15 Years After The Lean Startup, Eric Ries Explains Why Great Companies Go Bad

Intro

00:00My name is Eric Reese. Most people know me as the author of the book, The Lean Startup. I've been an entrepreneur now for something like 20 years and have been working to help people build great companies and great organizations all over the world.

00:11I've recently built a company, an AI company called Answer AI, as well as the long-term stock exchange or LTSSE. So, I'm always very active as a as a builder and as a writer, [music] always in the shared mission of trying to create an environment where people can create great companies.

00:24I feel very blessed. I've been so fortunate in my life that so many great entrepreneurs have asked me to be part of their journey in hundreds of companies and thousands of companies. I can't even count anymore. But I've also seen the dark side of [music] this business.

00:37I can see how many of those companies failed to live up to their potential. How many of them were destroyed or harmed or driven away from that vital spark that made them worth creating in the first place. And in particular, quite a few of them have been murdered in the name of profit.

00:54And if you think carefully about that, it doesn't make sense. In our [music] economic system, companies are supposed to compete to create the most value. That's how investors reap the most profit. So [music] why would we do something immensely valued destroying in the name of profit?

01:11And that has been the mystery that has driven me crazy. The book is [music] my attempt to answer this mystery. [music]

Why Great Companies Get Destroyed

01:25I diagnosed long ago that having a philosophy of long-term thinking is really the foundation of company success. And when I talk about success, I mean financial success. Yes, companies do a lot of great things in the world. Yes, they are important way to solve social problems and many other wonderful things they can do.

01:42But just evaluate on a purely financial basis. Saul Price is a legendary American entrepreneur. Saul is considered by many people in this country as the father of modern retail. You know, discount American style big box retailing. He was the first to figure out the formula.

02:01So FedMart was a company he started in the 1950s [music] and before Saul Price was an entrepreneur, he was a lawyer. And when he was a lawyer, he said, "I am a fiduciary to my client." That's how I [music] was trained. Being a fiduciary means you put the client's interest before your own.

02:17So when you would shop in a FedMart, sometimes he would put up signs with his competitor's advertisements in them to let you know that you could get a certain product cheaper from somebody else. And every time he did that, people thought he was crazy.

02:30He's giving up money. He's helping a competitor. Why would he do that? He said, "Well, the most important thing is to win the trust of my customers." People really trusted him. People wanted to work there. The company grew and thrived for more than 20 years.

02:42He took the company public. He became a wealthy man, but his investors were never satisfied with the level of growth that he could provide. They always wanted more. And so he was always fighting with them. Why does he pay wages higher than he has to?

02:54Why does he charge prices lower than he has to? And he says, "Well, I don't pay low wages. I pay high wages not because I have to, but because I want to. That's why my employees trust me. I believe in low prices not because I have to, but because I want to.

03:10I want to take care of my customers and their communities. And there's a lot of legendary stories about him doing [music] these kinds of things that his investors found frustrating. So one day in 1975, keep in mind he's been running the company now for more than 20 years.

03:23He comes to work and he cannot enter his office anymore because they have changed the locks on his door because he doesn't work there anymore. Saul Price has been fired [music] by his board. They wanted more profit. They got what they wanted.

03:39They were [music] able to convert FedMart to more conventional retail practices. And the net result is that by 1982, so we're just talking about seven years it took them to liquidate the company. It was completely destroyed. It's much easier to destroy than it is to [music] build.

03:53And FedMart was one of those casualties of this kind of greedy manipulation. But the reason why I like telling this story is because although it is quite sad what happened to FedMart, the story has a bit of a happy ending because Saul Price wasn't done when he was fired from FedMart.

04:09He got right back on [music] the horse. He got right back to work. He took a short vacation and then he started a new company. He called the Price Club, which today is not that wellknown, but that's because one of his proteges also left FedMart in protest when [music] he was fired.

04:24He started a company that when the two companies merged together, we called Price Costco, [music] which today is just called Costco. One of the largest retailers in the world, a $400 billion public company. And Costco maintain [music] Saul Price's ethos, his beliefs about how customers and employees should be treated even all these years later.

04:45Why would investors destroy a company in the name of profit? There is a psychological explanation. It's a force that I call financial gravity. And unfortunately, we have built an economic system that rewards people for short-term thinking. It rewards people for cost cutting without ever holding them accountable for the consequences of those cuts to brand, to quality, to product, to the environment, what have you.

05:10So, we have built this system that has this gravitational force. It exerts itself upon people who live in organizations who want to succeed that it's their desire to succeed that our economic system latches on to to manipulate them to do what it wants.

05:23I don't think this is a very good way to build an economic system, but this is the reality of our highly financialized economy. So, there's two things I want to make super clear. The first is this is not the only way you could build a financial system.

05:36We obviously could build a financial system that transmitted different [music] values than these. We just happen to have this one. And the second thing is most people when they hear about this force for the first time or maybe they've suspected it in their own lives, you know, I meet a lot of people as I'm traveling around, people who have had a favorite brand [music] be destroyed, a company that used to be great and now it's terrible.

05:57I mean, a lot of people have this feeling about food. A lot of food products have been taken over by private equity or taken over by a private company and then ruined again. Murdered in the name of profit. You ask them, why is this happening?

06:07They say, well, it's inevitable. It's human nature. It's greed. It's our it's capitalism, whatever. But if this force was inevitable, there would be no exceptions. And yet everywhere in the world, everywhere you look, there are these exceptional companies.

06:22And if you gather up the data set of all the companies that seem to have defied this force, just like we saw with Costco, they have something in common. And it's not what you'd expect. It's not culture. It's not strategy. It's not values. They don't come from the same c country.

06:38They don't all come from the same decade. They're quite different from each other, but they have something in common. What they have in common is they all defy the so-called best practices of how we teach entrepreneurs to build and govern companies today.

06:54And the fact that they violate these standards is the proof that our modern financed theory of business is wrong and something better is possible.

Granola, the AI meeting assistant

07:07The best companies aren't built in the moment. They're built on the groundwork. Same goes for us. Before the main interview, we always do a pre-in call and Granola quietly transcribes it in the background. No bot ever joining, turning it into clean notes.

07:21So, we built our own recipe for this. It's called interview prep. We wrote the prompt once with everything we want before a shoot, and now it's one click every time. Then, minutes before the cameras roll, we run it right on that pre-in call.

07:34In seconds, it surfaces the story worth telling, the threads worth pulling, and [music] the questions worth asking. It's like having the whole transcript in your head without ever opening it. So, we sit down already knowing where it should go.

07:50It's not a generic checklist. Every line is drawn from the real discussion we just had, shaped by exactly how [music] we like to prep. Less time scrambling to remember, more time fully present in the room. Turns out, no matter what you're building, the groundwork is everything.

08:04Try recipes today. New users get 100% off their first month at the link in the description.

Built to Resist - Ethos + Integrity = Incorruptible

08:15So, why was FedMart destroyed while Costco endured? You have to look somewhere that most people never think to look. You have to look at the governance, [music] the founding documents, the legal boring stuff that no one ever pays attention to.

08:27Most companies are built to a very weak governing structure. But Costco was built with what I call a governance fortress, a series of provisions that prevent outside meddling, prevent investors or anybody else from bullying Costco. And that is something that all these great companies have in common.

08:46They have a way to thwart this force which is trying to undermine the [music] mission. I call them mission guardians. As a result, most of these companies are considered to have bad governance. They get criticized routinely. They are rated poorly by the ratings agencies whose job is to study these things.

09:02And yet, this is a funny fact that is in the book. Since 2008, companies that have bad governance have outperformed companies that have good governance. When I meet with entrepreneurs, coaching them, helping them start a company, especially I always ask them about their governing documents.

09:19And honestly, most of them have [music] never read it. They have no idea. They signed it, they filed it, but they didn't read it. They don't know what it means or what it says. So what I explained to them that according to the modern governance theory that we all live our lives under the theory that is called shareholder primacy.

09:32According to this theory, companies must always be sold to the highest bidder. It's the law. This is a crazy idea and it's a relatively new idea. This is a choice that [music] people inadvertently choose when they start their company. And so when I tell people that, they kind of don't believe me.

09:50They think that sounds like an exaggeration. Are you saying that if someone tried to buy my company for just a dollar per share more than it's worth, [music] I would have to sell it to them? Yes. Before you say I'm exaggerating, why don't you pay attention to this story?

10:02Vector was a uh university spinout of the University [music] of Bath in the UK. It was a company designed by scientists to create inhaler therapeutics to uh treat diseases like asthma or COPD. So, a science-driven healthc [music] care company, very successful, was publicly listed on the London Stock Exchange, was doing very well.

10:21All of a sudden, the company that you would least want to buy, an inhaler therapy healthcare company, came to try and buy them. Company was Philip Morris International, the cigarette maker, and they made a bid to acquire Vectura for 165 per share.

10:34A private equity firm at the same time bid 155. And so the board of directors of Vector was faced with a very simple choice. Option one, do nothing. The company did not need to be sold. There's not a business problem that this is trying to solve.

10:53Option two, sell to the private equity firm and reap 155 or sell to Philip Morris and receive 165 p per share. Everyone would have looked at this said this this is a terrible idea. We never would want to see a cigarette company owning an a lung health healthcare company.

11:10Absurd. But the board of directors of Verura didn't care about any of that. They had I think two meetings and they said look it's nothing we can do. It is our fiduciary duty to say [music] yes to Philip Morris and they did. Within 3 years the company was completely destroyed.

11:26And what's so interesting about this story is again we see that pattern of a company being murdered in the name [music] of profit. And some people did make some money. I want to be clear like they did pay a premium to buy the company. Some investors made money for sure.

11:39But was the transaction overall profitable? Was there more value in the world after than before? No. Value was destroyed. And one of my arguments in the book is [music] we have to stop calling these acts of immense value destruction profitable.

11:57They're not. There's a blueprint here. And yes, the blueprint has two dimensions. But I promise for anyone who's encountering this idea for the first time, this is not abstract. These techniques are very concrete and very specific. Ethos refers to a company's character.

12:12How often does it try to do the right thing? Is it consistent in its behaviors and does it stand for something or not? Is it aligned to human flourishing or merely to financial extraction? Every company has a culture. Every company has a business model and a strategy.

12:29But only some companies have an ethos. If you want to be one of those companies, there are specific techniques we have to adopt. We have to build a business model such that the company can only make money when it is achieving its purpose. We have to develop what I call the virtuous cycle of performance where the more successful we are at achieving our mission, the more money we make and then that gives us more money to invest in the mission and that cycle builds and builds and builds and of course we have to build a culture where every employee understands that their job is to pursue

13:01this mission even if no managers are present. So that is the path of ethos. the techniques, the managerial techniques required to create a highly aligned mission-driven company. The path of integrity is also very important. What does it mean for a company to have integrity?

13:14I mean like structural integrity, the ability to make and keep a promise. And it's important to understand that to see a company is not a person. It is a huge collection of people. So if a person even the CEO of a company makes you a promise, [music] you can't rely on it because the CEO might be replaced.

13:31So promises, corporate promises, organizational promises have to be rooted in something deeper than the good intentions of any individual person. And this [music] is the dimension of things like the public benefit corporation. Changing the legal charter of a company to reject shareholder primacy.

13:47This is the dimension where we enshrine proper relationships between the investors [music] and the company itself. And this is where we establish what I mentioned before the mission guardians [music] who has the responsibility for making sure the company stays on track and to holding it accountable including its board of directors accountable [music] to achieving that goal.

14:05This is something that most founders struggle with because [music] they just tell everybody what to do. I give an example in the book of a company in Texas called [music] HEB grocery store. There's an ice storm in Texas and the power goes out and all the customers think they're going to have to go home empty-handed.

14:21But the store manager gets up on a counter and yells to everybody, "Hey, listen. I know the power is out. It's okay. Take your shopping carts and just go home." People say, "How are we going to pay you?" And the manager says, "You're not going to.

14:30It's okay." The customers were moved. They were in tears. But this was not the act of a lone rebel. This is something that the company instills and trains for. Not for ice storms in particular. That was hard to [music] forecast. but rather to see the customer as the person that they are serving.

14:46So [music] this ethos is drilled into employees in every way possible and in the book I give a lot of the techniques that require do this but they require [music] extremely consistent action at every level of the company requires the board and the CEO and the managers to be [music] insisting on this behavior and also to be rewarding this behavior.

15:04You hire people from the outside. They bring with them their past [music] beliefs, how it worked in their previous company. They bring with them workplace traumas and all kinds of emotional upset. So if you want them to understand what your company truly stands for, you have to repeatedly over and over and over and over again demonstrate that you truly believe in these principles.

15:26In the book, I call this idea harder is easier. The famous story of Steve Jobs. He once got into a fight with his engineers. Fight about the layout, the visual layout of the cables and wires inside a computer whose case Steve did not believe customers should be allowed to open.

15:46And the engineers were just Steve, what does it matter? Nobody will ever see these cables. No one will ever know if it's ugly or sloppy or twisted or no one will ever know. But Steve would say, but we will know. See, to him, design was an absolute.

16:00It wasn't something that you do when it's convenient or when you have to. It was like how Saul Price felt about being a fiduciary to the customer. So, it's important to defend these values in small ways as well as in big ways on Monday as well as on Sunday, on every day of the week, every month of the year.

16:17You have to do it over and over and over again. That is a lot of extra work. I don't want to sugarcoat it, but it makes every other problem the business will face in the future that much easier.

Build a Company That Outlives You

16:30For the vast majority of time, I'm talking for hundreds of years, for the vast majority of time, there have been joint stock corporations on Earth, it was considered [music] quite obvious by everybody involved that corporations should exist to pursue a specific purpose and that this purpose [music] should be society beneficial.

16:46So in the United States for example in the 19th century every incorporation had to be approved by the local state legislature and the company had to say in its corporate charter the specific thing it was going to do and why that was in the public interest.

17:00[music] So that is how incorporation has been for the for a long time. And yet in the over the course of the 20th century industrialized countries especially in the United States but not only United States came under the sway of this new idea they called shareholder primacy that corporations don't exist to make [music] anything.

17:16They just exist to enrich their shareholders. It's very important for people to understand that what we now consider to be the best [music] practice of like rich people can just take over companies whenever they want and change what [music] they do just cuz they're rich.

17:28that would have been considered a crime in 19th century America. The critical date in the US for the transition [music] away from this purposeful incorporation happened in 1899. It's not really that long ago. And the shareholder of primacy didn't take root until the 1980s, very very recently.

17:46This state of affairs is not working very well. You can see in the number of companies that are betraying their promises left and right and just how many of them are frankly collapsing. What's happened is a set of reformers in many countries reformers have been trying to to restore this historical norm that companies should be allowed to declare in their corporate charter why they exist.

18:06What do they exist to pursue beyond just profits for shareholders? In the book, I lay out a goal which is to create constitutional governance, which is like taking ideas from political philosophy about checks and balances, about the appropriate role of the executive versus other branches.

18:23To create what I call mission controlled companies, that is companies that have the architecture of institutional longevity. They have the ability to stay true to some specific purpose over long periods of time. That's our goal. And I've been talking to companies about this for many years.

18:35One of them very famously is Enthropic. They came to see me shortly after the founders had left OpenAI as they were thinking about starting the company. And it's funny when I started writing this book, Anthropic was not a well-known company.

18:47The structures that we set up together have been tested [music] sorely tested and so far it's early but so far have stood the test of time. When we say that a company is structured for longevity, it doesn't necessarily mean that you agree with everything that it does.

18:58It means that you can respect them for being consistent with their own values. when they are pressured to betray those values, they often choose to defy entities as powerful as the United States federal government. And that's unusual for a for-profit company.

19:12It's enabled by this structure [music] that they have. Now, in addition to being a public benefit corp, like we've talked about, in addition to enshrining a defined public benefit into their corporate charter and and therefore their AI safety mission [music] is infused into everything that they do, they also are protected by a mission guardian entity, what they call the long-term benefit trust or [music] LTBT.

19:35And this is a two entity structure where where a set of outside trustees have the role of appointing directors to the for-profit company's board. This is not a new idea that Anthropic invented. By the way, you know, Patagonia has the same structure, very similar structure has existed for [music] for a very long time.

19:51The German optics company Zeiss had this structure in 1887. So, this is not that new. It's actually so old that there's a whole branch of academic study devoted to these kinds of companies, these companies that have this mission guardian entity.

20:04And in one study, companies that had the structure were found to live on average five times longer than companies with a conventional structure. So far, we've been talking about institutional structures. And some people listening to this are going to say that what does that have to do with me?

20:20I'm not a CEO. I don't sit on any boards. I'm not an investor. This seems like someone else's problem. But that's wrong. This is something that every one of us needs to master and understand. [music] First of all, because we're all going to have careers in which we will come into positions of power one day, and we will be tested to see if we can maintain our integrity or not.

20:38But even more importantly, all of us interact with these institutions every day as citizens, as consumers, as employees, as investors, as members of our community. And we have to learn to wield the power that we all have to shape the values of these companies.

20:55This is the biggest and most important lesson of the book is that this gravitational force that draws companies towards other values, we are the generators of this [music] force. We the public, not the fancy CEOs and the board. They seem like they're in control of everything, but they actually operate at the mercy of what the public requires and demands.

21:16So, we have to learn to wield that power for good and not for evil.

Rethinking the Lean Startup

21:25You know it's been 15 years since I wrote the lean startup. In every generation founders have approached me to ask how build measure learn changes. Number one thing they say to me is like look because of a new technology because of a new outsourcing ability because of a new culture because something has happened.

21:40We can build so much faster. Does that mean that entrepreneurship can go faster? And the answer is not necessarily because although building and measuring can be dramatically accelerated through new technology and especially through AI learning, we still have the same old wetwware between the ears of the people doing the learning.

21:59Learning is a hard thing to outsource. I use [music] the tools quite a bit in the research and editing of my book. I didn't use AI to write my book, okay, just to be super clear, but I use it a lot to help me accomplish my goals better. When deep research first was invented, first by OpenAI and then by Google, deep research was the ability to go and have a AI agent go out into the world and grab information for you.

22:18I thought that was going to solve all my research problems. [music] But of course, it didn't because first of all, you get inaccuracies. But more importantly, like even if it didn't make any mistakes, just because I had a 10-page research report about something didn't mean that I myself understood what the research showed.

22:34So when I switched over to using this the tool we call solve it uh at answerai where I could load that research into a context [music] where I could take a piece of my writing I would take a chapter or a story or a section and I would tell the AI here are my goals to improve this section here's the research I have available let's brainstorm together and I would use the tool to help me understand what the research says help me understand what is available to be incorporated into that section of text and then we would work on it together ultimately I would have the final

23:05control over how that flowed into that section which we would then commit back to the larger project. So instead of sending agents [music] out to do the work on mass, it was more like taking a large project like a book and decomposing it down into human scale subtasks that I could do with the assistant really outstanding editorial and research assistant.

23:23[music] Not make me a website but teach me how to make a website. Not make me a product but teach me how to make a product. Not measure what customers think but help me figure out what customers think. Once we learn to make this shift, we're able to see AI tools that are really designed to accelerate the rate at which we achieve validated learning.

23:40But in the meantime, I think people need to be careful and and maybe would be better served by using the old [music] methods that they understand better.

Advice for Founders

23:50So for founders in particular, I would just try to pick one thing to get started. So building an incorruptible company is not something you do overnight like ha tada. No, focus on make yourself a checklist and work on that checklist over time.

24:07You can't just say, "Well, I ate a healthy meal today. Now I'll never get sick. Now I'm fit." No, that's not how it works. You can't say, "I went to the gym one time. Now I can be an Olympic athlete." No. If you want to achieve greatness, you have to train.

24:18You have to work at it. One thing I would ask founders to do, have [music] like a quarterly meeting or every couple of months, doesn't have to be every day, where you sit down with your co-founders, with your board, with your executive team, whoever the right people are, and ask yourself, is our ethos intact?

24:33Survey your employees. Ask them, do you know what we stand for? What do you think the mission of this company is? What do you think its values are? Are our governance protections adequate to what we're facing now? Or can we start to see cracks in the structure forming?

24:46And most importantly, look ahead. Are there new threats on the horizon? Are there tiny inconsistencies? Think of it like micro fractures in a bridge or in a submarine's hull before it collapses. There sometimes will be the indication [music] of stress fractures that we could observe.

25:02So do that as a regular practice. Get outside support if you need it. I've helped start some companies that are trying to help and support startups in this in this brave new world. But whether you get the support from me or anybody, but find somebody who can be your partner in helping you think through these issues because I don't want your company to be on the new edition of this book on our list of the graveyard of good intentions.