The Lean Startup Author on What Ruins Good Companies

0:00The Lean Startup was foundational to me when I came to Silicon Valley. I remember I went to a Lean Startup book event probably back in 2012. You spoke there and it was very inspiring as I was starting my first company. And I took away from it just, you know, money is not infinite. Don't die. Don't burn all your money. But I mean, maybe we can start there and sort of reset. Like, what are the correct lessons that you think should endure from the Lean Startup? and then we'll go into Incorruptible and sort of all of the evolution. But I'd love to sort of have a reflection on that. Super incredibly influential on my career and journey.

0:39Really unlocked entrepreneurship for a lot of people because it was the perfect time. You needed$20 million to be a business person. Well, yeah, for me as somebody who just grew up obsessed with startups, beyond TechCrunch every day, and all the startups that I thought were cool and crushing it we're in TechCrunch every 12 months raising all this money and it feels like out of reach when you're a teenager and then you realize like, hey, capital is way less of a constraint than you would think. So thank you for that. Well, guys, thanks. First of all, congrats to you on the success. What's really held up, a lot of the techniques and the specific tactics from Lean Startup are a little dated now.

1:24I mean, you know, Groupon is a case study. Like, it's old now. It came out in 2011. But I think the principles have held up really well. And especially if you think about, like, from a megatrends perspective, the book said that the world's going to get more and more and more uncertain. So our ability to plan and forecast is going to get worse. I think we nailed that one. And that the democratization of technology is going to mean that more and more and more people are going to be able to build faster, cheaper, better products. And so when you put those two things together, every industry that's been hit with a double whammy of those two things, Lean Startup holds up real well.

1:54Yeah. Do you think startups are getting leaner or less lean in the modern era? And what I mean is that I will see, we have folks on the show all day, oh,$200 million seed round. It doesn't feel lean. At the same time, we hear about the mythical one person,$1 billion company. And although there's been some reporting that's been a little bit debunked on has it happened yet, But it feels like it is becoming more attainable. You can run leaner even if you're just using SaaS products, but also AI agents can do a lot of things. You can answer a lot of questions. You might have slightly lower legal bills just because you're a little bit sharper going into that negotiation.

2:36And so I'm wondering on the net leanness, how are you processing the modern era? Well, every time we have a mania or a bubble, you know what I would call it, right? The situation goes bimodal real fast. You have people who are struggling to raise money if they're not in the favored category, and then obviously the money is flowing ridiculous. What's funny is I've been at Lean Startup long enough that people periodically write these articles that are like, such and such company proves that Lean Startup is over. And they always pick a company like Quibi. So it's like, you just never know what it's going to be the thing.

3:06I think fundamentally, using resources well is an eternal entrepreneurial virtue. So even the people that are overfunded, a lot of them run into trouble because now you don't have that reality kind of barking at you all the time to make sure that you're actually building something that people want. Because it's easier and easier to delude yourself the more money you raise. The other kind of startup that's emerged is the lean startup that ends up raising a lot of capital, but simply because they were lean and they were like really scrappy and so they grow super quickly. I'm thinking of like, you know, a Turbo Puffer, right?

3:39Our friend's company where raised very little money is at a nine figure run right now, but extremely attractive to capital. But his entire approach is like, how do I maintain that scrappiness even once I have a fortress balance sheet? Because that's what made the company great from the beginning. It's just like doing things that customers want that they'll pay for, all these things. When it's so easy, when you take in that level of money to lose that ethos, the thing that made it worth investing in in the first place. I think it's interesting. I know quite a few companies like what you're describing where the fundraising was done for some other reason than for the money.

4:19In fact, I know a bunch of founders who brag to me, we raised this money and never spent it. Because it can make sense to have a Fortress balance sheet. But to me, the real question is not about how big or small is the organization, how much money was they raised, but how much control do the people who are locked into that mission actually have over what happens next. And sometimes when you raise too much money, especially too much money too early, you think, you know, you ring the gong and you're really proud. That's great. You know, like, it's okay, that's really fun. But then like, have you actually, yeah, or you get the air, you guys get the sound effects.

4:48And like, sometimes, you know, this is, you know, the media environment, like steadily building a product that people love day in, day out. Like, that's not the sexiest story. And so sometimes, you know, we get, we get distracted by all these other things that take us away from the one and only one thing that truly matters, which is, can you build a great product, build a great company? Yeah, yeah. I mean, there are so many, and a lot of financial reporting sort of misses the changes of control that happen. Like there might be a company that's raised a$1 million series seed and then a$5 million series A, and there's two VCs on the board and one founder.

5:21And then there might be five founders on the board and VCs are stuffing$100 million checks and they can't even get a board seat because there's so much demand. And which one tells you more about the future of that company, potentially the governance side? But how are you grappling with the just governance in the modern era? I mean, I feel like that's a lot of what this book is about. There's so many different paths. There's PBCs and really diffuse, lots of co-founders having even stakes. And then you have the SpaceX AI, immense control in a single founder. Both can produce fantastic products and good financial outcomes.

6:00But how should we interpret all the different roads that are available to founders these days? It's really confusing. That's actually part of the reason I wrote the book. The book is meant to blueprint to actually show a new, better way forward. Like the extreme founder control has its problems. A psychologist called it hubris syndrome, not to name check any particular founders. But that can cause some issues. But also investor-dominated companies really underperform precisely because we have this financial system that has this gravitational force that pulls companies down into mediocrity or worse.

6:34And in the book I document, like over and over and over again, we reenact the parable of the goose that laid the golden egg and just stab it right through the heart by removing the thing that actually made it worth investing in. In the first place, how many times have you gone to a restaurant and you look on your phone and you're like, take one bite and you're like, did private equity buy this restaurant? It tastes disgusting. No, I have the best example of this. My favorite hotel in the world was bought by Private Equity. And one of the things that every guest would talk about, didn't matter at all, just barely contributed to the cost of having a guest there, was that every night the hotel would walk around and they would leave a warm chocolate chip cookie and milk for each guest.

7:20And Private Equity bought the hotel, which only had something like 20-something keys. And they immediately removed the free chocolate chip cookie with milk at night thing. And I just so such a funny thing to like take out. But is exactly the kind of thing when you met you transitioning from, you know, this like founder led, you know, family operated business to invest around. Yeah, what's sad about it is we built an economy where people are routinely rewarded for cutting costs, but never held accountable for the downstream brand and quality consequences of that. So like on the balance sheet, getting rid of the cookie is immediate ROI positive.

8:04Yeah, and you can justify it because the cookie is still on the menu, so people want the cookie. Yeah, they can get the cookie they want. Why do we have to give it for free? We looked at the data. A lot of people don't even eat the cookie, right? And so it doesn't matter. Of course. No, you got it right. Like, how is it possible that the capital structure of a company has a flavor that you can literally taste it? Because like notice how when you said that Private Egg took up your hotel, we're all ready to give you condolences, right? Like you could in theory, you might be like, well, having those resources made it better, right?

8:31Go. That's great. I know they're going to know. No one ever feels that way. And everywhere I go, you know, I've been doing this book tour in the new book. People are coming up to me to be like, I know that story. Yes, that happened to me. And they've named like 20 different restaurants to me, hotels, like so many service products. where, and again, it's not about private equity per se. It's that we've built this pervasive force that is just dragging companies down. So if we're gonna now get to the governance question, and I know for founders listening, it's like, oh God, governance, so boring.

8:57But like, as I say in the book, if you don't get the governance of a company right, no other decision you make will matter in the long run because you won't be the one making it. So we have to figure out how do we create that like incredible alignment? You've seen it in mission-driven companies, right? Where everyone's on the same page. How do we protect that special thing from outside pressure? And when you put those two things together, we can create what I call mission-controlled companies that cannot be corrupted by this temptation. Yeah. There's a bunch of different things that I want to click through to interrogate that.

9:32The first is probably quarterly results, quarterly earnings. I've seen proposals to go to every six months reporting. and it seems like, okay, that would align public companies with like the CEO could think for six months instead of three months and take bigger risks and think longer term. That feels very good. At the same time, it feels like the rug that you sweep things under is potentially just getting bigger. Twice as large, yeah. Twice as large or the closet where you hide the bodies is getting twice as big. And I'm wondering, is there a tension there? Am I wrong to think that there's a tension there?

10:10because a lot of, like, I think about problems in the public markets with long-term value creation, long-term alignment, but then I also think about the transparency that comes with being public, the regulation that comes with being public, the access to public investors, retail investors that can participate in a company before it's a trillion dollars if it's going to be a great company. So how are you dealing with those tensions if there are tensions? Yeah, okay. First of all, the tension is completely real. And the thing you got to know is Long Term Stock Exchange, the company that I founded, is the one who filed the petition last year to the SEC to switch from quarterly to semi-annual.

10:48Oh, no, wait, you're the one. Okay. So obviously I have a strong view about it. Oh, nailed it. Exactly. So and what's funny about it is, okay, so first of all, we have to understand the scale of the problem. You're not going to believe this, but we have really good. Sorry, before we continue, you should have named it Eric's Law or something like that. You're not getting enough credit for this. Listen, the memes and everything, that's your department. But you've got to understand the magnitude of this problem is insane. If you look at other countries, there's these natural experiments where certain countries have switched from semi-annual to quarterly reporting or vice versa.

11:29And they happen to do it in such a way that not every company changed at the same time and it was random who did which. So we actually know the valuation consequences of quarterly reporting, and it's roughly a 5 % loss of total equity value. Companies are 5 % less valuable when they report quarterly than semiannual. So the academic research on this is pretty good, and the magnitude of the cost, we're talking about so much, so many billions of dollars of lost value. It's not because the effort to do a quarterly report is expensive, although it is expensive and annoying. Rather, when people report quarterly, they start to run the company for the quarterly report.

12:07So companies no longer make products. They start to view the quarterly report as the product, which means they're basically meme factories. What do I have to do to generate the report that will get me what I want? Now, getting rid of quarterly reporting just by itself I don't think is a very good idea, and we'll see what the SEC ultimately decides to do. I think we should replace quarterly reporting with a better, more fulsome disclosure project where long-term investors can actually find out what the F is going on at the company's office. they invest in, where today companies are strongly incentivized to give out as little information as possible.

12:36But that's kind of broken the partnership we need between long-term companies and long-term investors. That's, of course, part of why we created the exchange in the first place. Yeah. Talk about public benefit corporations and how incentive alignment might play out in the longer term. When you get to a stage of a company that's a lot more like Apple than a founder-run, Like, Anthropic is a unique example with a set of co-founders, but like the normal Fortune 500 company has a leader at the top that might have 1 % equity and a board seat, but there is a chairman of the board, there's a board of directors.

13:14It's much less controlled. But in that scenario, they are reporting to shareholders and they have a fiduciary duty to shareholders. If you have a company that's broadly held and has diversified board and diversified ownership structure, but is a PBC. How does that play out? What are they doing differently? Is it that the CEO has two different hats and they're mentally taking these on and off throughout as their decision making? How does that actually play out? Yeah, that would be too hard. The so-called double bottom line, triple bottom line, I think has not worked out very well precisely because it leaves CEOs really confused.

13:52Okay, you want to be multi-holder? Great. Customers want lower prices, but employees want higher wages. Now what? So it kind of leads to a compromise. But what's interesting, PPC is actually not that new. For the vast majority of time, there have been joint stock corporations on this planet. It was considered obvious by everybody that they should be incorporated to do a specific thing. When they're just trying to make money for themselves, they wind up hollowing themselves out. That's what makes them dangerous. It was only in the 1980s that the idea of so-called shareholder primacy came into effect.

14:22So if you walk by your local park, you will see trees that are older than this idea. This is not some like pillar of ancient pillar of capitalism. And in the book, I make the case for, first of all, we got to get rid of shareholder primacy. I think it's a terrible idea. But the question is kind of like attacking it is easy because the data is so good about all these best practices being so bad. The issue is what do we replace it with? What does mission primacy look like? And I think the key to that is to understand that being a for profit company is actually great. Making a profit is actually about making the world a better place.

14:52That's literally the definition of it. It's like a positive margin transformation. So in the book, I argue, and I feel we're doing it on the same day that like Pope Leo made this same point in way, way better fashion. You know, I have hundreds of pages. I only mentioned it in passing. But like literally to make a profit is to maximize human flourishing. That's what it means. So now coming back to the PBC, all PBC does is give the CEO and the board the legal cover to pursue long-term value creation in the face of hostile investors. So if you go there and say, listen, I want to sell the company to Philip Morris because they're willing to pay a dollar more per share than it's worth.

15:25You need the tool to be like, no, that's ridiculous. Of course we're not doing that. And that's what PPC allows you to do. Interesting. What do you think are some of the most underappreciated companies in history that you feel like had mission primacy? Yeah, yeah. Obviously, these are profiled in a great deal in the book. And what's really interesting is if you talk to people about corruption and say like, why does companies go to, you know, go to bleep after they get big or whatever? Most people would be like, it's inevitable. It's human nature. It's companies get old. They get big. There's a lot of money involved, blah, blah, blah.

15:59But those same people, if you're like, are there any companies you trust? They're like, man, I love Costco. Yeah. It's like, well, interesting. Like, how come? But I thought it was inevitable. Costco is a$400 billion public company. Oh, yeah. Well, they're the exception. You're like, well, what about Patagonia? You got a Vanguard mutual fund? What about, you know, John Lewis Partnership? or you ever eat a hershey's chocolate bar you ever taken a nobunardis medication like there's all these weird exceptions many of which are decades or even like more than 100 years old and what's interesting to me is if you take that whole category of companies as a data set and say what do they have in common every single one of them violates pretty much all of today's so-called best practices about how companies are supposed to be structured built and run so i think we actually have really good data that this is not some abstract thing so like so for For example, when the founders of Anthropic left OpenAI, so what is that, like three or four OpenAI crises ago?

16:50I can't track. But anyway, it's hard for me to keep track. But anyway, it's been a rocky road. When they left, I was one of the people that they talked to setting up their governance structure. And not only – and again, I am not taking credit. Okay, don't do the meme thing, okay? I'm not taking credit for Anthropic success. Obviously, I played only a very big part. They wanted to call it the Eric PBC, but you said – And I had to talk them out. I was like, guys, please, please, no, no, I don't. No, no, no. They were looking for an idea and you told them, like, I think you should work on AI. That's what happened.

17:19Yeah, they were like maybe thinking of pivoting out because they left open AI and they were like, maybe we should give up on AI. They were going to do protein shakes or they were going to do an energy drink and you were like, I think AI, AI. Don't do this. I just talked to you guys about the IRS CEO. Don't get me in trouble here. People are going to click this out of context. You're going to get me busted. Okay. Well, listen, so I'm not, for the record, I am not giving credit for their success, nor am I trying to talk smack about open AI. I know you guys love them. Yeah, yeah. But the specific thing I think is really interesting is because they were really worried about this specific issue, when I gave them my typical litany of founder, loss of control, horror stories, they could see how bad that would be.

17:54And in fact, it's funny talking about the Pope. I was at an event at the Vatican last year, talked about AI governance. And I was on this panel with every major AI company, OpenAI, Anthropic, Cohere, Palantir, Google, Meta, everyone on one panel together. And me for some reason. And I'm looking down this row and I'm like, oh, my God, not a single one of these companies has standard governance. They all consider it to be too dangerous. They got to have somebody playing the role of what's called the mission guardian. But Atropik, to their great credit, I think, did not want it to be the founders personally holding that special responsibility because it's stressful as many founders who are trapped in this situation.

18:31So they created something called the Long-Term Benefit Trust, which is like a multi-branch government. So you have the for-profit PPC, and then you have the board of directors accountable to a second entity, this outside trust. And the data shows that companies with that structure are something like five times more likely to live to year 50 and have way better long-term value creation metrics too. So again, I think we have the evidence that there are these better structures, yet most founders are never given this as an option. And by the time they find out about it, it's too late. They've already lost control.

19:02I want to talk about. I think one interesting thing is if we move to by annual reporting, there's going to be a lot of work, accountants, lawyers are going to have less work, but you're creating a new structure, you know, these much, you know, these complicated structures, they can just shift their attention to working on mission, mission aligned companies. Maybe, maybe. Yeah, sorry. That wouldn't be that bad, would it? No. I think like, compared with what they're working on now, I think that. No, no, I'm sort of joking, but at the same time, I think it would be much better use of their time. I want to talk about Mondragon.

19:40Is that how you pronounce it? Oh, sure. Yeah. I'd like you to introduce it, though, first, for those who aren't familiar. And then I have some questions about, you know, where we go, what lessons we learn from it. But first, how do you understand that? See, I don't get to talk about Mondragon very often, so I know you did your homework and I just A+. Awesome. Okay, so it's funny we're talking about the day of the Pope's encyclical. So a Catholic priest walked into the war-torn Basque region after the Spanish Civil War. So it's not the setup for a joke. It's not like a priest walked into a bar.

20:11He actually went there. And instead of like preaching, you know, just comforting people who are being devastated, he had this vision for a new kind of economic reality where workers would be empowered to learn a trade and to control their own destiny. And to make a very long story short, he started to create this network of worker cooperatives where the workers themselves own the means of production and they build all kinds. They started with like industrial equipment and now make all kinds of stuff. And if you zoom out today, Mondragon is this gigantic company that employs 90 ,000 people in Europe, one of Spain's largest companies, makes elevators and have a grocery store chain and all kinds.

20:52If you look at it from the outside, you say, oh, that's like a fully diversified industrial conglomerate. Makes sense. Like making a lot of money, that's perfectly sensible. But if you zoom in, there's nothing about Mondragon that actually resembles a typical for-profit corporation at all. It is a network of, I think, 80 or 90 of these independent worker cooperatives that work together. They have like a congress where they send representatives and they self-govern. And any of the cooperatives can leave the network if they don't get benefit from the central services that it provides. so this is an example of what I call a mission locked constellation which is a set of entities that when you zoom out the customer the investor anyone from the outside perceives it as one thing but it's actually many things now be honest if I pitched you this is my business plan that I was gonna create 90 ,000 person network of 80 like if I pitched it to you wouldn't you say it was impossible?

21:47Well, that's my question. That should never work. Yeah. I would say it's not that it could never work. It would just be extremely hard to reproduce. Like, I think if you got a really talented group of people and you tried to rebuild something like this, even knowing all of the mistakes and challenges that this last one had, it would still be very difficult and probably end in failure. But it's clearly possible. The fact that it exists obviously proves that it's possible. But I think most people, when they're thinking about how to start a company, just have a very narrow view of what can be done.

22:25Cooperatives, I don't have the stat in front of me, millions of people worldwide. It's not some weirdo niche thing. It's actually a tool that we can use. Now, in the book, I try to go through all the different ways you can create Mission Lock. this is a huge Vanguard episode like REI as well. I guess my question with it is that, so I agree with you, like you got me. If somebody came to me and pitched me that I'd be like, ah, that's too complicated. That doesn't pattern match to like the usual series A. Like, I don't get it. I'm out. Right. But is that why we don't have an American Mondragon in the modern era?

23:05You know, like, why is there no, Why aren't there as many Mondragon-style counterparts to the monolithic, traditional, founder-led companies? Because I've heard people pitch this as like, America would be better if we had more co-op networked, like Mondragon-style entities. And my initial pushback has always been like, well, it's a free country. I don't know that that's illegal. I think it's legal. I think you could just go do it if you wanted to. So is it that people don't want to or is it that like Jeff Bezos is secretly out there like killing people who want to try to start the Mondragon of Amazon and like what's going on?

23:44That's a really good question. And like so for example, so credit unions, credit unions are the closest thing we have in the US that serves like I think it's like 40 % of American households have an account or credit union. So they're pretty big. They're all not, you know, they're not for profit member on financial institutions. And the fact that they exist holds big banks accountable in really interesting ways. So that's like maybe the closest. The point that I was trying to make in this book is not so much that we need to copy Mondragon or any particular company, but rather collectively these are called alternative structures control something like 5 % of world GDP.