Eric Ries on why "bad governance" outperforms, the case against shareholder primacy, and AI's Chernobyl moment

Eric Ries created the Lean Startup methodology and authored the bestselling book of the same name, which has sold over a million copies. He's also the founder and executive chairman of the Long-Term Stock Exchange, the co-founder of Answer AI (an AI R&D lab), and the author of the upcoming book Incorruptible, releasing May 26th. In this episode of Summation, Eric and Auren discuss: why "bad governance" companies have outperformed "good governance" since 2008financial gravity - the invisib...

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Auren Hoffman?

  Hello fellow data nerds. My guest today is Eric Ries, the creator of the Lean Startup Methodology and the author of the bestselling book by the same name, which has sold over a million copies. He's also the founder and executive chairman of the Long Term Stock Exchange, and he's the co-founder of Answer AI and AI R and D Lab. And his new book, Incorruptible, will be out later this year, which I'm super excited about. Eric, welcome to Summation.

• 0:23Speaker 01

  Hey, thanks for having me. It's always good to see you.

• 0:26Auren Hoffman?

  Great to see you as well. Now, you kind of argue that the, that capital is kind of like a gravity that bends companies a little bit away from their mission. Like, walk us through the argument.

• 0:38Speaker 01

  Yeah, yeah, it's actually very straightforward. And most of us have like, lived this experience so much that we kind of don't even notice it when it happens. Like, have you ever been to a restaurant and like, you take a bite of the food and you're like, "Did private equity buy this restaurant?" Like, you can literally taste it. And it's funny, I've been using that anecdote a lot. And people come up to me after talks and stuff and they'll be like, "Oh yeah, I know what restaurant you're talking about." And then like, name like 12 different restaurants, because we've all had that experience. People will say like, "Yeah, as things get bigger, as more money gets involved, as investors get involved." Like, it's just natural, natural, that things be bent away from their actual values, from the thing that originally made it great. And so, the, the goal of the book is to answer kind of like a double mystery about this. First of all, why does that happen?

• 1:22Speaker 01

  When the thing that made the company super valuable is often the thing that made it special? Like, why are we losing the distinctiveness? And why, why is it in particular? Why would investors ever want to lose the thing that makes a company valuable? You think they want to double down and get as much as possible of the thing that make it valuable? But then, the second part of the mystery is, if this is a natural law, if it's inevitable, why are there exceptions? How come there are these companies that just don't seem to have this happen to them? Like, I was, I was watching a video, I think it was Rory Sutherland, the, the marketing guru, was giving this talk and he was like, "Yeah, uh, family, only family-run companies can resist this pressure, this temptation to make everything about ROI, about, you know, efficiency, about quarterly returns, et cetera, et cetera."

• 2:04Speaker 01

  He's naming all the different family-run companies, Ford and Toyota and this and that. And then at the end of the video, he's like, And also Costco for some reason. Costco's not a family run company, but they also seem to be able to do this. Anyway, moving on, it's like, whoa, whoa, whoa. If it's inevitable, why is Costco the exception? It turns out there are a lot of these exceptions. So the key idea to understand this, you have to understand what this thing called financial gravity. It's like an unconscious force that acts on people and organizations. And like you've been around a lot of rich people, you know what this is like. You ever watch a normal person like meet a celebrity for the first time or be around a billionaire for the first time? They like, they start to act really weird. They start to act like a little bit obsequious. They start to be like, oh, and if you ask them about it afterwards, they're often a little bit embarrassed. Like they weren't trying to act that way.

• 2:47Speaker 01

  And I remember even I was a Microsoft intern back in the day. And I remember being at Bill Gates's house with all the other 20 year old interns. You know, it's like all kids and people are, and we all get a chance to meet the great man himself. And people are like crowded around him. Like it was like a feeding frenzy, trying desperately to say something intelligent that he might notice. And I remember that even at the time, you're like, this is super gross. What's going on? But as I got older, I started to understand it better because of course everyone's got this little fantasy. Well, you know, maybe if you say just the right thing.

• 3:20Auren Hoffman?

  Yeah.

• 3:21Speaker 01

  You would be like, you, I'm going to give you a billion dollars and set you loose to like pursue.

• 3:26Auren Hoffman?

  All of a sudden I'll say something with Taylor Swift and she'll make me her backup artist or something.

• 3:31Speaker 01

  People who have a lot of a status item that you crave. If they have a really a lot of it, they have the power to change your life with a word. If they want to, we've been seeing this phenomenon since we had medieval kings, you know, like if someone has power, status or resources in abundance, the resources themselves exert a gravitational pull on everybody involved, including them and you. And notice that Taylor Swift doesn't actually have to do anything to change your behavior. She might not even know you exist. The fact that you're imagining this thing might happen is enough to change your behavior. Now in psychology, we understand, we have a lot of research on this, that consistently enacted behavior eventually becomes internalized as values.

• 4:14Speaker 01

  So over time, resource disparities lead to values changes in the people. It often unconsciously by the people who are them changed. So you and I've been around a lot of startups that have had a lot of success. And you'll notice this pattern, I'm sure you've seen it too. I have lived through this process of watching these organizations get surgically deboned. Like they just start out so idealistic and strong and over time, they make compromises. They get told you need to be a little bit more professional. You got to follow the best practices. And like, next thing you know, like they're really like being run at first for like, hmm, I wonder what investors might want. Right? What might make the board happy? What might make investors happy? What might allow us to raise our next round? When they go public, if you've talked to CEOs of taking companies public, you say, what's the difference before and after?

• 4:59Speaker 01

  The number one thing they always say is after the IPO, everyone looks at the stock ticker. And next thing you know, you're having a product management meeting. You're talking about product quality, whatever. And someone's like, mm, the market might not like it. And the word might is doing a lot of work in these sentences, right? Like, you're not, because remember, it'd be very healthy to be like, I'm going to go interrogate investors to find out what they want as a key stakeholder. And like, that's not what we're doing. We're imagining what might allow us to win their favor. So if you look at companies that started in different industries by different founders, different countries, different geographies, different industries, different decades, they all kind of wind up in the same place. And it's actually, we're used to that, so it doesn't sound like a big deal. But if you think about it, like, that's actually kind of weird. If it was random, big companies, when I say that company has like big co-disease,

• 5:45Speaker 01

  you'd have to be like, well, which one? Huh? But no, I don't have to say anything about it. You instantly know what I'm talking about. It's like, oh, yeah, they're bureaucratic, they're lethargic.

• 5:52Auren Hoffman?

  Just to, just to kind of like push back a little bit. I mean, the founder-led companies do seem to, to stay more true.

• 6:00Speaker 01

  That's right.

• 6:00Auren Hoffman?

  Not always, obviously, it's harder. They stay more true.

• 6:03Speaker 01

  No, no, that we have, that is not a tendency or a theory. We have really good data about that.

• 6:08Auren Hoffman?

  People who worked their way up the ladder in most of these companies, in most cases, like, there are different types of people. There may be a little bit more political. There may be a less product-oriented. I mean, like, often, it's like the finance person who ends up running the company or something like that.

• 6:24Speaker 01

  Yeah, yeah, but why?

• 6:25Auren Hoffman?

  They're a good, or a sales person, like, they're a good person. They're really good at what they do. But they weren't, they're not like the person who's like very in touch with the product. Inevitably, things slide over time and then that creates new companies that could come in.

• 6:39Speaker 01

  And again, if you ask founders what they want, do you want to go on this slippery slide to mediocrity? Almost all founders are like, no, I've just told that was inevitable. But it's like, no, actually, and this is what the book is about, there is a blueprint for preventing this if you want to.

• 6:54Auren Hoffman?

  Usually what happens is when the founder leaves often, the number two person is the one who takes over in a successful company, right? And the number two person in almost every company is often the opposite of the founder.

• 7:11Auren Hoffman?

  They're the person who's like, you know, very, if the founder's good at product, they're good at, the number two person's good at sales. Or if the founder's like an ideas person, they're more operational or whatever. They're the yin to the founder's yang. And in some ways, almost that's the worst person you should promote. But they promote that person because they don't want to lose them because they're so valuable to the business. So they promote them to the number one. But really it should be like finding like the number seven person who's close to the product and move them as number one.

• 7:42Speaker 01

  Yeah, so all these things that you're saying are true, but you gotta, we gotta get to the deeper question, which is, but why is it this way? Why do we do it this way? Like, why do boards do that? Why do companies fail the test of succession so often? And my, my theory is that we have basically become indoctrinated to a set of corporate governance best practices that are designed to produce this outcome. And because of that, they're actually value destroying. We call them best practices, but really they're just like the popular or dominant practices. They're not actually very good. So a huge part of the issue is that most founders don't know anything about corporate governance, don't give two seconds of thought to their corporate structure. Most founders have never even read their corporate charter. They just accept these kind of just so stories about the way things are.

• 8:26Speaker 01

  And as a result, they don't build into their organization what I call the, um, the architecture of institutional longevity. And that can't just be about the founder or about individual people. It's gotta be about something bigger, something that can last longer. And in the book, I give examples of companies that have been able to last 40, 50, 100 years. Even though the founder is long dead, because they are protecting the organization with something that is more durable than just an individual hero putting their finger in the damn.

• 8:57Auren Hoffman?

  Now, when you think of like a company like OpenAI, where they've had kind of their ups and downs and everything like that, like, is that a case study or is that a counter example? Or is it just the fact that its founder led still, you know, it's still to be determined? Or, you know, how do you think about a company like that?

• 9:13Speaker 01

  Well, I'm very, I'm always very reluctant to comment on OpenAI just because it's such a, it's just a very idiosyncratic and odd situation.

• 9:19Auren Hoffman?

  Yes, it's an odd company.

• 9:20Speaker 01

  So like, I don't, like, I can, I, but I can say a few things about it. First of all, people sometimes think that OpenAI is an example of a, of a foundation-controlled company, like there's a thing called an industrial foundation. Think of Novo Nordisk, where you have a nonprofit foundation that oversees a for-profit company. But, but OpenAI has actually never had that particular structure because they've only ever had one board, even when it was a complete nonprofit. The same board ran the nonprofit as the for-profit, even now that they've converted to a public benefit corp, it's still a single board. The more durable structure, the one that's been studied and found to be very effective, often has two boards, a board of trustees that have the responsibility of mission protection and long-term alignment, and an operating board that has the kind of operational rigor to avoid some of the issues that OpenAI has.

• 9:58Auren Hoffman?

  That's a Novo Nordisk or some of these, like, a little bit of an odd, some, there's a few of these odd companies that are out there.

• 10:04Speaker 01

  Well, it turns out there's actually quite a lot of them, even though we treat them like they're these weird outliers, like, for example, and like, this is actually an idea that's been studied. So, for example, the German optics company Zeiss adopted this structure in 1885. So, it's actually been around for a little while and it's working pretty well. Novo Nordisk adopted the structure in the 1920s. But you also have, like, if you've ever eaten a Hershey chocolate bar, Hershey's run by a nonprofit, a nonprofit foundation. If you've ever shopped at IKEA, if you've drank in a Carlsberg beer, the structure's all over the place, not to mention, you know, Patagonia, Vanguard, like, a lot of name-brand companies have this structure. So, I think it's interesting, not only are they unusually long-lived, like, we have, as a data set, companies with this unusual structure are six times more likely to live to age 50.

• 10:46Speaker 01

  Literally like 10% chance versus 60% chance, they're much more durable than the classic investor primacy, shareholder primacy kind of company.

• 10:53Auren Hoffman?

  And partially because they don't sell too, right?

• 10:56Speaker 01

  They don't sell, they have no, they exist in perpetuity. They can sell if they want to, but they often don't. In fact, I tell in the book, a story of a time when one of these companies was tempted to sell and the nonprofit had to intervene to stop the transaction. And in the course of doing so, literally created $500 billion of shareholder value. So, you know, it works out pretty well when you take the long-term approach, as it turns out. But also they violate almost every one of the best practices that we teach founders are necessary in order to create a globally competitive company. So to me, they're like, they're really the double exception. They're both exceptionally long-lived and exceptionally likely to be true to the mission, and they are exceptional in that they don't follow the best practices. And of course-

• 11:34Auren Hoffman?

  What are some of the best practices that they don't follow?

• 11:37Speaker 01

  Yeah, so the biggest and most important one is what's called shareholder primacy. Today, it is considered an absolute best practice that the purpose of a corporation is to enrich shareholders. Corporations are now understood to be financial instruments designed to enrich their shareholders. This has been encoded into law in places like Delaware. But first thing that's really important for most founders to know that they don't know is that this idea is very recent. For the vast majority of the time, there have been joint stock corporations. It was considered completely obvious that the purpose of a corporation was to do some specific thing, and that specific thing was meant to be beneficial, to have a defined public benefit is how we now, using the modern language for it. So like in the 19th century, if you tried to like go take over a railroad and be like,

• 12:22Speaker 01

  I'm going to convert this from a railroad company to a company that is designed to enrich its shareholders, that would have been considered a crime and your corporate charter would be voided because that would be defrauding the shareholders who had invested to do the specific thing. So this idea, this modern idea that companies are just, just instruments for shareholder value is younger than the trees in your local park in most cases. Another best practice is loading up boards with independent directors. There's like tons of research that shows that like independent directors basically have more loyalty to the financial system than to the companies they oversee. And so although people like think they've created a balanced board, like a classic five-person startup board, that's two insiders, two VCs and an independent.

• 13:04Speaker 01

  People feel like, oh, that's pretty balanced is not balanced at all. And we have good research for that.

• 13:08Auren Hoffman?

  Most public companies have like a 13-member board and it'll be like the CEO and none of the other people on the board will have even 1% ownership in the stock.

• 13:19Speaker 01

  That's considered an absolute best practice. Yeah. Because you want kind of indifferent mandarins. You don't want people who have a stake in the outcome. How ridiculous is that? Which is totally absurd. And if you compare the behavior of those companies to, for example, ones that have employee, a significant employee ownership. The employee-owned companies run circles around them because of people.

• 13:34Auren Hoffman?

  But you would think, okay, like, I mean, there are a lot of these private equity companies and the private equity companies.

• 13:42Auren Hoffman?

  Often the board might control 80, 90% of the company, right? So they're the real owners of it. Yet I don't know that they do any better either.

• 13:51Speaker 01

  Well, because they have a fiduciary duty to their LPs that is widely interpreted to mean that they have to do every extractive thing they can think of to make every possible dollar for their investors. This idea has gotten like, people have gone crazy for this idea and it's causing companies to basically destroy.

• 14:06Auren Hoffman?

  Actually do that? Like, to me, it seems like they're just as bloated as any other company that's out there. When I see these private equity run companies, when I work with them, they're like super bloated. They don't seem like they do the cost things that they like, you know, back maybe back in the eighties they did.

• 14:20Speaker 01

  Oh, yeah. No, that's true.

• 14:22Auren Hoffman?

  They do any of those things. Like, they have like massive bloated management teams. They don't seem like they hire that well anymore. Like, they kind of like, they like, it seems like the barbarians at the gate, like, all just like left out to lunch. And now it's just like people who do spreadsheets or something.

• 14:37Speaker 01

  Yeah. Well, it's if you look, if you follow the money, most of these practices are designed for self-enrichment. So, and this is not, this is not unique to Google, but like I quote in the book, a Google employee who talked about what it was like to be there for like 10 or 15 years. They said gradually over time, 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 made the decision. And that, again, that's not, you know, Google's not a bad company. Google's a great company. But this is what happens to companies. It doesn't matter. Private equity, public, it doesn't matter.

• 15:07Auren Hoffman?

  Inevitable, but it's maybe not inevitable as companies get bigger, like that happens, right?

• 15:13Speaker 01

  No, no, this is what I'm trying to tell you. It doesn't have to happen. There are companies where this doesn't happen. And the fact that it is possible to build a company with an immune system against this is the ultimate indictment of this whole system. I'll give you one of my favorite factoids from the book. Since 2008, in aggregate, companies that have been rated to have bad governance have outperformed those rated to have good governance.

• 15:37Auren Hoffman?

  Yeah, I believe that.

• 15:37Speaker 01

  Yeah. So like, what are we doing? Like, this is supposed to be

• 15:40Auren Hoffman?

  Right. You just look at all the Elon Musk companies. They all have quote unquote, bad governance.

• 15:43Speaker 01

  Bad government, incredibly bad government.

• 15:45Auren Hoffman?

  Companies like volunteers, bad governance, one of the best performing companies of all time, right?

• 15:49Speaker 01

  So many of the ESG ratings.

• 15:50Auren Hoffman?

  I want to invest only in companies with quote unquote, bad governance.

• 15:53Speaker 01

  Oh, you do really well.

• 15:54Auren Hoffman?

  Founder controlled, right?

• 15:55Speaker 01

  Yeah. And you look at a lot of companies, their ESG scores are incoherent because in order to create the environmentally sustainable outcomes, it's supposed to give you a good ESG score. You'd have to be, you'd have to have control of the company such that you could resist this pressure. So to get a good E and S score, you'd by definition have to get a bad G score. So it's impossible to do well on these ratings because our whole theory of corporate governance, I think, has gotten it wrong. And so in the book, I try to lay out, first of all, the history of how did we get here? The theory of what is wrong, like at an intellectual level with our ideas about corporate governance. But more importantly, the blueprint for how we could develop what I call a new governance, new ideas about how companies should be governed, that would be designed to create this outcome that is incorruptible.

• 16:39Auren Hoffman?

  And some of these companies you talked to, we'll talk about, you mentioned, you know, Nordstrom, Costco. Obviously, there's companies like Vanguard. For a long time, maybe you put like Visa in that world or something like that. Maybe they're not in that anymore.

• 16:54Speaker 01

  Well, they had, they used to be like a member owned cooperative. Now they're a for profit, now they're a publicly traded for profit company. It's very different.

• 17:00Auren Hoffman?

  Yeah, yeah. But so even companies like that, like they do switch, right? Like maybe you would have said Visa was in it, you know, 20 years ago and now it's not in it, right?

• 17:10Speaker 01

  I have a chart in the book. I can't wait for you to see it. I'm very curious to see what you think of it. Basically, I traced 200 years of this happening, like decade by decade, case study after case study. This pattern that I call enlightened capitalism, basically what happens is someone figures out. That here's a better way to run a business, right? Treat your employees well, pay higher than prevailing wages, be trustworthy to your customers, treat your investors fairly. Like, there's like a set of practices that get rediscovered in every generation. And everyone's like, oh, but because the market rewards value creation and capitalism is about competition, then obviously I'm going to be a hero to all my fellow industrialists. When I tell them the good news that we all have a way to make more money and they're all going to copy me. And then one after another, hundreds and hundreds of these entrepreneurs commit, I think, like the biggest fallacy of all time,

• 17:55Speaker 01

  which is they just assume that the market will reward them for this. And what do they get? What they get is ousted from their own company. What they get is the ethos that made the company super valuable, super competitive is removed. And let me just be concrete. Let me tell a story because this is super common, but it's helpful to have something concrete. I really admire Saul Price. He's the father of modern retail. He created a company called FedMart in the 1950s. And he was a lawyer before he became a founder. So his idea was if you're a discount retailer, just like a lawyer has a fiduciary duty to his client, meaning the lawyer has to put the client's interest before his own. If I'm a retailer, I have a fiduciary duty to the customer. So he created this hierarchy. He said, my hierarchy of value is customers first, employees second,

• 18:37Speaker 01

  shareholders third, the complete opposite of what we now teach as the best practice. Over 20 years, he built FedMart into this huge retail behemoth. Customers would drive miles out of their way to go shop at a FedMart store because they trusted him. They knew that this is a company that wouldn't take advantage of you. There's so many great Saul stories. I want to help you to say one of my favorites. His competitors were always trying to drive him out of business because he drove them crazy. And they would often do the classic retail strategy of dumping. So they would like, they would sell eggs below cost in order to be able to advertise that they have a lower price even than FedMart and get you not to shop there. And anytime someone would do this, Saul would put up signs inside his own store, letting customers know that eggs were cheaper down the street and they shouldn't buy the eggs from him.

• 19:21Speaker 01

  So like you couldn't use the typical tactics with him because he didn't care. He's, he's trying to earn the trust of his customer and he would never betray them. And of course they built this incredible loyalty. So he took that company public. He hated being a public company. He felt like the pressure to constantly, um, you know, think short term and get rid of these practices was overwhelming. So he did a take private. He took the company private with a new set of investors. They became the 51% owner. He was the 49% owner, but he thought they understood his retail philosophy. But the new owners found Saul very frustrating because he's constantly quote unquote, wasting money that should be theirs on improving the customer experience. You'll sometimes see this in analyst reports about Costco. Still, Wall Street was always complaining about Costco with, they'll write things like Costco takes money

• 20:05Speaker 01

  that rightfully belongs to shareholders and spends it on improving the customer experience instead. That's considered a criticism. Most product people can't even understand what they're talking about. So it's been going on a long time.

• 20:15Auren Hoffman?

  I mean, these are, I mean, what you're really just saying is like be long-term greedy, not short-term greedy in some ways, right?

• 20:22Speaker 01

  It's not that, it's not that complicated. And yet, look around, we're not doing it. So the investors decided in 1975, after he'd been the CEO of this company for 21 years, um, that they were going to fire Saul Price so they could return the company to conventional retail practices. He literally came into work one day and the locks on his doors were changed. That's how it went. Classic boardroom coup. You've been around Silicon Valley long enough. You've seen this many times. He lost.

• 20:46Auren Hoffman?

  Really? Actually, I haven't seen it very often. And I'm sure, I know what happens.

• 20:49Speaker 01

  What are you talking about? You haven't seen this happen? I could, I could rattle off like 20 of these stories, really?

• 20:54Auren Hoffman?

  Yeah, I know it happens, but I haven't really seen it too often.

• 20:57Speaker 01

  Man, you've, you've had a blessed run, my friend. I, I guess I have counseled a lot of people through this scenario, um, sadly. In any event, the investors got what they wanted. They were able to force him out. They were able to return FedMart to conventional faster growth, you know, more profitable quote unquote practices. And within seven years, they had driven it into insolvency. And that's kind of like the killing of the golden goose. We see it like in company after company after company after company. And it's done in the name of value creation, but actually it is a practice that is value destroying. And my thesis in the book is that when people do these value destroying activities, when they find ways to make money without creating value, they've actually corrupted the moral logic of capitalism. So we don't, we don't even really have a word for this behavior anymore. Cause our modern sense of the word corruption is very narrow.

• 21:42Speaker 01

  It means only like embezzlement or fraud, although even these days like we're getting confused even about that point. So I kind of think we should take the old, do the old fashioned move or bring back the way our grandparents and great grandparents would have thought about this and say, yeah, when people do that, that's a corrupt act and we should, we should strive as organization builders to build organizations that are incorruptible.

• 22:00Auren Hoffman?

  You know, if you think of like the Mars family, right? The Mars family still controls the Mars business. It's incredible business. I love their products. They make incredible products that we all love, that we've all kind of grown up with. And yes, it is somewhat incorruptible today, but you can imagine the next generation changing their mind and selling the company or splitting the company up or, or whatever.

• 22:24Speaker 01

  And yeah, like what I'm trying to say though, is it's actually not as difficult as it sounds. If you're willing to open your mind to new alternative corporate forms. And like in the book, I try to present the research that these alternative structures actually outperform our conventional structures. So a lot of the difficulty that we're experiencing in business has to do with having taken shortcuts early on in a company's life that have a long-term negative consequences. And if we're willing to be a little bit more bold and are thinking about what an organization can be, how it can be structured from the beginning. If we're willing to look at the evidence, the research and the case studies, we can develop new practices that don't have this problem.

• 23:03Auren Hoffman?

  Some companies, they need capital to grow, right? They're raising capital from venture capital or, you know, maybe other alternative places. These venture capitalists like want a return. They certainly are very comfortable with like founder controlled things where they may not have control of the company. Some, most of the very best outcomes are founder controlled. I think they've already kind of come to that belief and most, at least most of these venture capitalists probably believe that today. But like a whole new structure might, might scare some of these venture capitalists away.

• 23:38Speaker 01

  Yeah, everyone, everyone when they hear about this for the first time, they have this worry. Okay, but so let's, let's be super clear. If you talked, if you talk, I was like, I was at Bioneers at Berkeley the other day, which is like full of people who are very skeptical of, of investors and they have like all convinced themselves that like an investor, once you bring investors into the, into the company, you've basically let the fox into the hen house and there's nothing you can do. Corruption will follow. And then I do tell a bunch of stories of companies in the book like Patagonia, John Lewis Partnership, you know, Eileen Fisher. These are companies that have never taken outside investment, so they've always had the freedom to do what they want. But I also tell a lot of stories of companies that have taken investment. Nova Nordisk is a publicly traded company. I tell the story of the founding of Anthropic because I was there. And that story, that company has famously raised really a lot of money with an alternative structure.

• 24:23Speaker 01

  The evidence, of course, there are some investors who don't get it. And I talked, there's actually a whole section in the book about how to talk to investors about these ideas. Because the critical thing is that for an investor, just because an idea is new to you, doesn't mean it's new. So the good news is we actually have a lot of data about how these different company structures perform. So you don't have to be like, oh, I happen to think this is a good idea. No, we have the evidence that these structures lead to outperformance. So I think as they become more common, as investors become more educated, it won't be that hard to convince investors to give it a try. Because like I said, the current best practices are value destroying. So you think investors ultimately will want to do whatever is value maximizing.

• 24:58Auren Hoffman?

  But when you mentioned these clinical best practices, these are things that often don't, aren't implemented at the founding. There are things that get implemented, at least the ones you mentioned, like later on. And sometimes way later on.

• 25:12Speaker 01

  They get implemented later on, but they get built to a blueprint that is established at the beginning. I'll give you one clear example. Most companies these days like claim to be mission driven. Okay, that's like very common. If you ask a founder, are you mission driven? They're like, yes, my aspiration to build a mission driven company. And I'm like, great, is the mission in your charter? And they're like, my what? Like, have you ever read your corporate charter? No? Would you like to? So, they say the mission of this company is to solve this important problem. Like, I did this once with a founder whose mission was like to build the highest quality software possible. I did it, I've done it for people who are trying to build robotics, you know? I was someone who was like, no one, someone's mission, they were like, my mission is that no, like, work will become voluntary. No one will ever have to work again, I don't ever have to do manual labor again.

• 25:55Speaker 01

  So like, sometimes it's very lofty, sometimes it's really simple, like, Cloudflare, they were just like, we're just putting a firewall on the cloud, okay? But their mission was to build a better internet. Anyway, whatever the mission is, that's like the nominal mission, the thing you claim the company's all about. But if I read your corporate charter, it'll say something like, "The Acme Corporation is hereby incorporated to pursue," quote, "any lawful act or purpose." Any purpose. So I'm like, any purpose, including like turning your customers into Soylent Green? And he was like, "No, no, no, well, we don't want to do that." I was like, "Well, then why does it say any purpose? Why doesn't it say that you won't do that?" And so they go to their lawyer and say, "Oh, Eric said we have to make sure our mission is aligned with our charter." They're like, "No, don't worry about that, keep your options open. Optionality means higher valuation, don't foreclose your future options."

• 26:37Auren Hoffman?

  When I meet a company, when I ask them what their mission is, usually their mission is so broad and vague anyway. It's like, "To create good on the internet."

• 26:46Speaker 01

  Yeah, but that's just, that's just bullshit.

• 26:48Auren Hoffman?

  I think Stripe's mission is to increase the GDP of the internet, like, it's so broad, it's like, it could be anything. Google's is like, I don't even know what Google's is anymore.

• 26:57Speaker 01

  These days, who knows what it is. No, but even take Stripes, for example, that one is actually very specific. There's a lot of things they could do that would increase Stripe's profits, but not actually achieve that mission. Because it would be harmful to their customers, they would be stealing GDP from the internet to keep for themselves. I talk about this in the book, Silicon Valley Bank, you remember the collapse? That was real fun, that weekend. Silicon Valley Bank had an awesome mission statement that was like, "To, you know, support the innovation ecosystem and the people that make it work," or something like that. But, since they're a bank, their charter's public, you can look it up, their actual legal purpose was to maximize shareholder value. So the divergence between what they said their mission was and what their

• 27:40Speaker 01

  Mission actually was that is a

• 27:43Auren Hoffman?

  So you but like, so if you put this thing in the charter, like, what does it do anywhere? Like, it doesn't really constrain you in any way.

• 27:51Speaker 01

  That's not true. That's not true. It actually has significant consequence. It's not enough by itself, but in Delaware and 44 other states, we have something called the Public Benefit Corp. Statute or PBC. If you put this, if you do PBC filing, it's not the speed with a circle in it that you've seen at your farmer's market. There's something different. If you do this two-page filing in Delaware, you can write into your corporate charter that the public benefit of this company is to do a specific thing. Whatever it is, you know, Anthropic is a public benefit corp. It has a AI safety mandate, whatever you put. If you don't put that in there, here's what can happen. One day, whoever you hate the most, like, I always want you to ask people to visualize whoever you think is the most evil company in the world. The company that no matter what, you would never work for them, no matter how much money they offered you.

• 28:36Speaker 01

  Everyone's got some company on that list, like you couldn't pay me enough to do it. I, my father's a pulmonologist, so I was, I was raised that Philip Morris is the most evil company in the world. So we'll use them as my example, but you could pick any company you want. Your values may be different than mine, but do this exercise. Imagine that most evil company comes to you and said, hey, I'd like to buy the company from you for $1 more per share than it's worth. You saying yes? Every founder, of course, every founder I know is just like, hell, no, or something like much less principal, right? Like, people are like, that's outrageous. Of course I won't do it. But if you have a standard corporate charter that says any lawful purpose, you don't realize this, but you actually have already committed yourself to a fiduciary duty to say yes in this circumstance.

• 29:19Speaker 01

  It's absurd, but that's the law. So being a public benefit corp, doing the filing at the beginning is like a prophylaxis against this very specific.

• 29:28Auren Hoffman?

  But in some ways, that's saying like, hey, if you have founder, so really what you're saying is founder, it's like, kind of like founder control, but post the founder leaving the company or.

• 29:37Speaker 01

  No, here's what's even more crazy. Founder control is not sufficient to stop this from happening. Because you have a fiduciary duty. It is stronger than your founder control. You can be sued by your investors for failing to maximize their returns. Now, they won't necessarily win. It's complicated, like it could be complicated. And of course, generally speaking, investors have a lot of deference to founders with founder control because if they they mess with you, you can mess with them. So founder control is also a useful form of prophylaxis. But but I wouldn't, I would never rely on it by itself. You've got to have, like, think of it like a plate mail suit of armor. You've got to have overlapping plates.

• 30:12Auren Hoffman?

  Even if you had some sort of like mission or whatever, unless the mission said, we can never sell to this organization or something, they can say, well, we'll maintain the mission.

• 30:24Speaker 01

  You can say, but the point is to give you and your board discretion to be able to say no without being sued. The point of this filing is to give you the absolute right to say no in the circumstance.

• 30:35Auren Hoffman?

  Why would it give you the absolute right? Like, if the if the other if the other party claims that they're still mission aligned?

• 30:42Speaker 01

  No, but see, this is what I'm trying to say.

• 30:43Auren Hoffman?

  You still have a fiduciary responsibility to your shareholders to take care of them, right?

• 30:47Speaker 01

  Not if you're a public benefit court. Now, you do have fiduciary duty to your shareholders, even as a public benefit court, but you're allowed to say, look, I, I, I am not going to do this. Even if you, even if you can make the case that it's profit maximizing to do it, I'm still not going to do it, and it's okay. Because I get to make the determination.

• 31:04Auren Hoffman?

  What you are saying is that you are more, you, whoever you are, the board or whatever, is more mission aligned than the outside shareholders who actually might be more mission aligned than you.

• 31:14Speaker 01

  That is the legal function of the public benefit court, is to give the board the discretion to make this determination for itself. Whereas, under normal governance, they simply cannot.

• 31:22Auren Hoffman?

  Because I have seen so many, and it is many cases where it's nonprofits. It was, there was a founder who founded it with a very, very specific mission, which is in the charter of the nonprofit, very, very specific. And that board morphs over time, over many, many years. And then they do like literally the complete opposite. So, I mean, if a nonprofit could do it, like, it doesn't seem like they're aligned. Like, in some ways, if they're real shareholders, they would like take it back from these nonprofit boards. People will say, hey, you're not aligned with the mission anymore. Like, we're gonna take it over.

• 31:56Speaker 01

  Okay, okay. We're mixing up, we're mixing up a bunch of different vectors of attack. And they're all real and they all have to be defended against. So yes, the, the, there's a, like, first issue is, what happens? Like, if the board is aligned to the mission and some outside investor tries to force them off the mission, do they have the tools to defend themselves? That's a very important factor. We have to get that right. But then we have a separate issue is what if the board themselves becomes unaligned with the mission? What then? A lot of people, a lot of founders get betrayed by the independent directors on their own board. I'll give you one example. The defense contractor SAIC, the founder, was once the largest employee-owned company in the country. It was founded to do independent research, like scientific research was its, was basically its thing.

• 32:39Speaker 01

  And the whole point of it was if you come, if you're like a, a serious researcher and want to do this kind of research, you come work at SAIC, we will give you the freedom and the laboratory space and the things you need to do the research. So company like grew to like 40,000 employees. It had something like $5 billion of earnings a year. Like they were huge, become a huge, huge, huge company. And part of their theory was they wanted to stack their board with as many independents as they could, who were like big name lofty title people. So it was like former admirals and generals, secretaries of state. You know, like they just, you get the biggest name people possible, they come out of their government service, because of course they're government contractors. So very logical thing to do. And in order to make this work, since they were a private company, they used their profits to buy back shares from the employees to create liquidity,

• 33:22Speaker 01

  to make sure they had a completely closed ecosystem. So this like engine worked really perfectly. But as the founder was getting to be in his seventies, bankers started to show up to the board and say, you know, it would be a best practice to stop, quote unquote, wasting all this money on your employees. You should really take this company public.

• 33:38Speaker 01

  Now, founder was completely opposed to this, so the board forced him off the board. Because they were like, this is pretty sweet. So they, over his objections, forcibly took the company public and ended its policy of employee ownership because they wanted to, quote unquote, save all this money. Today, SAIC is a shell of its former self. It was split into two entities. Like, within a few years of taking it public, they got rid of all the employee ownership and they started getting, like, got into all kinds of corrupt stuff happened. Like this huge scandal where they were like overcharging municipalities. Like, they, they just didn't have any respect whatsoever for the ethos of what this guy had built. And in fact, right before he died, someone asked him, like, you know, how do you feel about this? He was like, that's my, my main regret is I trusted the wrong people. They didn't get it. Now, here's the key.

• 34:21Speaker 01

  Every time you read these stories, it doesn't matter if talking about John Mackey and Whole Foods, or any of the people who've been ousted, who've had a bad experience, who've had the company like taken away from them, they always interpret it as a personal failing. Oh, I should have been smarter. I should. The press loved to tell these stories as like the greedy bastards at the hedge fund versus the like naive founder running like John Mackey versus the hedge fund with like a press loved that story for for all the months it was going on because we like the personal drama of it, but personal causes distract from these underlying structures. And again, when properly structured, we can take that discretion away from the board. We can keep them mission aligned over long periods of time. We have the tools to do this. It's not a fantasy.

• 35:04Auren Hoffman?

  Okay, I'm skeptical, but I'm willing to I'm willing to I'm willing to be convinced.

• 35:09Speaker 01

  Look at the evidence. We have the evidence. This is not my my personal theory. We've got a lot of data on it.

• 35:13Auren Hoffman?

  Why are so many nonprofits get captured? Like, why do they? It just seems like any nonprofit has been around for more than, you know, more than 50 years. Not anyone, but quite a quite a lot of the ones, and especially a lot of the big ones, they changed. They're no longer do what the founders wanted. They often do like the exact opposite. Why have we seen so many there? And you would think those would be mission aligned, like the people who joined the board would be part of the mission, you know, etc.

• 35:41Speaker 01

  Yeah, I mean, I actually think the way we currently categorize companies as for-profit nonprofit is a mistake. Like, I think we were letting a quirk of tax law get in the way. What we're really talking about are founder, sorry, our investor controlled companies versus self-controlled companies. And investor controlled companies, we've been talking about the problems with that. Self-controlled companies have a different problem, which is they have nobody that they're accountable to. And the same financial gravity that we've been talking about for for-profit companies affects nonprofits, too. Getting on these boards is a sweet gig.

• 36:11Auren Hoffman?

  Yeah.

• 36:11Speaker 01

  But like what?

• 36:12Auren Hoffman?

  It's a networking opportunity and.

• 36:14Speaker 01

  They're much more focused on what's going to get them their next gig than on the health and wellbeing of the organization that they're supposed to steward. We see that in for-profit and nonprofit boards alike. And that problem also has a solution, which people can read in chapter 11 of the new book.

• 36:27Auren Hoffman?

  Part of the problem is just to me is that a lot of these companies, they just stop innovating. They stopped doing like they had this great thing that they were doing, everything like Boeing or something. Boeing was run by these engineers. They were building these most, the most amazing things ever, these incredible planes, all this other stuff that they were doing. And then it kind of got taken over by non engineers and they were less involved in the product. And, and then they kind of took it in a direction where like Boeing today is unrecognizable from what it once was at its peak. And, and eventually, not every company succumbs to that, but it does seem like it is, I wouldn't say inevitable, I'm going to give you that.

• 37:12Speaker 01

  Yeah, it's an epidemic, though. It's an epidemic.

• 37:14Auren Hoffman?

  It's an epidemic. And it seems like almost anything you, in some ways, the most important thing you need to do is just like figure out who the next, it's not the investors usually often, it's usually the successors. And it's maybe not the next successor after the founder. It's often like the next successor after that. If you look at like GE or Intel, or you just go down the list of all these great companies that eventually were, you know, became financialized and no longer were innovating anymore.

• 37:45Speaker 01

  Yeah, I actually tell the Boeing story in the book because it's, it's an absolute tragedy what happened. And it's really, people now are like, oh, they kind of stumbled into it. No, you really have to look and see the people who did this to Boeing. It was very much their explicit goal to bring the company to heel, to bring it in line with the best practices. I also saw the story of Johnson and Johnson. In Robert Wood Johnson II, he, he was preparing for Johnson and Johnson's IPO in the 1940s. Okay, this is a guy who like took over his father's business during the depression, worked up from stock boy to, you know, to founder and he was to CEO. And he was like ruthless about his priorities. And he had something he called the Johnson and Johnson hour credo. It's a very, very famous document. You can still, they still, still have it around. And it basically lays

• 38:28Speaker 01

  out their fiduciary priorities, just like remember Saul Price said, customers first, employees second, shareholders third. The credo is a five part framework. It's like, I can't remember offhand, patients first, doctors and nurses, communities, employees, and again shareholders last. These great companies always have shareholders last. That's like shareholder value is the output, not the goal. So he was so concerned that the company might drift one day that he carved the credo into 10-foot-high limestone blocks and installed them in the corporate headquarters. So that every person who works there has to walk by the credo every day on their way to work. They're still there. They're awesome. Okay? He was like, while he was alive, the company was just absolutely ruthless to do it. But once he died, we started to see this drift.

• 39:11Speaker 01

  And what's really fascinating to me about it is over time, the company gradually became captured by these best practices. They started to be more shareholder-centric. Now it's a complete, I just actually got an email from someone who was like an executive in the, during the transitional period. And he sent me this incredible letter about, you know, thanking me for capturing the story accurately. I was really worried, you know, did I get it right? And he was like, this is exactly what happened. Eventually shareholders went from being last to being first. Now, what's interesting about the story is the blocks were still there the whole time. The people who put asbestos in the baby powder at Johnson & Johnson walked by a credo every day on their way to work that we put patients first. So you have to understand how unconscious this corruption is.

• 39:56Speaker 01

  People who are doing it are often not aware that it's happening until it's too late. And so if we want to do that, we need more than blocks in the headquarters. We need something a lot more permanent.

• 40:06Auren Hoffman?

  There are some practices that it does seem likely that it's, that it's, that it's destroy, long-term destroying shareholder value, even though it might be short-term increasing shareholder value. Like, one of them would be like loading up a company on debt to do stock buybacks. To me, that seems like it pretty much never works long-term. It's almost always a bad decision if you have a long-term view. I'm sure someone who's listening to this podcast can give me a counter example, but I can't think of one counter example. It seems like it always goes bad, yet it's a constant playbook. Like, there are those kind of like short-termism things.

• 40:49Auren Hoffman?

  But in some ways, I think those are a bit different from what you're saying. You're, a lot of the things you're saying about best practices are things that I think a lot of people think are actually good for long-term. Whereas the things that I'm mentioning, like the, I don't think anyone actually thinks it's good for the long-term. Like, everyone knows that's just like some greedy bastard who's trying to get like some sort of short-term pop.

• 41:12Speaker 01

  Yeah, yeah, yeah. Part of my goal with this book is to show how both are expressions of the same underlying impulse, even though they have very different virtue signaling cadence. You know, we talk, they seem very different on the surface, but it's actually just the same. And in fact, when you have everyone acting short term, you lock in. If people say this is being done for investors, but this is bad for investors, not just because it is value destroying and therefore their returns are worse. It's like, it's a sucky system to live in too, because you're locked in this prisoner's dilemma. If you're an investor in a company and you think the other investors are going to pressure the company to squeeze all the returns out in a way that's selfishly good for them, you gotta do it too. If you don't get there first, and if you don't get in, get out before they get in, get out, then they're going to suck all the value out for themselves and you're going to be left

• 41:57Speaker 01

  holding the bag. So what we're seeing is if you look at the data, the average length of company life is going down. So S and P 500 companies, like average tenure is going down, average executive tenure is going down, and average stock holding periods have totally collapsed. It used to be multiple years on average, now it's less than six months on average. So we've entered an age of temporary leaders helming disposable organizations on behalf of like tourists, temporary owners. And then we're like, gosh, how come trust is collapsing across the board? Well, no kidding, what'd you expect? These companies are not being run for their own long-term benefit. They're being run for the benefit of short-term.

• 42:38Auren Hoffman?

  I mean, the biggest owners of most Fortune 500 companies are these large ETFs. Vanguard, you mentioned, BlackRock, like you just go down the list. The S and P 500 is the whoever owns those things.

• 42:53Speaker 01

  Part of the reason we're seeing increased volatility is because with so much passive investing, there's very few people actually actively trading the stocks for the purpose of discovering proper price.

• 43:01Auren Hoffman?

  And in some ways, they don't have an incentive to make that particular company better. Like, they want the companies broadly in the index to do well, right? They want, in some ways, like they're betting on, let's say, the American economy or something, and they want the American economy to do well.

• 43:16Speaker 01

  No, no, no.

• 43:16Auren Hoffman?

  But they don't, they don't care about any one company at all. In fact, maybe they actually want the company to do badly to support their other companies.

• 43:24Speaker 01

  Yeah, that is a common issue, and people have raised like antitrust questions about that. But there's actually a worse aspect of it. Which is these passive investors, like a lot of founders I know, they're like even reformers, nonprofits, foundations, like people who are very values driven, have their money in the stock market and their financial advisor tells them to put their money in neutral investments, put it, just put it in an ETF.

• 43:46Auren Hoffman?

  B 500.

• 43:48Speaker 01

  Right, just like, keep it really simple, that's neutral. Those investments are not neutral because passive funds don't have the fee structure to do their own analysis of how they should vote the shares. They outsource their voting decisions to, to what are called proxy advisors.

• 44:02Auren Hoffman?

  ISS, Glass Lewis, which are terrible.

• 44:05Speaker 01

  ISS is the, one of the biggest advocates for shareholder primacy in the world. They, if you look at their ratings, their ratings are inversely correlated with value creation. So like, you're, you're literally, and I remember, I remember.

• 44:21Auren Hoffman?

  It's, those guys are, those guys are sort of criminals, in my opinion.

• 44:24Speaker 01

  I remember, I remember talking to Mike Moritz about the experience of being on the receiving end of a, of a, Mike Morris, like the legendary investor, was, was on the receiving end, he and a founder of a company he'd backed of an activist campaign trying to oust the founder. He described to me what it was like to have to sit before these tribunals at places like ISS and Glass Lewis. He's like, a 25 year old with a spreadsheet is telling me how I should run this business. It's outrageous. And whether that, whether the activist is right or wrong, the person making the decision about how the shares are going to be voted, has absolutely no incentive to see that the company thrives or succeeds. So, so trillions of dollars of capital are having their decision-making process outsourced to people who are completely indifferent to the company's long-term health. How is that value creating? And that's why.

• 45:06Auren Hoffman?

  Well, this is interesting. How do, how do you square in some ways, one of your heroes is Vanguard, but in the same way, like they're responsible for a lot of this happening. They're almost like the cigarette company in a way, right? They're almost like, they're almost like against their own values.

• 45:22Speaker 01

  Vanguard, like Vanguard is awesome, like you, again, you have, can't say that any company is absolute good, absolute evil. Vanguard's structure, Vanguard has this incredibly customer favorable structure, that is why they save billion, probably trillions at this point in fees from being charged to investors. They actually do a pretty good job with the stewardship of the assets. But yes, but you but on the flip side, John Bogle, the whole whole Vanguard phenomenon like presaged the rise of passive investing. Now, I don't think passive investing is a problem in itself. I think it is the delegation of the votes to the wrong people. Now, of course, there's an obvious solution to this problem. Passive investors should just pass the proxy vote on to the passive holder. Because like, what's the the idea that because you hold the S and P 500 in aggregate in one entity,

• 46:07Speaker 01

  therefore, you don't get to vote those shares anymore makes no sense. So like, it's actually an unnecessary fee structure to pass on the voting to someone like ISS. You could have the hold the underlying holders vote the shares. And it turns out that retail holders.

• 46:20Auren Hoffman?

  Holders don't want to. I I own I own S and P 500 ETF. I don't want to go look at every single thing to go determine.

• 46:29Speaker 01

  No, no, and then we should so you should so those should count as abstentions rather than as no votes on whatever the company wants to do. And in fact, for companies that have high trust with their customers, they also have a huge retail investor base that defends them. For example, every time someone an activist has tried to kick Costco out of its governance structure, it's millions and millions of retail investors have rallied to their cause. That's why the activists tried to they can't stand the fact that Costco has this governance fortress that the retail investors, the customers of Costco themselves defend. So, yeah, we there are models for how this could be done properly. And the fact that the structure is set up in this insane way is a choice. It's not a law of nature.

• 47:08Auren Hoffman?

  Okay, now you famously kind of prior to this created kind of the lean startup world and stuff like that. I think it was back 2011. So very long time ago, we were talking about 15 years ago, we're getting old here.

• 47:23Speaker 01

  Yeah.

• 47:24Auren Hoffman?

  And, you know, you you I think you're you're one of the guys who coined things like the MVP pivot, Balde learning. When you when you hear those kind of words today, is that like, is that still super exciting? Or do you think they're now getting like misused?

• 47:39Speaker 01

  Well, they were getting misused from the beginning. I'll never forget when TechCrunch went from, they wrote this article that was like, "Everyone stop using the word pivot, it's overused." And I was laughing that they basically went through, they went directly from not understanding what the word was or ever using it correctly, to ask people to stop using it because it's overused, without ever going through the intermediate stage of finding out what it was. It was like very, very funny to me. Yeah, you know, I actually studied lean manufacturing a lot before I created Lean Startup, and so I knew to expect this. Lean manufacturing's had this problem for more than 50 years. People like thinking that lean means cheap and all kinds of other dumb stuff.

• 48:13Auren Hoffman?

  Yeah.

• 48:13Speaker 01

  Now, Lean manufacturing-

• 48:14Auren Hoffman?

  The new core way, or you know, etc.

• 48:16Speaker 01

  Yeah, people have been like very confused about this point. Now, now we live in the age of Wikipedia. So I always say, we live in the age where ignorance is optional. If you see someone spouting off some bullshit and that they don't know what they're talking about, you know for sure that they didn't spend even five minutes going on Wikipedia to find out if what they're saying is true. So like, you know, think about whether you want to listen to that person or not. So anyway, yes, there are still, there are of course, tons of misconceptions. But I'll tell you what, and I don't, the fact that the jargon of Lean Startup has become as famous as it is, I don't take like special satisfaction in that. Like, it's a mixed bag, believe me. I'm a subscriber, I think it was Bill Murray, he told this joke. Someone once came up to him and said, "I want your advice, I want to become rich and famous." He said, "Well, why don't you start by being rich and see if that does it for you." The public aspect of this is like, at best, a mixed bag.

• 49:00Speaker 01

  But the amazing thing about it is basically every day of my life, still, like, I did it this morning. Every day of my life, somebody comes to me for advice on how to build their company. And so I get to, it exposed this incredibly wide range of really interesting people and interesting projects. And so many of those people tell me that they found the concepts really helpful in their own entrepreneurial journey. And ultimately, that's the validation I crave, is that people who've built companies of significance think the idea was helpful to them. And that's, I'll, I'll, I'll take that in exchange for all the other bullshit.

• 49:31Auren Hoffman?

  In this new world where, in this new AI world where you could build things much faster, you could build more things, is, does that kind of change the way we should think about from like the lean startup framework from 15 years ago?

• 49:48Speaker 01

  Well, there's obviously tactics are super different. Like when I, when I wrote lean startup, I was really proud of having shipped an MVP in six months instead of five years. That was real good. Now, obviously, that would not be considered state of the art anymore. But I think the core insight, like lean startup is about two really important philosophical principles. One is bringing scientific decision-making into business, and the other is a more humanistic approach to organization building. And I feel like those values have stood up real well. In particular, one of the biggest misconceptions I see people have about AI is one we addressed way back in 2011. Thinking that the value of a tool like AI is about the artifacts it lets you build is like the oldest startup misconception there is. Artifacts are not what makes a startup valuable. What makes it valuable is what we call the validated

• 50:33Speaker 01

  learning. The learning happens here. It can never be outsourced, not even to open claw, okay? Not even to your super smart agent. At the end of the day, you learn. So I found that people can use LLMs in two different modes, and one mode is like basically lethal, and the other is really good. The lethal mode is the slot machine mode. You think you're in flow. You're like, wow, I'm cranking out code. Like, I think some of the investors have been like all over social media being like, lines of code is back now, and we can, we're just cranking out artifacts left and right. And I just think it's a little bit embarrassing, because we have the data already. There's already been studies that show that people dramatically overestimate how valuable these artifacts are. And it has to do with the authorship fallacy. So here's a psychology result that I just always found so amazing.

• 51:18Speaker 01

  They took people who love poetry, and they put them in an MRI machine, and they asked them to read their favorite poem out loud. So if you take such a person, put them in the MRI machine, ask them to read their favorite poem, their pleasure centers of their brain light up like a Christmas tree. You could just see in their brain how much they love it. Then you say, listen, before I take you out of the machine, just if you just real quick, spend two minutes, write a poem yourself. And they'll be like, I'm not a great poet. Just whatever. Write anything you want. Write some crap poem that even they think is really bad. And you ask them to read it in the MRI machine? The brain lights up just the same. Cause you wrote it. If you look at your own creation, you, your brain loves it. Whether it's any good or not. And so unfortunately vibe coding and all these tools, they activate that same, that same sensation.

• 52:03Speaker 01

  So the, the, so if you view, if you, if you think the artifact is the value, you're going to use these tools badly. We're only, I think AI is headed for its Chernobyl moment, almost certainly. Cause we are having people vibe coding tools that they don't understand. And, and you creating software that no human being can possibly evaluate if it works or not. It's only a matter of time before someone ships one of those things into a mission critical application and has some kind of disaster. Hopefully it won't involve the loss of human life. You know, God forbid. So a much better way to use it is if you have a learning orientation, you say, okay, the purpose of these tools. L M is an incredible teaching tool, one of the best ever created. So if you say, don't create an artifact for me. Teach me how to create an artifact. Make me better at this thing. Show me step by step what I have to do. At the beginning, that's going to be a lot slower and harder and painful.

• 52:47Speaker 01

  And you're going to be limited by your very limited cognitive capacity. But the flip side is over time, instead of losing your sense of agency, you will be increasing your sense of agency, your skills will be enhanced and eventually you'll get better and better and better at creating these artifacts. Of course, you'll then use the L M more effectively when it comes time to do artifact creation. So yeah, I'm a big believer in AI as a enhancement of human creativity, not a replacement.

• 53:12Auren Hoffman?

  Your lean startup co-creator, Steve Blank, he's been a mentor to the US intelligence community for a very long time. How have these ideas influenced national security?

• 53:26Speaker 01

  You know, I don't want to speak for Steve because he's been on the inside of all kinds of stuff. And, and lean startup has a big following inside of governments and even inside of.

• 53:33Auren Hoffman?

  Very big.

• 53:34Speaker 01

  Like, yeah, I've, I've been very surprised, like part of, you know, I've gotten a chance to do, you know, to do work and, and have meetings like at the Pentagon and, and for the NSA and for her majesty's secret service, like all, all kinds of stuff, like it's been, it's been weird. Because like ultimately, like we're talking about innovation in a mission critical domain. Like national security is super, super important. And what's funny is I remember being, I did an, an event for GCHQ, which is the. And like the NSA for the UK. And you know, it was like a terrifying experience because you go to the building, like the building where they film the movies, like on the outside, you're going there and there's like people with guns and it's super secure and you leave your device and it's like on the outside, it's just like very intense thing.

• 54:19Speaker 01

  But I remember going in to do this workshop and in the conference room, once you get into the conference room, you'd have, unless you knew where you were, if I showed you a video of these meetings, you'd be like, oh, it's just this is a typical corporate innovation workshop. Like it was totally, and they'd be like, yeah, I, you know, I'm working on this mission critical thing. And really important that we get it right and we're trying to figure out who the customer is and whatever. And like, of course, if you ask too many questions about what is this going to be used for, it gets spooky. But if you don't, it's like, it's the same issues as before. And I'll never forget, I did this lecture once and someone who was from one of those workshops had come to my public lecture afterwards, like that evening. And I'm noticing them like in the third row, like I'm like, am I supposed to say hi? Am I supposed to pretend I don't know them? Like, what's the deal?

• 55:02Speaker 01

  I asked for questions and the person raises their hand. And I'm like, ooh, definitely calling on you. What's your, and they're like, um, I work at a medium sized, not for profit organization that is mission, very mission driven. And I have a question. And I was like, my God. But yeah, that's at the end of the day, that's all it is. It's very, it's very similar. So yeah, Steve's on immensely productive work with the DOD and with, with many allies inside a government trying to make it better. And I think, you know, I'm, I'm very proud of that work.

• 55:32Auren Hoffman?

  Okay. Now we have two questions we ask all of our guests at the end, but one of them you basically have already answered, which is what is the conventional wisdom or advice? That's generally bad advice, but if you have other ones, I would love that. But the, the, the second question we ask all of our guests is what is a conspiracy theory that you believe?

• 55:49Speaker 01

  Oh, man. I got so many. I think I just, I remember I, I happened in college very briefly, not in like not super deep or anything, but I remember taking a class on the rise of global communism and authoritarianism. And I happened to be in school in the nineties. So I was at a time when because of the fall of, of, of the Soviet Union. All these old Russian archives were being liberated. And so there's all this, those, all this new documents, like basically everyone who had a pet theory about what was going on during the Cold War, got to find out if they were right or wrong. You know, it's like incredible testing, right? Who was right, who was wrong? Anyway, it turned out that like a bunch of conspiracy theories about how various forums, various political movements and nonprofit groups and all kinds of weird stuff was funded

• 56:34Speaker 01

  out of Moscow turned out to be true.

• 56:37Auren Hoffman?

  Yeah.

• 56:37Speaker 01

  Like it was not, it was not basically not a grassroots.

• 56:39Auren Hoffman?

  A lot of environmental movements, other types of things.

• 56:41Speaker 01

  All kinds of, all kinds of stuff.

• 56:42Auren Hoffman?

  Anything, anything non-nuclear.

• 56:43Speaker 01

  Things you wouldn't expect.

• 56:44Auren Hoffman?

  Yeah.

• 56:44Speaker 01

  And that when the, when the turban collapsed, like a bunch of these groups just went away. So my, my, my current favorite conspiracy theory is that Russia's like Putin knows what he's doing. He was, Putin was a KGB operative during that era. Like I think there's a huge, my conspiracy, there's a huge percentage of global organizations that are awash in Russian money. And when, when eventually it comes out, you're going to be like, oh, the global turn to authoritarianism was like brought to you by KGB 2.0 was not actually a, that's true experience at all.

• 57:12Auren Hoffman?

  Okay. Yeah, that makes sense. Yeah. Often, often I think a good conspiracy is when you see uh, uh, somebody, whether it's a nonprofit or whether it's a for-profit, I'm advocating for something and it isn't like, and you're never sure, like, okay, they're not like directly benefiting from it.

• 57:32Speaker 01

  Why?

• 57:33Auren Hoffman?

  There's often someone behind it. It might be a government, it might be another company, it might be, there's someone else behind it who is going to like directly benefit from it.

• 57:41Speaker 01

  Yeah, yeah, yeah. That is often the case.

• 57:43Auren Hoffman?

  All right. This has been awesome. Thank you, Eric Reese. We've been friends for a while, so I'm really excited to do this. Thank you, Eric Reese, for joining us on Summation. I also follow you at Eric Reese on X. I encourage our listeners to engage you there. This has been super awesome and a ton of fun.

• 57:59Speaker 01

  Yeah, thanks, man. It's always good to see you. And yeah, thanks for the questions. And yeah, I hope, hope, uh, hope some of your listeners will get a chance to check out the new book. And if they do.

• 58:05Auren Hoffman?

  Absolutely. Everyone, please go buy the book.

• 58:07Speaker 01

  Tell me all their thoughts about it, all on social media. I love it.

• 58:09Auren Hoffman?

  The book is incorruptible. I highly recommend everyone go out and buy it. Actually, I have quite a few copies and give it to some friends, too.

• 58:15Speaker 01

  My man, my man. Please do. That's awesome. Thank you.

• 58:18Auren Hoffman?

  One more thing before we go. I read a blog called Summation. It's the same as this podcast. The blog is about non-obvious idea sharing on business, talent, data, longevity, and random contrarian takes. If you like the conversations on this show, you'll probably like the blog. It's free. New content comes out twice a month. You could subscribe at orin.substack.com. That's orin.substack.com.