool – instead of, say, make me an artifact, just say, teach me how to build the artifact. Teach me how to do it. And every everything it creates for you insist that it walks you through step by step exactly what it does.

20:53Make sure you make it quiz you to see if you actually understand. And people hear that. They're like, but I have cloud code generating thousands of lines of code a second. There's not time for that. I'm like, right. That's what I'm talking about. So you want to be responsible morally, ethically and economically responsible for deploying these armies of robots that you don't understand. You're much, much better. I think in the long run, people who invest now in craftsmanship, in the understanding of software principles, architectural principles, artistic principles, whatever the thing is, are going to be so much better off.

21:23They're going to wind up being like incredibly super productive cyborgs that are going to run circles around the vibe coders. Because they know how to code or because they understand how a vibe coded? No, it seems like you're saying because they know how to code. Well, I don't care if you can type the physical lines on your keyboard, right? So if you say I'm a great writer, you're like, really? You have excellent penmanship? Okay. No. You should see my handwriting. This is terrible. To be a great writer is to understand the craft of writing. And to be a great programmer is to understand the craft of software engineering.

21:55That's what we're talking about. So I think these tools will make that elite level of performance available to far, far, far more people than is currently possible with the way we teach people programming. So I think a lot of vibe coders can graduate to this skill. All that is required is you just have to be determined to understand what you're doing. And if you have that hunger to understand, you will become far, far more powerful. You know, let's take it to writing because writing is universally understood. I've never found that AI can write well for me. No. What you're saying is don't even try.