Eric Ries on Why Good Companies Go Bad

Eric Ries https://x.com/ericries is the creator of the Lean Startup method and the author of the New York Times bestseller The Lean Startup, which transformed how a generation of founders and engineers think about building products. It introduced concepts like the MVP, the pivot, and build-measure-learn that are now so widely adopted they feel obvious. Over two decades of working with founders, CEOs, and investors, Eric has observed that some companies built on those principles eventually betray the very customers and engineers who made them great. His new book, Incorruptible: https://www.incorruptible.co/ Why Good Companies Go Bad and How Great Companies Stay Great, is his attempt to answer the question of whether it is possible to build a company that resists that fate. In this episode, Eric joins Gregor Vand for a wide-ranging discussion about why so many great companies lose their way, and what software engineers and founders can do today to build or find companies that are genuinely resistant to corruption. Sponsorship inquiries: [email protected] mailto:[email protected] The post Eric Ries on Why Good Companies Go Bad https://softwareengineeringdaily.com/podcasts/eric-ries-on-why-good-companies-go-bad/ appeared first on Software Engineering Daily https://softwareengineeringdaily.com.

• 0:00Speaker 00

  Eric Ries is the creator of the Lean Startup Method and the author of the New York Times bestseller, The Lean Startup, which transformed how a generation of founders and engineers think about building products. It introduced concepts like the MVP, the pivot, and the build-measure-learn that are now so widely adopted, they feel obvious. Over two decades of working with founders, CEOs, and investors, Eric has observed that some companies built on those principles eventually betray the very customers and engineers who made them great. His new book, Incorruptible: Why Good Companies Go Bad and How Great Companies Stay Great, is his attempt to answer the question of whether it is possible to build a company that resists that fate.

• 0:43Speaker 00

  In this episode, Eric joins Gregor Van for a wide-ranging discussion about why so many great companies lose their way and what software engineers and founders can do today to build or find companies that are genuinely resistant to corruption. Gregor Van is a security-focused technologist, having previously been a CTO across cybersecurity, cyber insurance, and general software engineering companies. He is based in Singapore and can be found via his profile at van.hk or on LinkedIn.

• 1:28Speaker 01

  Hello and welcome to Software Engineering Daily. Today is a very special episode. My guest today is Eric Ries. Welcome, Eric.

• 1:35Speaker 02

  Hey, thanks for having me.

• 1:36Speaker 01

  So I think a lot of our listeners will know who you are, will know your work. I think I'd just like to dive straight into it there, which is you are Eric Ries of The Lean Startup.

• 1:48Speaker 02

  Yes, indeed. I'm that guy, yep.

• 1:50Speaker 01

  So a lot of our listeners, I reckon we've maybe got 50%, have all read that book and guided them so hugely on their journeys as founders, as software engineers, and maybe the other half maybe haven't heard of it as well. So just starting there, why was The Lean Startup so seminal in terms of what it brought to software engineering?

• 2:08Speaker 02

  Well, you can never really account for why does a book become what it becomes. So it's at the end of the day up to readers to spread the word about it. I think. A lot of people entering into product engineering entrepreneurship today take for granted concepts like pivots and MVP and build measure, learn and continuous deployment almost as like, of course, obviously, like, how else would you do entrepreneurship? How else would you build a new product and don't really appreciate how different the state of the art was even 20 years ago. Lean Startup was published in 2011, but I'm old enough now that I can be your eyewitness. I can tell you what it was once like. And listen, it still is that way in a lot of places that are still following a stage gate or waterfall style methodology, still really believe that the

• 2:52Speaker 02

  business plan is not just like a thinking exercise, but a literal prediction about what is going to happen in the future. And in fact, a lot of people still get bought into the idea that that's really almost like an astrological belief, like you can manifest this future with the power of your mind if you believe in it hard enough. And so Lean Startup stood opposed to that, said, look, we're not going to take away the importance of vision, obviously, even in the scientific process. If you have no vision, how are you going to form a hypothesis in the first place? But once we formulated some definite hypothesis about what we think the future will look like, what we think customers will want, what we think the product should be, then we're going to rigorously test and experiment to discover which elements of that vision are true and which ones

• 3:33Speaker 02

  are not. And so in its own way, Lean Startup established entrepreneurship as one of the truth-seeking disciplines, like right up there with being a scientist or an artist. And I think in some ways elevated it into something aspirational rather than just something that's about making money. And so therefore opened it up to a lot of people, including a lot of Silicon Valley entrepreneurs who made it their bible, that's wonderful, but also to a lot of people in established organizations who've used it to build new products, new businesses, new divisions, new kind of stuff. It had a whole second life in government and in nonprofits all over the world. So it's became this idea that I think a lot of people found actionable for creating positive change in the world.

• 4:12Speaker 01

  Yeah, absolutely. And I think what is so interesting about that is actually just how much the ideas have endured. And anyone that hasn't read it, it's quite obvious when they do try to say start a startup and they're kind of making all the quote mistakes. Lean Startup talks about perhaps trying to avoid a so I still still would highly recommend it to anybody out there starting a company and if that hasn't been on your reading list. However, we are here today to talk about your new book, Incorruptible. Why this topic and like, what is the topic? Why this topic? Let's start there.

• 4:44Speaker 02

  Sure. Yeah. Well, let's start with why it's called incorruptible because this was kind of a difficult choice for me. Lean Startup has been incredibly successful and the benefit and the curse of being known all over the world as the lean startup guy is people call me basically every day for input on how to build a company, how to revitalize an old company, or take a company public, or raise money for a mid-stage company or early-stage company. I mean, I've seen it all. And it's a privilege because I've gotten to see the very best that our industry has to offer. I've been involved in the creation of billions and billions of dollars of personal net worth for product and engineering and entrepreneurial leaders all over the world. That's been wonderful. Okay, no complaints. But the dark side of it is I've seen the underbelly of this business, too. I've seen so many companies betrayed,

• 5:29Speaker 02

  so many products collapse. Corey Doctorow calls it shitification. He really meant it only with regard to a very specific software product that can become worse over time. But I've seen it all over our economy, so many ways in today's economy to make money by destroying value. And I just struggled for a long time. What do we call it? Well, this happens. What is it? What does it have a name? And I just realized that our grandparents would have had a much easier time talking about this than we do. They would have had no trouble saying, this is corruption. That's what we're looking at. The corruption of something beautiful into something malign, the loss of that special spark that made it worth building in the first place. That is something sad. And today, corruption

• 6:10Speaker 02

  really only refers to overt illegal acts like bribery or embezzlement, although increasingly in these days, not even that. But the older definition of the word was really much more about these kinds of self-serving or self-destructive ways to make money. So that really put me on the path to trying to answer this question that a founder asked me. This is like a real product person really like approached me to be like, hey, I'm building this piece of software. I'm really worried about what it could become. And I want to know, like, is it possible to build an incorruptible company? And I was like, okay, good news, bad news. Most people think the answer is no, it is not possible. That corruption is inevitable, but I don't think so. I actually believe it is possible to do what you're describing. But the bad news is you're already not on track to accomplish it.

• 6:54Speaker 02

  Because you have absorbed consciously or unconsciously, a whole bunch of so-called best practices about how companies should be built, structured and governed that are almost guaranteed to lead to a corrupt outcome. So that's really what the book is about. A blueprint for how to build products and organizations that are resistant to this corrupting influence.

• 7:12Speaker 01

  Yeah, and I think for our listeners, many of you are software engineers. Many of you are founders and this very much applies to both camps. It's not just if you're starting a company. But sticking on that, I think a lot of, I've been in that position as well. I've run a company in the past that was purely self-funded and in my opinion, incorruptible. Then I've run also a startup that had venture backing. And basically, when I read through the book, I'm like, yeah, I made all the classic mistakes of making that a highly corruptible company.

• 7:41Speaker 02

  Join the club.

• 7:42Speaker 01

  And I'm not obviously in that startup anymore. So I think taking some examples that can really resonate with software engineering. I mean, you dig through some really interesting companies throughout the book. The two that stick out as names and products, I think that a lot of our listener base are familiar with Cloudflare and Anthropic. So I mean, I think Cloudflare is a great one. I remember using Cloudflare way back in the day and being like, why is this thing free, but sure, this is amazing? And it protects all our websites and all our apps that we're building.

• 8:12Speaker 02

  Yeah, yeah, yeah.

• 8:12Speaker 01

  Much later on in life, I've likened to almost literally like a government service at this point in time in terms of how it operates. So talk to us about, I guess you got to spend some time with those at Cloudflare and or you have done in the past. And yeah, what makes Cloudflare so special in this respect?

• 8:27Speaker 02

  I like the Cloudflare story in particular because when they started the company, I knew them long ago, they were very anti-mission, values, corporate speak way of talking about building a company. Like they just didn't believe in that stuff. They're like, look, we're just putting a firewall on the cloud. It's pretty straightforward. Okay? And I just think Cloudflare is one of these companies that perfectly illustrates the difference between being a mission-driven company and having a mission statement. Okay, mission statements are worthless. But mission is an emergent property of the super organism of the thing that we're building is actually very important. So mission is something you discover as much as it is something that you choose.

• 9:09Speaker 02

  So in the early days of CloudFlare, you know, they always had this freemium business model, but they would find themselves doing what we would kind of colloquially call the right thing in lots of situations where they didn't have to. So one of my favorite examples is there was one of the major democracy protest movements, and now I'm blanking on which country it was in. I don't want to misspeak, but anyway, a sovereign country is having pro-democracy protests. The nation state is trying to shut them down, and one of the ways they're trying to do that is by cyber hacking all their websites and DDoS them. Okay. Like one of these classic situations where you have a real asymmetry between the attacker and the defender, and so of course the protesters are getting crushed. So they're reaching out to one Silicon Valley company after another, being like, can you please help us?

• 9:51Speaker 02

  And one big company after another is like, no, we can't help you, sorry. We just like, we do not want to incur the wrath of the sovereign nation who is important for our business. And so tiny little CloudFlare is like, yeah, we'll help you. And they do it. They like step up like, we will protect your websites. We will handle all the costs of dealing with all this DDoS stuff. They were like fighting these hackers. And it was just funny because like, these weren't even paying customers. Like for the privilege of protecting a non-paying freemium customer, they took on the wrath of nation states. You know, they just did this stuff because like, that's our job. They're our customer. Somebody has to act in defense of these values. If not anybody else, why not us? So over time, they developed this ethos. They didn't name it. It wasn't like part of their propaganda.

• 10:34Speaker 02

  This is what they actually did, even when nobody was watching. And one day they're having lunch, and one of the engineers says, you know, the reason I really like working at CloudFlare is it's really the first job I've ever had where we're really making a better internet. And that phrase starts to stick around the company. People are like, yeah, that's why I'm here too. Like people like that phrase a lot. Someone asks, I think Matthew, like, is this our mission statement? And he's like, no, I told you, we have no mission statement, like absolutely not. But over time, like he had to kind of be dragged to the realization that, no, actually this is our mission statement. This is the best way to encapsulate this belief that we have. And eventually they did in fact, adopt corporate values. And the whole shebang. Number one value on their list, by the way, is to be principled.

• 11:12Speaker 02

  And this is why leaders are taught today not to do this, because if you adopt a mission statement and you try to be principled in decision making, one day, this will happen to you. One of the engineers comes into Matthew's office and says, hey, boss, listen, I remember at the board meeting you were saying that the number one feature that drives conversion from free to paid in our business is web encryption. Some of your listeners will be old enough to remember when SSL encryption was not yet standard on the web. And so anyone who wanted could eavesdrop on your conversations online. That was pretty stressful for everybody. So a major factor that caused people to upgrade from their free to paid cloud front pants is you would get SSL encryption. And that was like a very logical thing. He's like, look, boss, you said this is why is it a paid feature? Because

• 11:54Speaker 02

  in those days, encryption was expensive to serve. We have to like, we have extra computational costs to serve the SSL pages compared to regular web traffic. And we have to pay for the certificates. So it's like, no one's complaining. Everyone agrees that this is like perfectly natural reason to upgrade to cloud. Okay. But isn't our mission to make a better internet? And he's like, uh huh. Where are you going with this? Like, well, isn't our number one value to be principled? Uh huh. Where are you going with this? Uh huh. It's like, well, wouldn't a better internet be an encrypted internet? Uh huh. So why don't we give it away for free? I want everyone listening to really imagine you had this conversation with your CEO or the CEO you know. It would be the most natural thing in the world to expect the CEO to be like, get out of my office.

• 12:37Speaker 02

  This is our number one revenue driver. Why are we talking about this? But Matthew told me that his way described, he's like, once I saw it, I could not unsee it. And so he's like, well, we need to figure it out because we literally could not afford it would have bankrupted the company to give away for free at their current cost structures. He's like, well, we need to do this for mission reasons. So we need to figure out how to drive this cost to zero. And they did. They rewrote the whole server stack and assembly. Like they did all this technical work to drive the cost down. They did these really complicated business development deals called contra deals. Where, well, I won't get into it, but they found a way to offset the costs at the certificate authorities to be able to drive down the cost of the certificates. Anyway, they eventually did it. Now, at every step of the Journey, they had the opportunity to take a really easy off ramp.

• 13:22Speaker 02

  Nobody would have criticized them. Okay. First of all, there was no need to do all this extra work. They could have just been like, we're busy. We don't have time for this. It's a number one revenue feature like go. So like, again, they're taking on all this extra work for the privilege of giving away for free. Something that they're making a lot of money from. They could have used the technical difficulty as an excuse. They could have used the business development difficulty as an excuse. When they finally got the thing working, they could have been like, wait a minute. This just lowers our costs. What if we just lower our costs and pocket the margin? Like, that's just free. We teach everyone in business school today that higher margin is better. They didn't do that. Then they took it to the board. Board had to approve this. It's like a big deal. And the board's like, wait a minute, wouldn't this cause our conversion rates to go down? That would have been easily, because like, they're like, yeah, probably, probably will.

• 14:07Speaker 02

  Like, that could have been a perfectly valid reason to back out at that point. They did ship the feature and the conversion rates did go down and they could have bailed out at that. Think about how many companies would chicken out at that point and revert the change. But no, they stuck to their guns. They gave it away for free. They let the conversion rates fall down. And they trusted that doing the right thing would ultimately lead to winning the public's trust, winning the trust of developers, which is of course what happened. And they had an order of magnitude increase in their signups. So today, cloud first worth $70 billion or whatever, because they've been willing to make these kind of sacrificial moves. And I just feel like that is so contrary to how we teach business today and teach a lot of product engineers too. Like you just stack rank by ROI and do whatever thing comes to the top.

• 14:51Speaker 02

  And here it's very important to see how this was a negative ROI action by every tangible metric that they had available. In order to do it, they had to really understand that the trustworthiness that they will gain by doing the right thing is an asset far more valuable than the tangible costs of giving up this revenue stream.

• 15:08Speaker 01

  I love that example and I didn't actually fully appreciate the piece on the SSL certificates and how that's sort of how they managed to angle that one by, I guess, renegotiating those. I think, you know, in today's startup land, at least I see it as one of the easiest ways you can do something along those lines is effectively being open source. By just saying like, we're always giving back to the community, back to code. Even if there is obviously a paid, that has, I mean, that's what a company is. It has to get paid for something. But by being able to give back and contribute back that way, I think is a really interesting way that suddenly isn't even as controversial as giving away your whole product for free. Really, it's quite an interesting concept.

• 15:48Speaker 02

  I have been an open source advocate for many years. Okay, I was an F S F software licensing volunteer, if you know what that is, like back in the day. So I've been on the side of trying to convince people to use open source software and to open source their own software for a long time. And open source is just the absolutely classic example of the strategy that I call harder is easier thinking. Because when you ask people to open source their software, they're always like, well, what's the ROI? And you're like, it's gonna be great. You're gonna have increased loyalty. Our customers are gonna find bugs for us and they're gonna use it to create this other stuff, but they're like, well, how much of that is gonna happen? I don't really know. Again, well, couldn't some bad stuff happen? Like, couldn't a competitor use it to get some advantage? You're like, yeah, I don't know. So like, quantify for me. Tell me the probability.

• 16:33Speaker 02

  Like, and just people talk themselves out of it so easily because they can only see the costs of doing it without seeing the tangible, like, because the benefits are so intangible. And just like, it wasn't that long ago, I can remember, some of your listeners will find this inconceivable, but like, it was not that long ago that it was considered heresy to use open source software in a business context. I can remember being told, no, you're not allowed. I wasn't allowed to use MySQL in a job once. You know, you have to pay for Oracle. I was like, that's gonna cost us like $600,000. Like, we could get it for free. Like, what are you talking about? But even then, it was considered risky. And now it's considered really obvious that, of course, you use all the free software that you can, right? I think that same change, I anticipate, in the question of whether you should open source your own software.

• 17:17Speaker 02

  Today, it's actually very rare for companies to contribute back to the open source commons. And I think in the future, it will be seen as just one of the most obvious business things to do. And this is the reason why, with most business decisions, the way we teach business today, we are blind to externalities. That's the economics concept for this. We're blind to the negative externalities. So if I make a product that pollutes or has side effects for people that causes them to get sick and die, those costs are not borne on my balance sheet, so they don't show up in my profit and loss statement. But as bad as that is, is even worse that we are blind to the positive externalities. We're trying to maximize profit only in this very narrow view of our own balance sheet, rather than trying to create as much value as possible.

• 18:00Speaker 01

  Yeah, exactly. Moving to a slightly different example, Anthropic. And I think this is just such an interesting one, given where they are. We're recording here in early June and they're probably gonna file for their IPO soon. One of the largest IPOs in history, kind of thing. And I think this is such an interesting example, given it didn't seem obvious where they were actually gonna make a business from, actually, initially. And we've actually seen the duopoly, I guess, of themselves and OpenAI play out and with quite different approaches to this company's structure and purpose. So let's go there. Talk to us about how and why is Anthropic the way it is?

• 18:42Speaker 02

  Yeah. What we've been talking about so far is like the cultural and leadership side of resisting corruption, right? Making choices to see the positive externalities to really go for this. So that is one element for sure that is an important part of the Anthropic story. I mean, they obviously, I met them when they were first leaving OpenAI. And for the record, I played only a bit part in the story. Okay, so I'm not taking credit for their success, nor do I want responsibility for their many other things that they've done. Okay, I can only comment on this one aspect of the story. But they were like really mission-driven, really mission-aligned as a team. That's very important. But there's a second dimension to resisting corruption that's just as important. It's what I call structural integrity, which is what happens if somebody tries to force

• 19:24Speaker 02

  you to do something bad, or you have a financial temptation to do something bad. In the book, there are a lot of examples of companies that started out really great, but kind of lose their way as they get bigger because they give into the temptation to betray the trust that they've built with customers, or they get taken over, they get forced to sell to the highest bidder. And there's all kind of mechanisms for that to happen that we have to structure to resist. But unfortunately, today's best practices really encourage building weak companies, companies that do not have sovereignty or strength to resist pressure. And that's why we see so much institutional collapse all around the world today. So Anthropic founders had enough foresight to see that this was going to be a big problem. If there was nobody who could act as what's called the mission guardian,

• 20:07Speaker 02

  someone who could defend the mission against such pressure. The technology would simply be too valuable. It would be like worth it for nation states or investors or public company. Think about how many people would love to just swoop in and take over Anthropic if they could afford to do so. They wanted to make sure that they could resist that. Now, one way to solve the mission guardian problem is to appoint an emperor for life. So that's not that uncommon. You know, Mark Zuckerberg is emperor for life of Facebook, of Meta. Larry and Sergey at Google, like that's something that's been tried. But I don't think that's the best way to go. It's better than standard governance for sure. But Anthropic decided to go a different way. They created something called the Long Term Benefit Trust, or LTBT, which is what's called a purpose trust in Delaware law. There's actually a second entity that has the mission protection,

• 20:50Speaker 02

  mission guardianship responsibility over the for-profit company. And this two-tiered system, it's like a multi-branch system of government with checks and balances. In the historical record, we have a lot of data on this. And the evidence shows that companies with that dual structure are more stable. They perform better, they're more long-term, they're five or six times more likely to live to year 50. Like it's a more stable structure. So it's not like it's new for most people are only hearing about it for the first time in the context of Anthropic. But I always remind people that the German optics company Zeiss, who makes the lenses in mine, pretty much everybody's glasses, they had this structure in 1887. So it's actually not new. It's like a new old thing, if you will. And so the founders of Anthropic, I think in a very far sighted move, adopted this structure at the time of their Series C. And I think it's part of the story, not the whole story,

• 21:35Speaker 02

  but certainly part of the story for why Anthropic seems unusually courageous amongst its peers.

• 21:40Speaker 01

  So yeah, I mean, it's interesting. You just touched on there. Series C was when they adopted this. And we think they're probably going to IPO soon. And Cloudera has self-IPOed. And we're in this era of tech at the moment where staying private is very easy. Various companies, I wouldn't name exact ones, but various companies that are plodding along in pure private. And whether they ever IPO is actually always a question mark. Do you see aiming to IPO and IPO-ing as something that would go against being able to create an incorruptible company?

• 22:14Speaker 02

  Yeah, look, most people think that. So I totally understand why that is very common. A lot of companies, that is the precipit- Petting act that causes them to lose their soul. I was so concerned with this problem that I started a whole stock exchange to try to fix it called the long-term stock exchange or LTSE. People can check it out at LTSE.com. It's the first new listings venue for public equities with a new listings model that lists multiple stocks and trades multiple stocks.

• 22:36Speaker 01

  I'd heard of LTSE only from reading the book that I realized it was you behind it.

• 22:40Speaker 02

  Yeah, yeah, exactly. It's not something we get a lot of publicity for, but it has been in the news, for example, that there's been this recent push by the SEC to change the way that quarterly reporting is done. In a way that I think most business people consider to be highly beneficial. That is the result of an LTSE petition filed last year. So that company has not taken over the world, but it has been approved. It is operating and it's the first thing of its kind since the creation of NASDAQ 50 years ago. So in building that, of course, I wanted to make the environment of being a public company more conducive to long-term thinking and to multi-stakeholder thinking. I think that's really important, but the trick of it all is although we say these things are inevitable, even as we say that they're inevitable, we know about exceptions.

• 23:19Speaker 02

  So obviously we talked about Cloudflare already, Anthropic, it remains to be seen, but there's plenty of other exceptions, like for example, most people consider Costco to be the exception to every business rule. And it's like, wait a minute, but Costco is a $400 billion public company, yet they seem to have been able to maintain their integrity. So if you study, how is it done? You will always, always find this distinctive combination of an ethos, a character, a philosophy about business that puts something above financial considerations. In Costco's case is the idea of being a fiduciary to the customer, not just to investors. And then you'll also find what I call a governance fortress, some kind of deviation from governance best practice that allows the company to resist pressure.

• 24:01Speaker 02

  And there are so many of these exceptions. It's not just Cloudflare and Anthropic and Costco, but it's also Nova Nordisk and REI and Vanguard and Mondragon in Spain and John Lewis Partnership in the UK. Like so many companies, Akosia, if you know that, the search engine is structured this way. Like you just, you'll see it all over the place. Once you start to look for it. And I think what's really interesting is if this law was inevitable, there would be no exceptions. So just the fact that so many exceptions exist proves that something is wrong with our common theory about how markets work and how products work and what we're really all doing here in our day jobs. And if you say, okay, well, what is it? What exactly is the

• 24:42Speaker 02

  problem? If you take a data set of all the exceptions and put them up against each other, the pattern is really striking. The blueprint is really striking. So the fact that we treat them as one-off exceptions obscures the fact that they actually are avatars of a whole different way of thinking about business. One that is not just better for product, better for quality, better for the environment, better for whatever social cause you care about, but also a lot more profitable because it doesn't have these blind spots.

• 25:10Speaker 01

  Yeah. Looking at like some slightly more, I guess nuanced examples, but I think ones that will really resonate with sort of day-to-day life of a software engineer. You mentioned GitLab in the book and a very interesting example thereof, effectively something going wrong and how they handled that. And I think that's a really great example to pull out of when maybe someone's listening today going, well, sure, but I'm just a software engineer sitting inside.

• 25:35Speaker 02

  Yeah, yeah. What can I do? Well, first of all, if you're a software engineer, you have one of the most highly coveted skills in the world and you can choose where to work. So that might make a better choice if you don't have this in your workplace. Yeah. GitLab has a commitment to radical transparency that's like so extreme. I just think most executives in the world would be horrified, like terrified even to do it and would have said, this can't possibly scale. You could never make a 10-person company out of this, let alone a $10 billion company out of this. Like, no way, right? And yet they've been able to do it. I didn't really know this until I met Sid Sabranji. Like, they are very famous and yet somehow I was not, I got vaguely knew they were into transparency. Like, the entire handbook by which they make all of their company decisions, meaning every corporate policy, the history of every policy, every detail of how they run their

• 26:20Speaker 02

  business is available on their website for free. It's literally in a Git repository. You can clone it, analyze it, look at it. It's just an incredible document. But you might say, okay, well, so they publish a lot of stuff, so what? But of course, an ethos is not about what you publish, it's about how you behave. And I give the example in the book of A time when an engineer like accidentally dropped a production database. I can't remember now, did they delete a customer record or?

• 26:43Speaker 01

  It was deleting six hours of customer data.

• 26:45Speaker 02

  Yeah, I think that I was like, it was like one of these situations where just like the worst possible thing you could do as a production engineer during doing a deployment and they inadvertently deleted customer data. So it's just catastrophically bad. And, you know, they posted about it in company chat like, and that's like, first thing is they didn't try to cover it up. They instantly knew that the right thing to do is to come clean and let everybody know we have a customer issue. We're going to have to rally to fix this. And the company livestreamed the response. So it wasn't just that they put out a blog post after it was remediated. It wasn't like they didn't do that. A lot of companies do this thing where it's like, we are aware that we have an issue and we will provide more details soon. It's like, first of all, if you're posting that, you know more than what you just said, right? The fact that you could tell me that you know there's an issue means like you're already withholding information from me. Why? I can't trust you.

• 27:29Speaker 02

  And it reminded me, the reason I included it in the book is it really reminded me about a very famous story in Johnson and Johnson history. Where, and people who've gone to business school will certainly know this story. There was a time when there was an accusation of tainted Tylenol in drugstores. And they thought it was maybe like, you know, someone I think had claimed that Johnson Johnson was like, had batches of poisonous Tylenol. Now, in retrospect, as it turned out, it was just a crazy person had done this on purpose. They had like gone into a drugstore and contaminated like a bottle of Tylenol to create this scandal. But that took a long time before that was known. So during the initial days, the then CEO of Johnson and Johnson, kind of James Burke, he went way above and beyond to be transparent about what was going on.

• 28:12Speaker 02

  He pulled, he ordered every bottle of Tylenol pulled off every shelf in America. Just on the possibility that there might be a problem with it. He invited the press into his office. His office was open to the press during the entire crisis. He had daily press conferences and he was just like, just, we're not hiding anything. Come watch every step of this response. It's just, it's considered to be the masterclass of crisis response. Because the transparency that he demonstrated caused people to trust the company more after the incident than before. Whereas other companies have obviously taken a much less transparent result. And sometimes a scandal really can overwhelm. The whole company. So that's why I like that GitLab story so much. It's like they're like, look, we're going to show you everything about what's going on until the issue is resolved.

• 28:53Speaker 02

  And that's really the ethos. It's just, we are not going to hide anything from employees. We're not going to hide anything from customers. That's who we are through and through. And that's the reason they've been able to be so successful. So again, being open source, being transparent, like these extra financial values. People often say like, oh, I guess they're successful despite that. It's like, no, you got it backwards. This is the engine. The mission is the engine by which the product succeeds.

• 29:18Speaker 01

  Yeah, I absolutely love that example. Like when I was building my first company, which did run for 10 years or still running now, but a lot of our inspiration was always looking at these companies that did this kind of radical transparency. And Buffer is another company, which is quite interesting. We do completely open salaries. So you can just go and look at a spreadsheet, literally of every single employee. And they're very clear about why they're paid, what they are. And it just completely changes. I've always had Buffer on my mental map of like, well, you know, if there are companies you're thinking of applying to or whatever, you know, a company like that is always there because you just think, well, that to me speaks volumes over a company where like you can't find any information or you that kind of thing. So, but it is a very different way of working and it's quite difficult to start, which we'll get into shortly. One thing I'd like to touch on before we're going to get into

• 30:03Speaker 01

  what can founders actually do to ensure they've like, set things up correctly in this way and like thinking ahead. I wanted just to pull one more example. What can happen effectively when things go wrong? And it's with Twilio. And Twilio was a very interesting example. And the timing of this was also interesting. I happened to meet Jeff. I think a few months before he, because he was the founder and before he was removed. I happened to meet him at one of very large Twilio event. And you know, I just remember sort of how so much energy and how like he was clearly absolutely loving it. And then within a few months, I read that he was no longer there. And so you have a bit more of the background on that one because to me it just didn't make any sense.

• 30:45Speaker 02

  Oh, this is like such a classic story. So let me give you the story from the investor's point of view. Okay. The case closed. So Jeff built this company from nothing. I knew him when the company was very, very, very young, a true developer's developer. For the longest time, you could find this billboard on the 101 driving in San Francisco that just said Twilio, ask your developer. It was like just a I remember that, yeah. Yeah, remember that slogan? Yeah. He came up with that slogan himself, you know, it wasn't some marketing focus group thing. They've replaced it with a total focus group billboard now that I can't remember because it's not memorable at all. Ask your developer. And he built this company to just an absolute behemoth. Now, I don't have the numbers in front of me and I hate to misspeak, but the company had a very successful IPO, had steady growth for a long time. And then during

• 31:26Speaker 02

  the run up in telecom stocks during the pandemic, remember that? How crazy things got in 2020, 2021 for tech companies? So the stock went up crazy amounts. I can't remember now, you know, the stock was trading at like $400 or forfeit. It's just like billions and billions of dollars have been marked. He was, he had created literally billions of dollars for his investors. Such an incredible success. And then the stock collapsed when that bubble burst. So the stock was down 80, 90%. I can't remember. It was down way, way, way down. And there was a lot of pressure to get the stock back up. And so people are like, look, stock is way down. That's obviously a reason to change CEOs. Now, what's interesting about this story is when I mentioned before that some people choose to be the mission guardian personally, like Zuckerberg or Sergey and Larry. That's what

• 32:10Speaker 02

  Twilio had done. At the time of their IPO, they had agreed to give Jeff super voting shares, dual class protection. And when I think about this now, it's like the ominous music plays like in the movie, you know, it's like dun dun dun. He agreed for the sake of good governance that the shares would sunset after seven years. Sunset, meaning they would go away. So he had this protection and, you know, companies encounter this all the time. It's a very common belief. If you go read a lot of good governance documents, they advocate for this as a good compromise. And the way they sell it to founders is like, look, seven years is a long time. Who knows what the situation will be then. If you need to extend it, you can always extend it, whatever. But in practice, it doesn't get extended because you don't want to jeopardize your good governance rating. You want to take a guess? I always ask people, please guess how many days elapsed between

• 32:53Speaker 02

  the day that these super voting protections expired and the day that he was removed as CEO? For those that are following at home, it was 199 days, not even a year, because at the first possible opportunity to get him out, they did. And their Point was, look, stock's way down, so you're out. But first of all, that's an absurd reason because he created all that value in the first place. But more importantly, if you measure the revenue growth from the time of the IPO, the company was up like I can't remember how many thousand a percent. It's not like the company had stopped growing just because the stock price had come down. Even if you measure revenue growth from the day of the peak of the stock price, they were still up, I think, one hundred and fifty percent. So it's just like you have this, if you look at a chart of it, you can just see like this

• 33:39Speaker 02

  incredible rising revenue line and the stock is just gyrating as it does. And so, yeah, sometimes it's up and he's a genius, sometimes it's down and he's a villain. But I thought the whole thing was really sad and it's just so common. Harvard Law School study was done among all venture-backed companies. The founder will only be CEO three years after an IPO in twenty percent of cases with standard governance. So standard governance is just a loaded gun. It's like just waiting for some investor to decide, hey, as much money as you made me, you know, we deserve more. And so I just feel like for companies that are trying to do something different, that have a distinctive and different ethos, you know, it's real difficult. It's so difficult. Now, GitLab and Cloudflare both are protected by permanent dual class shares. That's why both of them have been able to do this kind of thing.

• 34:24Speaker 02

  And if you think about other companies like Buffer or think about like, I don't know, Oxide Computing, which has the same salary, all employees have the same salary, right? It's like such a countercultural thing to do. It's so great. And they were a great blog post, I think, last year about just all the many counterintuitive benefits they get from doing this. So you just go through all these companies that are doing something different, that it's like really working, making so much money for their investors. It's like the parable of the goose that laid the golden egg. We can't help ourselves, but we're like, but why not more? Why isn't it giving us more? And we tend to destroy those companies rather than support them. I think it's really sad.

• 34:56Speaker 01

  Yeah. And this is really interesting because it is this, I guess, counter to the narrative that these supervoting shares are like evil and terrible. And why does it give, you know, one person so much control? And actually, having these dual class structures can actually, when used appropriately, can help in such a big way. I mean, there's small parallels to like where I live, which is Singapore and people pseudo-democracy. Problem is it works very well. The people are served very well on it, but it only works because of the kind of the way that the system has been set up here in Singapore. But I think what will be very interesting to then look at is like, okay, I'm a founder. I'm a software engineer, thinking of becoming a founder. I think the pressure is pretty great, you know, when you're setting up your company, you're taking on some investment.

• 35:37Speaker 01

  Safes tend to be the first mechanism that people take on money, but then before they know it, they do have, obviously in many positive cases, they do have term sheets and they've got actual VCs. What's your advice around how can someone starting out today actually think about and protect against what we're talking about?

• 35:55Speaker 02

  Okay. Well, first of all, I promise that all the details you need to actually do this are in the book, including obviously there's a lot of details in the book itself. And then there's a couple of QR codes you can download, implementation guides, which have sample term sheets, sample incorporation documents, all kinds of stuff. Prepared by my friends at Virgil, the startup law firm that I helped start. And the most important thing is not to view this as like a one time thing you do. Obviously, the earlier you do it, the better. So if you're just, if you're thinking about becoming a startup, I have a whole package of things that you should just do. And I'm just going to give it to you in very, very, this is like the blueprint in extreme brief. But before I give you the list, I really want to warn you against the Leroy Jenkins thing. Okay? You can't just be like, okay, I did one thing. Now I'm invincible. Leroy Jenkins, like right out into battle. Like, no.

• 36:38Speaker 02

  One thing's not going to get it done. In the book, I joke, it's like you have the plus two pauldrons of invincibility. So yeah, if someone tries to stab you in the shoulder, you are impenetrable. But if you have the rest of your body is naked, you're going to get stabbed somewhere else, you're still going to die. So it's really important to see this as like a lifetime discipline, not as a one time thing that you do. That said, here's the blueprint in the short version. Okay? The first thing we need to do is three dimensions. Purpose, coherence, integrity. Okay? That's it. Purpose, coherence, integrity. Purpose. We have to establish what is this company? What is his legal purpose? Why does it exist? Today we live in the era of what's called shareholder primacy, meaning that companies exist only to enrich their shareholders. If that's what you want to do, okay.

• 37:18Speaker 02

  I can't help you. But if you want to do anything else at all, you tell me you care about quality, you care about beauty, you care about engineering efficiency, you care about your customers, you care about your employees, you care about Environment, you care about inequality. I don't care what it is. You tell me you care about it. You need to write it down. And that means encoding it into the legal charter of the company through what's called a public benefit corp. Or PPC filing. This is a really easy thing to do. Do it in Delaware. You can do it at the time of your incorporation or later. Highly recommend PPC. And you need to operationally decide what are you committed to? I ask people to really think about who would you rather die than betray? Who's on that list? Your employees? Great. Write it down. Is your customers? Whoever it is, let's write it down. Let's figure it out. Let's write it down. Okay.

• 37:59Speaker 02

  Then the second dimension of the blueprint is coherence. This is the leadership style of running a company according to this harder is easier principle. Just like Cloudflare. You say, okay, we're going to commit ourselves to defend these values and this purpose, even when it's difficult. And the book has a lot of details about exactly how to do this, how to take your company from mission hopeful to mission driven. And then the third thing is integrity. So purpose, coherence, integrity. Integrity means structural integrity. Like how are you going to prevent your board from betraying you? How are you going to prevent investors from attacking you? That's things like the anthropic L T B T, things like having your directors sign an oath, like the equivalent of the Hippocratic oath that doctors have to take.

• 38:39Speaker 02

  Boards of directors should take a similar oath to defend the mission. So in each of these things, like, you know, if you're just starting out, I would just pick some of the lighter weight things to do and then add that to your incorporation. It's just like a really, it's really simple and easy way to get started. And the nice thing about the legal stuff, the operational stuff, I think is very natural for product people. Most of the things, most people listening to this will read the book and be like, yeah, of course. This is like a helpful encapsulation of things I knew I wanted to do already. The legal stuff can sound really daunting, but one of the really powerful things about a legal charter is you don't actually have to do all the things. You just write in the charter that you will do it and that becomes legally binding on yourself to do it. So it's like, it's actually a lot of things that if you just write it down early enough, it's just so much easier than having to jury rig or retrofit it later.

• 39:23Speaker 01

  Yeah. One thing I've been thinking about, especially reading the book is founders still want to think, any business owner wants to think that they have like an exit strategy effectively. And this idea of selling the company on, for example, does that sit at complete? Odds with this incorruptibility or you know, how can founders think ahead on that one? And I guess what I'm thinking about things like Berkshire Hathaway, they're very clear about, you know, sure, we give you a contract to sign, but it's not really about that. It's literally, it's pretty much about a handshake and saying like, we think we're the best for you. And there's another company out there called Tiny Capital. And I think that's interesting, like, because that's where someone can also make a choice when it comes to

• 40:04Speaker 01

  like how they're thinking of taking their company forwards, but not always having to be exactly involved. Like, how do you think about that one?

• 40:12Speaker 02

  The critical thing to understand is just how valuable trustworthiness is. So I just think that we dramatically underrate this asset in business today. And really in product, in engineering, it's just like, it's not, it's considered something vague or intangible, but it's not, it's actually super specific and a very valuable asset. So yeah, Berkshire can pay, literally can pay lower amounts for their transactions. They buy assets cheaper and they don't have to pay nearly as much contractual cost because people trust them. The ability to work on a handshake is a well documented asset. It causes more employee retention, it causes better customer loyalty, it causes better fundraising results. You have lower cost of capital, you have lower partnership costs, you have higher alignment of employees.

• 40:56Speaker 02

  Just the list of benefits goes on and on and on. The book is loaded with studies to demonstrate that this is not my personal opinion. This is a well established scientific fact. And so when we think about like, what are the elements that create trust? That's really the positive framing of this resisting corruption. There's like resisting corruption is the same as intentionally generating trust. And so right now, as a founder, as a leader, if we're looking to quote unquote, exit the business, we don't have a lot of high trust options, but we do have a few. And it's not just Berkshire Hathaway, you could do what's called an employee ownership trust or an ESOP conversion. You can convert to a purpose trust, you can do what's called a seller finance transaction. There's actually like quite a few of these alternatives out there. And not all the case studies made it into the book, but they're in the supplemental materials.

• 41:41Speaker 02

  Like, you know, Taylor Guitar is, for example, is one of my favorite examples. They did an ESOP conversion as a company called Common. Trust that helps people do an employee ownership conversion. So the exit options are there if you if you look for them, if you want them. And obviously, maybe the most famous example of such a conversion is what happened at Patagonia. And I should I just think like, this is not like an unprecedented thing. We don't know what to do. We do know what to do. We have the data. We have the evidence. We have the options. And so part of this is just making people aware that these things exist because the kind of the lawyers and the lobbyists and the bankers and all the people that advise our current generation of leaders like, they all make their money from transaction volume and have absolutely no incentive whatsoever to tell you about this other stuff. As a result, it's quite invisible to most leaders.

• 42:22Speaker 01

  Yeah, just touching briefly, I know this isn't software, but Patagonia is that great example. I read that book, The Let My People Go Surfing.

• 42:29Speaker 02

  Yeah.

• 42:29Speaker 01

  And it was just such an eye opening. I was running a company at that stage and and it was just so eye opening to keep seeing, well, they're so successful. They're so profitable. But it doesn't have to sit at odds with kind of doing good as well. And I think that was just a really powerful example to have as I was building things.

• 42:45Speaker 02

  Yeah, I'm glad to hear that.

• 42:47Speaker 01

  So looking at what else can people do? I'm not a founder, but I am a software engineer and human traffic is one of the final chapters in the book. And I think that's a really powerful way to help explain, we're all part of the ecosystem. We're all part of this, you know? And yeah, like, I think he gives some just very nice examples of other things that people can be doing to feed to this way of supporting incorruptible companies, I guess.

• 43:12Speaker 02

  Yeah. Okay. So gosh, there's a lot to unpack there. And I know we're coming up in the end here. So first thing is there are a bunch of companies in the book that have a mission that is not what you'd expect it to be. I think the best example, you mentioned human trafficking, Tony's Chocolate Lonely is some of the best tasting chocolate in the world. There's this delicious. But the mission of the company is to end child slavery and cocoa production. So that's the mission. Like, in order to do that, they have to produce the best chocolate in the world at the best possible price. And they have to make sure that the money is used to create an ethical supply chain. They've done an incredible job, you know, evangelizing for that mission. So it's like one of these classic cases where you don't have to make this trade off between mission and money. The mission drives their commercial results. And if people don't know that story, it's pretty wild. It begins with the

• 43:57Speaker 02

  Founder attempting to get himself arrested for eating chocolate. So I'll just leave that as a teaser. But it's also really important that this book is read and used by people who are not founders, who are not board members, who are not investors, who do not see themselves as especially important or powerful in our society today. It's important for two reasons. One, because many of those people actually will go on to positions of power influenced later in their lives, and it's very important that they go into that experience with a pre-existing ethos. So you may be a future builder without even realizing it. So please do read even on that basis. But it's also important because every one of us has agency to shape the gravitational field around us by the choices we make as a consumer, as an employee, as an investor. You know, where are your retirement savings invested?

• 44:39Speaker 02

  So many people I know have their retirement savings invested with companies who take their governance guidance from a company called ISS, whose values are inimical to yours. Why are you giving support to someone whose values you don't support? Like, what's up with that? I'll give you another simple example. This came from an actual reader who came to me after reading the book. And he said, look, I really, really want to do this thing that you're describing, but I'm not a powerful person. In fact, I need a job. Okay. So they're like, can you please give me some advice on how to use the ideas in this book to help me get a job? And they were like, but caveat, I'm not courageous. Okay, so please give me a no courage way. I was like, no problem, no problem. Easy, actually. Here's what you're gonna do. You're gonna go have a job interview. Okay.

• 45:22Speaker 02

  At the end of the interview, they're gonna say, you have any questions for me? For those that don't know, you should always ask a question. Never, ever, ever say no. Always ask a question. Okay. Your question's gonna be, is this a mission-driven company? And you know what they're gonna say? They're gonna say yes. They're gonna say yes. Of course they're gonna say yes. What are they gonna say? Yeah. And you're like, great, how do you know? And they're gonna blah, blah, blah, tell you some reasons why they're mission-driven. Whatever they say, don't be judgmental, don't be critical, just with curiosity, just say, oh, that's so cool. Is that mission also in the legal charter? Is that our company's legal purpose? And I guarantee you, for the majority of people who have this conversation, the answer's gonna be, oh, I don't know. Now, it's a perfectly legit question. If you don't know, you deserve to know the answer to this question before you take a job, because if it is not the legal purpose, odds are they're going to betray you one day. So you deserve to know.

• 46:06Speaker 02

  In any event, whether or not you ever get an answer to this question, you have done your job. Why? Because every modern company has a hiring process. The hiring process involves managers whose job it is to make sure the process goes well, which means I guarantee you, whatever company you ask this question to, it is somebody's job to find out the answer to any question a candidate might ask. So just by asking the question, now it's her job. She's gonna be like, oh, I don't know the answer to this question either. I better ask my boss. And she's gonna have to ask her boss, and she's gonna have to... I've actually been in the room where this comes up at board meetings, where people will say something like, we're starting to get this odd question from candidates. What is our answer to this question? Now, look, sometimes nothing will happen,

• 46:49Speaker 02

  but sometimes that will be just the excuse the CEO needed to be like, actually, I've been wanting to do this for a while, and I've been looking for an excuse. How do I convince all these financially oriented board members to do the right thing for the wrong reasons? Perfect, ah, it's coming up in it, ah, sorry, we gotta do it because, right? That's all from if one person asked. What if two people asked? What if 10 people asked? See, you have no idea how much power you have, because you can't imagine the extent to which these companies, they seem indomitable. They seem so powerful, we all feel so helpless, and yet, they are desperate for your approval. You can't imagine how addicted they are to the question of what will you do? You think any decision you make, and I mean, no matter how trivial a decision it is,

• 47:34Speaker 02

  and whether you tell anybody or not is irrelevant. Every decision you make is some middle manager's OKR to make sure you do that thing. And it's probably some other middle manager's OKR to make sure you don't do it. So in the age of surveillance capitalism, every decision you make reverberates in gravitational waves through the whole economy, which means these companies are sitting there being like, hey, can we make the product a little bit worse? Will they still buy it? How about now? How about now? How about now? Will they still buy it? Can we shitify it a little bit more, to use Cory Doctorow's term? Can we treat our employees a little worse? Will they still work here? How about now? How about now? How about now? Like, they are addicts. They are desperately seeking your approval. So choose wisely who to give it to.

• 48:13Speaker 01

  Yeah, that's an amazing place to leave it. You know, we have so many software engineers who, quite frankly, will be having so many offers thrown at them these days for jobs in this AI era. And this is exactly the kind of thing that they can be asking and making, voting with their feet and their hands, I guess.

• 48:30Speaker 02

  Yeah, exactly. Like, I think people often misunderstand this. I'm not saying you have to vote with your wallet, with your feet for my values. I'm saying defend your own values, have some self-respect.

• 48:40Speaker 01

  Yeah, for sure. So we are coming up in time. Just where is the best place for someone to grab a copy of Incorruptible?

• 48:49Speaker 02

  Well, of course, the best place is at your local independent bookstore. If you would be so kind, if you want to do me a favor, you walk into your local independent bookstore and you'd be like, do you have every single book by Eric Ries? Do you have Incorruptible? Why not? What's wrong with you? I thought you were a great bookstore. That's always super helpful. If you go to incorruptible.co, of course, you can get it at every major retailer on the planet. Their links are all there. You can get it in audio form, in ebook, or in print hardcover. If you want to see all the different media and accolades and bestseller lists and all that stuff, you can find that at howisincorruptiblegoing.com. There's another place to follow. And either way, if you want to follow me, you want to get a whole bunch of cool bonuses, you could just follow, join my email list, just type in your email address. We promise not to spam you, but to give you as much value as we could humanly come up with for those who choose to be part of the community. So thanks for that, for those who want to follow along.

• 49:35Speaker 01

  There we go. Well, Eric, thank you so much, and not just for this episode, but for everything you've contributed.

• 49:40Speaker 02

  Ah, so nice of you to say.

• 49:41Speaker 01

  Lean Startup, obviously such an inspiration and has guided so many companies. And I think you put it very well, that you set up all these companies in a good path from the building stage, and now you're here to kind of help them also figure out the, keep going and make sure that they carve the best path for themselves as they succeed. So I think there's, you know, there's that quote in the book around, I think it was Brian Chesky, Airbnb, saying, you know, that Steve Jobs, the best product he actually made was the company. It wasn't one of the products. And I think that's an amazing quote and a great place to leave it. So again, thank you so much.

• 50:12Speaker 02

  Thanks so much, really appreciate it.