People have woken up to this reality. Given where we're at, if you can create a bootstrap company, if you can maintain control, it doesn't make you completely safe. Okay, the problem is actually not investors, but financial thinking. So, I tell a bunch of stories in the book of companies where the issue wasn't investors, but their own employees. You start to bring in professional managers, you start to bring in the CFO and the CFO has that extractive mindset. Or even worse, financial gravity is one of the most underrated concepts. It is like trying to direct our attention away from the surface characteristics of an organization to the deeper forces that act on it. Business model, strategy, vision, culture, these things are very important, but they are the things that we have control over. Gravity is a force.
Hey everybody, welcome to the Practical Founders Podcast, where every week we hear an amazing story from a serious founder who built a valuable software company and did it without big funding. I'm your host Greg Head, and this week my guest is Eric Ries, the author of The Lean Startup, one of the most famous and practical books in the startup lexicon, helping practical founders make smaller bets and do experiments and popularizing the term MVP. He's been an entrepreneur for the last 20 years, and he now has a new book out called Incorruptible. We talk about that today, plenty of examples, his blueprints, and the challenge that all founders face who are doing something beyond the financial results of the company for culture, values, mission, purpose, and all those other things that matter almost as much or just as much as the profit and success of the company. There's a lot of risks when you grow a company and take on funding, sell a company, go public. And Eric in his new book Incorruptible talks about all the ways that founders can defend and protect and ensure that the very important soul of the business that is the golden goose that helps the business grow faster and employees do amazing things stays that way long-term. It's a great practical book for practical founders. Hey, Eric. Welcome to the Practical Founders pod.
Awesome. Well, you are the author of The Lean Startup as everybody knows here. And you have some impact on the Practical Founder Revolution allowing software founders to not have to raise money to make huge bets and go long in their first product before they know anything. So, Lean Startup helped founders make smaller bets and get validation. And you know, you I guess you popularized the term MVP back in the day, but you know, if you could waste a lot less money, you don't need to get investors very fast. And combined with everything else, the Practical Founder Revolution happened. It's the hidden majority of software companies. So, you've been doing a lot of things since The Lean Startup. And now you have a new book Incorruptible. So, let's talk about what have you been doing in the last 10 years or 15?
Oh, it's been I've been busy since Lean Startup came out. Yeah. You know, so Lean Startup totally changed my life. You know, I went from being a software engineer myself to then, you know, someone who writes about these topics and gets to travel all over the world. And I got to do I did a whole stint about innovation doing innovation consulting for big companies, which was like a total trip in itself.
In among the corporate innovation people, they know me for the red book, The Startup Way, more even than The Lean Startup. Yeah, so I really got to work with some of the world's largest companies, governments. I mean, I really got like a backstage pass to business itself.
I really only did the business before, but then I got to learn manufacturing and retail and organic food and then energy extraction and so many other kinds of businesses. I got to work for defense agencies and all kinds of government agencies and just like so many different places where people are applying lean startup. And of course like tons and tons of small businesses, medium-sized businesses, privately owned held businesses, family run businesses, bootstrappers, you name it. People have embraced lean startup, so it's been an incredible incredible journey. And then alongside all of that work, you know, I built the lean startup company to help further that work, but I also built this thing called the long-term stock exchange. So I actually built a venture-backed stock exchange. Like not a crypto exchange or anything like the real thing, a national securities exchange, same legal category as NYSE or NASDAQ. It's the first such listings venue for public companies since the creation of the NASDAQ in the '70s. So it's a very difficult very difficult project.
No small feat. It was definitely the kind of thing where even our own investors didn't think it could possibly work and yet yeah, here it is. So I don't run that company anymore day-to-day. I started working a couple years ago on this new book called Incorruptible. And basically this whole time since the creation of lean startup till today, it's been 15 years. Almost every day of my life somebody calls me for advice about how to start a company. It's kind of a miracle. Like to me it's the most interesting job in the world. I get to just meet these extraordinary people and sometimes they're calling me because they have an existing company and they want to make it more innovative. Sometimes it's a big company that wants to get more agile, you know, so many different situations and sometimes it's just literally two girls in a garage being like "We've got a crazy idea. What do you think?" You know, so many of the name brand companies of today I met them when they were just kids in a garage.
So it's been cool, but I've also gotten to see the dark side, the underside of this business. And the conflicts that people get into with their investors, the way that companies founders can lose control of their companies, the way that companies when they pursue growth for its own sake can lose their soul and yeah, I started to be frustrated that I was helping people make all this money and be wind up miserable in the end. If you make all these moral compromises to seek growth at all costs, you make all this money and then you're unhappy, what was it for? Who's benefiting from this insane system? So this didn't start out as my goal to write a book or anything, I was just trying to figure out how can I help people build truly mission-driven companies that are immune to these pressures. And that kind of took me down the rabbit hole that led to the book.
And was the Long-Term Stock Exchange kind of in that direction, helping serious companies to have more long-term approach and less and resist to the
It's that simple really, yeah. The evidence No one ever wants to look at the evidence these days. We live in this polarized age, but the evidence clearly shows that companies that have a philosophy of long-term thinking make more money for themselves and for their investors. And investors that have a long-term investment philosophy also outperform. So to me it was just very obvious, why don't we bring the long-term investors together with the long-term companies and for mutual benefit create a mutual exchange. And what's so interesting is So for example, it's been in the news recently that the SEC is considering a petition to end quarterly reporting filing for all these years. LTSE were the ones who filed that petition. Okay, so like we are trying to drive real structural change into the public markets. Change that people when I first started this company and told people talked to me about it, people told me that those changes are impossible. The system is immutable. I don't think that's true.
And it's actually in the course of building that company that I learned all of the all I don't I'm not a lawyer, but I have to play one on TV, you know, when I'm working on the stock exchange. So like I had to learn all of our corporate governance best practices.
And a lot of them struck me as frankly insane. But I didn't know better, you know, very smart and powerful people tell me this is the only and best way to make a company. So, I was like, "Okay, well, I better learn about it." And I started to ask people the simple question, "Is that practice value creating? Are you sure? Can I look at the evidence?" And turns out, we've been living in the era of shareholder primacy long enough
that we have evidence. We have data for how well these practices hold up. And in the new book, there's literally a whole chart that just says, cuz just the title of the chart is best practices destroy shareholder value. And it's just practice after practice after practice. And I used to teach people as best practices. Everyone there Everyone says they're the best. We have the evidence now that they're costing our economy trillions of dollars in lost potential. I just think we have a very strong case for reform.
Excellent. Well, practical founders, startup founders, once they get out of pure desperation into less desperation, and they're on to something, practical founders can build beneficial value for their customers, for their employees, for the founders, and maybe keep the investors at bay, or at least keep that to a minimum. Now, is this about big companies and the corruptions of the financial primacy and shareholder primacy and, you know, the evil big companies, the evil venture capital, evil public companies, evil private equity? Like, there are a lot of bogeymen out there.
Yeah, well, listen, the book is full of stories like that, but not exclusively.
Because what's happened is not I think seeing things in purely moral terms can be distracting, actually.
And I think Yeah, thanks for a great bumper sticker. Yeah.
Yeah, it makes for a great bumper sticker. So, I totally understand. And listen, the book doesn't shy away from moral language, nor for making moral judgments when that's appropriate. But I think if we're going to study the systems of our financial system, like the structures of how it operates, we have to understand the mechanics of it before we judge the individual actors. And that's uncomfortable for people cuz we so desperately want accountability and it's so easy to say that there's this one villain. Once you get rid of the villain, problem will go away. But you know, if you noticed this problem been going on for hundreds of years. In the book I say, if the actors change but the play remains the same, it's not the actors who are causing the play. We need to learn the drama behind the scenes. So, I think that because we have financialized everything, we have made the world very different from the world of our grandparents. Our grandparents recognized very separate spheres of influence. You know, there was a public sphere, there was a private sphere of economic activity. There were public markets, there was an investment sphere, but they also they were like the Elks Lodge and they were social spheres. You know, if you like think about how we think about sports teams now. Like when you see a sports owner erupt in a scandal or some sports teams like milking their city for money and not actually putting a competitive team on the field. Today, you'll hear people be like, "Well, what do you expect? There's big money involved." But like our grandparents didn't They didn't see that. Like they would have seen sports as a totally separate sphere. And if you were like, "Yeah, like how dare you behave in that way?" Like it would have been a major scandal. You know, think of the Black Sox scandal and the response to that today. We have the equivalent of that happening like in every league every year. And we don't do anything about it cuz we just we financialized everything and the values of our financial system have leaked out of stock trading and, you know, hedge funds and stuff into almost every aspect of modern life. And finance is an interesting thing. Finance is not bad. Finance is not evil, but before a very recent turn of events, in almost every previous era of human history, going all the way back to Aristotle, people had a very clear understanding that there were better and worse ways to make money. And we've kind of forgotten that. Well, I don't think actually forgotten. I think most people listening to your podcast are builders by nature. And if you meet someone who makes things for a living and you ask them if secretly, like do you really believe all ways of making money are equally good? we'll all confess privately like, "No, obviously we don't." The best way to make money is to make net new value in the world and capture a little bit of it for yourself. And so you're like, "Well, what about people who just arbitrage and trade their way and like people If you name all these different ways of making money without creating value, most builders will be like, "Oh yeah, I don't think that's good, but am I allowed to say that out loud? Is it okay?" So, part of this is we have to break what's called the normative consensus that these sociopathic behaviors are value creating and are therefore good for society. They're not. And we don't have to pretend anymore. We can just be like, "No, no, they're not." And once you break that spell, you start to realize that we've just constructed a lot of our institutions, from the biggest to the smallest, with this extractive set of values at the center. And that makes it impossible to build a company that I think a lot of your listeners, maybe all of your listeners, want to do. Build a company that makes things. That has an aspiration to quality, has an aspiration to take care of customers and make their life better. And when I say that, if you have a simple aspiration, as simple as I want to bring I'm going to use my company to bring a little more beauty into the world, or I want to nourish and delight my customers, or just the simplest, most humble aspiration, you are already a business revolutionary, whether you know it or not. Because you have just said something that is catastrophically at odds with the values of our financial system, which says, "No, organizations are not beautiful organisms that we birth. No, no, no. They are merely financial instruments for the enrichment of shareholders. That's all." So, if you ever wonder, "How can we keep making products worse?" This is why.
And is it about investors and public markets? You know, in practical founder land, if you're bootstrapped and independent and you're creating magical value for your customers and not spending too much, you're lean about it, you can kind of hold off from the psychopaths with spreadsheets.
Well, that is one that is
Maybe you'll Maybe you'll you'll meet someday when you want to sell your company. Something like
Well, so interesting. So yes, of course there is definitely power in staying private and avoiding investment. And I actually talk about this in the book. I think it's actually a very unfortunate reality today. Many of the very best companies that are being created today are being created by founders who are like opposed to investment. They see investment as a source of potential corruption, understandably so.
As a result, investors are missing out on a lot of different businesses they could be investing in but can't because people have woken up to this reality. So it's a bit of a mutual avoidance that I think is foolish.
Given where we're at, if you can create a bootstrap company, if you can maintain control, it doesn't make you completely safe. Okay, the problem is actually not investors but financial thinking. So I tell a bunch of stories in the book of companies where the issue wasn't investors but their own employees. You start to bring in professional managers. You start to bring in professional like you bring in a CFO and the CFO has that extractive mindset or even worse, a lot of the most biggest tragedies in the book are board betrayals. I'll give you an example. There's this company in the book called SAIC.
Defense contractor. People don't know this now but for most of the 20th century, SAIC was the largest employee owned company in the world. They were like billions in revenue. They had like 40,000 employee owner scientists who did the research behind SAIC. The founder had this very particular ethos that about trying to create an environment that would maximize the life satisfaction of scientific researchers who could do the most productive work in their career. And as a result, so many people chose SAIC for lifetime employment over other These were coveted coveted talents who chose to go work there. I actually for a brief very brief time was a intern there when I was in high school. So I little little taste of it. That's why I remember it fondly even though of course it's a defense contractor. So it was actually like in some ways what they do is very grim. But interestingly, as he got close to retirement age, and I know for a lot of people listening, let's see, this is a problem that seems a long way off, but remember your board can strike at any time.
It happened to be when he was at retirement age. His board decided that it would be better if SAIC was a private was a public company, and they got rid of employee ownership. Why did they think that? Well, the company was having to spend hundreds of millions of dollars a year buying back shares from its employees. They actually had an internal stock market where they provide liquidity for the employees, owners. And the board saw this as a waste of money. Now, sounds like a lot of money. I think they spent $5 billion over a 10-year period, something like that. They spent over 2 and 1/2 billion dollars over a 10-year period on stock buyback. So, it was like a lot of money. But this is a company that had $5 billion of earnings a year.
They could totally afford it. So, the founder was like, "Look, this is a perfectly reasonable expense to defend this ethos." And the board was like, "See you, buddy." And they just had all these fancy independent directors who all should have known better. They fired him, and they took the company public. Corruption immediately followed. The company was embroiled in scandals. They had to split it into two companies, and today the remnants of SAIC, one company has the SAIC name, one has a different name, that total enterprise not only is smaller than it was at SAIC's heyday, but it features less than 10% employee ownership. So, what And look, your jam, someone listening to this may be like, "Well, my jam's not scientific research or employee ownership. My jam is you tell me." It could be as simple as the healthiest cupcakes in America, or as complicated as you're trying to save climate change. Whatever it is, if your board decides it's their fiduciary duty to betray you, they can and will do so.
So, that is the cautionary tale that I've been through about having investors that even minority investors, small investors, that have a little teeth and can push you. And if you don't have investors, when your company gets to 100 people, 150 people, and so forth, that financial gravity, as you call it in the book, right? The truth that spending decisions and growth
