Episode 834 | Eric Ries Revisits The Lean Startup and Discusses How to Become Incorruptible

Rob Walling (00:00): Welcome back to Startups for the Rest of Us. I am your host, Rob Walling, and in this episode I talk with Eric Ries, the founder of the Lean Startup. We revisit some concepts from his seminal work and we also discuss his new book about how to become incorruptible. Before we dive into our conversation, SaaS Institute is my premium coaching program for founders doing a million or more in ARR. We provide a private members-only community designed for candid conversations and trusted connections, invite-only founder events built to spark breakthroughs and accelerate growth. We surround you with a curated circle of peers. These are other ambitious founders at a similar stage to you and they’re tackling the same challenges, as well as one-on-one coaching with experienced SaaS operators and subject matter experts, as well as direct access to mentors across growth, sales, product, finance, and more. 

(00:59): You can find out the full story at SaaSInstitute.com. This is a premium paid coaching program, again, only for founders doing seven or eight figures in ARR and only for SaaS founders at SaaSInstitute.com. And with that, let’s dive into my conversation with Eric Ries. Eric Ries, welcome to the show. 

Eric Ries (01:28): Thank you so much. It’s good to see you. Always good to hang out. 

Rob Walling (01:30): Yeah, it’s been a long time, man, since we saw each other and this was your first time on the show, surprisingly enough. I think I want to have you back on before your next book. 

Eric Ries (01:40): Sure. Yeah. Always a pleasure. 

Rob Walling (01:42): Your new book is Incorruptible and it is out today. Incorruptible.co if folks want to jump straight to Amazon or a local bookstore and grab it. I want to talk today a little bit about Lean Startup, which is what most folks are going to know your name from. But you’ve written now three or four books and this new book is fascinating. It’s based on a lot of hard-won knowledge from working on the Long-Term Stock Exchange as well as a lot of observations that probably only you have, working with these large companies in the capacity that you’ve been doing over the past few years. I think first question before we dive into Lean Startup is: what motivated you to write this book? 

Eric Ries (02:25): The new book? Oh gosh. Yeah, I’ve been busy the last 15 years and as they say, I’ve seen some things. So building Long-Term Stock Exchange, building the other companies that I’ve built, helping hundreds, thousands of people start companies. I’m very proud of all the positive work that’s come out of this movement. The global startup movement together has pioneered everything from incredible bootstrappers to massive venture-backed companies and new institutions of every kind. We’ve really had a lot of positive impact, very proud of all that. But there’s a dark underbelly to this whole thing. There’s a toll, a cost. And we treat it like it’s just inevitable that as companies get bigger, they get betrayed. They cease to be what they stood for. We think that founder burnout, mental health issues, all this, we are accepting a certain amount of carnage that it’s just a necessary cost to get all the good stuff we like out of this system. 

(03:17): But the more I’ve studied, the more I’ve learned, and the more I’ve built, I don’t think that’s true. I actually think we’ve been misled by a whole package of what are today called best practices about how companies are to be built, structured, and governed that are frankly value-destroying. And so we as builders, we get the final say here. We get to decide what the best practices are and I’d like us to have an understanding of how we got into the mess we’re in now and start to work together to develop some new practices for the next generation. 

Rob Walling (03:48): Awesome. And that’s a great tease for the middle of the show when we start diving into your story around the Long-Term Stock Exchange and you have a new definition, or a more complete definition, of profit that I think folks want to stick around and hear. But before we dive into that, I want to ask you about Lean Startup. It’s been around for, is it 15 years now, since 2010-ish? 

Eric Ries (04:10): 2011, yeah. 

Rob Walling (04:11): Yeah, 2011. All right. 15 years. And I would guess almost everyone who is listening here has heard of Lean Startup, but to encapsulate it, I’ve always thought of it as you pulling together some concepts: product-market fit that Andreessen came up with, MVP, I think Frank Robinson maybe. I know you and Steve Blank popularized it. Customer development was a Steve Blank thing. You invented the pivot, the concept of the pivot. You pulled these ingredients together in this recipe. And it’s, as you said, been used by bootstrappers and massive Fortune 500 companies. Some of the 

Eric Ries (04:45): World’s largest. 

Rob Walling (04:46): Oh yeah. It’s incredible. But you’re 15 years in now and do you feel like the ideas within it have held up? How have they shifted? Any recent observations on your part? 

Eric Ries (05:00): Oh, sure. Happy to talk. What a ride. I mean, who could have imagined it would get so big? The book has sold millions of copies and people write to me still basically every day telling me they found it helpful. That to me is always the acid test: are practitioners finding it useful in real life, not just finding it entertaining and enjoyable. That’s great. As an artist, I appreciate that part of it. But I write these books for a reason because I’ve personally witnessed and endured the pain and I personally want to help people get out of that mess. I never ask anybody to try anything I haven’t been willing to try myself. I very much eat the dog food before I ever try to serve it to anyone else. It’s interesting being on this tour talking about the new book. A surprising number of hosts have asked me, do I feel vindicated by what’s happened since I wrote Lean Startup? 

(05:51): Meaning that the AI stuff that’s going on now, the kind of changes the technology platform, they feel like I called it 15 years ago. And I was like, “Really? I don’t really…” Yes, I guess that’s right. And people have been quoting my own work back to me: “Remember when you said this? Remember?” I’m like, “Oh yeah, I guess we did say that.” Fundamentally, Lean Startup I’ve always thought was about the confluence of two mega trends. One is the democratization of access to the tools of building. We take it for granted now that a kid in a garage can compete head to head with a Fortune 500 company in the global marketplace. That’s just normal, but that’s a very new accomplishment as a society. So more and more people could do more and more things because the cycle time is going down. 

(06:34): Things are getting faster. And the second mega trend is that, partly as a result of number one but partly for other reasons too, things are becoming more and more uncertain. So our ability to use the 20th century general management toolkit of planning and forecasting is getting harder. Not that it can’t be used for anything, but entrepreneurship is that special domain of business, of organization building, of building, of making, where we really don’t know what’s going to happen. And that’s exciting, but also it’s a little bit scary. Many of the tools that we have as managers, for holding people accountable, for raising and deploying capital, for figuring out what to do, they require the ability to forecast to work. So as uncertainty increases, our managerial tools break down. And so to me, I feel like that was a pretty good call 15 years ago, that we would see more and more of those two dimensions. 

(07:26): And so we would need to develop tools that are equipped and evolved to handle that environment. And boy, is this a crazy environment. 

Rob Walling (07:35): For folks who don’t remember what it was like before Lean Startup and customer development and MVPs became a concept: in probably 2003 to 2006, I was a software developer by day, engineering manager, and I was just trying to build bootstrap products at night. I would go into the basement and I would code. I wouldn’t talk to anyone. I would come up with an idea and I’d code for 400 hours, 500 hours, put it on the internet, try to market it, and it was just frustration after frustration, wasted swaths of time. And so when I heard about customer development, I was like, “A, that’s really scary,” and an MVP, that concept of launching something that’s minimally viable. 

(08:22): That felt scary and it was not the way we used to do it. We all think that’s just the way everyone does it now, but there was a time when, no, it was just years and years of wasted effort. 

Eric Ries (08:33): Oh, it was really controversial. I can still remember. I tell the story in The Lean Startup of a company called IMVU, one of the first Silicon Valley companies that I was a founder of, and we did all this stuff then. We didn’t have language for it, we just did it. And after that company, I was being asked to advise other companies. I didn’t really understand the way Silicon Valley worked back then, but VCs were all of a sudden my new best friends. I didn’t know why all these VCs wanted to talk to me and invite me into their offices. I would go to these meetings and the VC would set it up and they’d be like, “Hey, we have this company that’s going too slow. Can you sprinkle some of your magic pixie dust on them?” I’d be like, “No, no, no. I’m not smarter than anybody. I don’t have magic pixie dust. I just have a better system, a thinking system.” And they’d be like, “Sure, sure, whatever kid, just go make it happen.” 

(09:13): And I’d have these meetings and people would yell at me. They’d be like, “That’s not true. What you’re describing could never work.” And I’m like, “I’m sorry, I’m just telling you a story of something that I personally witnessed. I’m not even asking you to do anything. You asked me.” At a certain point, some of these meetings ended so badly I would have to say, “Listen, with all respect, you called me. You asked me as a favor to have this meeting and now you’re yelling at me.” That’s really how countercultural it was at the time. I can remember being a student in Steve Blank’s class. 

(09:53): He was one of my investors at IMVU and the deal was we had to audit his class. He had just started teaching customer development at Berkeley Haas School of Business and we would make the trip, my co-founder and I, from Palo Alto all the way through traffic to Berkeley to sit in on Steve’s class. I remember the MBAs just being so skeptical. And yeah, now it’s so gratifying to see that these ideas have taken over. But as a result, a lot of people don’t realize that they ever had to be invented in the first place. So they kind of take for granted: well, of course everybody knows about pivots. Of course everyone knows about MVPs. But no, it’s actually a relatively recent achievement that we have the vocabulary to talk about it. 

(10:36): And one of the things I’ve learned from that experience is that conceptual vocabulary is very valuable. Even people who want to criticize Lean Startup have to carry the meme forward to do so. So by creating an intellectual framework for talking about these issues, we have advanced entrepreneurship itself, even if some of the ideas are wrong, because it helps us get to the right ideas. Now we can reason about and talk about things that before we didn’t have language for. 

Rob Walling (11:02): Talk to me about AI. What parts of Lean Startup do you feel like AI makes easier? 

Eric Ries (11:09): I get this question a lot, but I think the question reflects a misunderstanding. Entrepreneurship is not a solo game. It’s not a single-player game. Imagine you’re playing a single-player video game and someone gives you an auto-clicker that does all the tedious clicking for you. Now you go faster, you’re doing better. Did the tool make you better at this video game? Oh yeah, totally. But what if it was a multiplayer competitive game? Well, if you get the auto-clicker and everybody else gets the auto-clicker too, how did it make you better? Not necessarily. In fact, now the question is whether you can use the tool better than your competitors. 

(11:51): It changes the basis of competition in such a way that it makes some things a lot easier, some things a lot harder. So I think the jury’s still out on what the net effect will be of these tools. Now, many of the specific tactical things that we recommend, if you read The Lean Startup now through modern eyes, you’re like, why didn’t they just use Claude Code for that? 

Rob Walling (12:09): It didn’t exist. 

Eric Ries (12:10): It didn’t exist. None of that stuff existed back then. So of course the stories are outdated in the sense that the timelines and the costs of things are all off because now those timelines and costs are totally different. But that’s why I tried really hard in the book to emphasize principles, not tactics, because principles can endure, but tactics are always tied to the specific economic environment in which they’re invented. 

Rob Walling (12:30): Yeah, like that. Folks who listen to this podcast know I’ve written five books. The first one was very, very tactical. That’s actually when you and I met. I wrote Start Small, Stay Small, published it in 2010, and then I was on the speaking circuit. You and I met and were speaking at several of the same events, lean startup events. 

Eric Ries (12:47): Yeah, sure. I remember those days well. 

Rob Walling (12:48): My first book was so tactical and people loved it and it became outdated in 18 months. And so my later books are much more about principles and concepts. 

Eric Ries (12:59): It’s the only way to write something that’s going to endure. And you see with AI, the durability of these so-called best practices is so short. The prompting tools and guidelines and context management, stuff that we were writing about six months ago, 12 months ago, 18 months ago, is now completely wrong. And what’s interesting to me is how quickly people fixate on the new thing, how quickly things become ossified as just so stories. “Oh, everyone knows now you have to do this to get the most out of an LLM.” And it’s like, no, that was just a quirk of how we were building them in February, but now it’s March and we’re doing it totally differently. The breakthroughs are coming fast and furious. 

Rob Walling (13:36): With customer development, obviously there’s build-measure-learn, and you’re talking to customers and then you go build and then you measure and learn. It feels like AI is shrinking these windows. It just takes less time to build. Does it take less time to measure and learn as well? What’s your experience? 

Eric Ries (13:57): This is the biggest problem with the way we are currently using AI. I tried to make this clear 15 years ago: learning is the unit of progress. Well, who does the learning? 

Rob Walling (14:09): The humans. 

Eric Ries (14:10): It’s still being done by old-fashioned wetware between the ears of the founders. At the end of the day, the rate-limiting step, the fundamental constraint, is how fast can you learn? Now AI can be an incredible learning tool. So I do think the next generation of founders, once we get past the bubble and all the nonsense happening right now, will use these tools not to make artifacts for themselves, but rather to improve their own capabilities. That is the big divide I see in the world of AI today. Yes, if you’re trying to just build and measure, these tools are incredible. You can say, “Go make me a thing. Now make me a new thing.” I have a Claude Code agent running on my laptop right now doing book promo, constantly trying to brainstorm ways to get on social media and make a post that might go viral. 

(14:56): It’s constantly looking at my posts and other people’s posts to see what’s gone viral and using that data. So it’s doing what it thinks is the build-measure-learn step on its own. The problem is it doesn’t do any learning. What they call in-context learning is not learning. It’s just token prediction, next-token guessing. So what happens is it inevitably convinces itself to do average work because that’s what’s in the training data. Unless you really give it a lot of your own learning capability, it just can’t break out of that paradigm. The build and measure can be accelerated, but the learning, if you just send it off to do the artifacts for you, if you have it make a product you don’t understand, if you don’t talk to the customers but have the machine talk to customers for you, it will not actually accelerate what you’re trying to do. 

(15:41): It will actually slow you down. 

Rob Walling (15:43): You and I are in agreement here. I talked just a couple weeks ago on this show about the four core SaaS skills: product development, marketing, and sales. Everything else you can figure out. But I conjecture you need these core skills on a founding team or senior folks if you can hire them. And I was talking about how AI impacts each of these. AI speeds along development. AI can help you with sales and marketing, it can create some stuff, but founders still have to do it. Product, making decisions about what to build next, especially in an early stage, I think AI is not good at that and will not be good at it for a very long time. Which is in line with what you’re saying, because it’s seeking the average. 

(16:25): I hadn’t put it in those terms, but it is seeking average work and an average product isn’t going to do anything for anyone. 

Eric Ries (16:33): Yeah. It’s funny. If you look at the studies on how AI works and how people are using it and how it performs, it makes everyone’s work more average, which for below-average performers is an increase. So a lot of people saying AI is so much smarter are kind of telling on themselves. 

Rob Walling (16:47): Oh, fascinating. 

Eric Ries (16:49): Everyone thinks they use AI writing and it’s so brilliant. But then when they receive AI-written slop, they’re like, “This is terrible.” You can’t tell the difference. The number one finding I think from use of LLMs is that LLMs cause the Dunning-Kruger effect to be magnified. They convince you that you’re more capable than you are while they degrade your actual capabilities. If you use them the way the normal tools are designed, obviously there are some tools designed differently, I help build some of them, but if you use them the normal way, I’m convinced that when we put these vibe coders into an MRI machine while using Claude Code, they’re going to look like slot machine junkies because you’re just saying next, next, next. You’re building stuff that you don’t understand. 

(17:29): And of course it’s only a matter of time before someone vibe codes their way into a massive, mission-critical disaster. When they deploy code, they think they understand it, but they don’t. It’s the psychological effect that’s really damaging. 

Rob Walling (17:39): I want to change it up and get back to Incorruptible, what you’re here to talk about today. You introduced it earlier, why you decided to write it, but one story that I was really compelled by, early in the book, is about the Long-Term Stock Exchange. This is a story I’ve been following since you announced it because I love the concept of it. So for someone who’s never heard of it, can you describe what the idea behind it was and then what happened? I believe you had to shut it down. 

Eric Ries (18:07): No, no, no. On the contrary, LTSE is still going strong and we actually made money last year. Yeah, I know. 

Rob Walling (18:14): Oh my gosh. Okay. This is amazing. 

Eric Ries (18:16): In fact, if you’ve noticed, the SEC is considering eliminating quarterly reporting for the first time in 40 years, and that’s our petition. Now I say our petition, but I have to get out of that habit because of course I don’t run the company anymore. I’ve long since turned it over to a really capable management team who are much better at running a financial services company than I am. But yeah, LTSE is live. It’s interesting that you have that reaction. A lot of people do. It’s very difficult to get attention for it because it’s so different, and press doesn’t like to write about it. So many companies come to me and say, “I’m so glad you’re working on this problem. It would be so great if everybody would adopt your principles.” And I’m like, “Great, would you like to adopt these principles?” “I would love to, but I can’t.” 

(19:01): Would you like to lift a finger in defense of the world you want to see? “No, I can’t do it.” So yeah, I have tremendous respect for the companies that are listing on LTSE. It’s such a leap of faith. And our job is to make it easier and feel less scary. One of my goals with the book is to lay out the long-form argument for why we need new civic infrastructure like LTSE and why companies should vote with their wallets to have the world they want to see happen. For people who don’t know, Long-Term Stock Exchange is the first new listings venue for public equities with its own listing standards, its own ideas about what corporate governance should look like, since the creation of NASDAQ more than 50 years ago. We’re in the same regulatory category as NYSE and NASDAQ. 

(19:45): We compete with them head to head. We list stocks. We trade all the same stocks that they trade. Most people don’t realize that modern stock exchanges are all interconnected through what’s called the national market system. All exchanges trade all the other exchanges’ stocks. It’s not like the old days where traders are in a physical building. In fact, that beautiful marble building in New York that people associate with the New York Stock Exchange is more of a museum than a trading floor. The servers are in New Jersey where the actual trading happens. We have servers in New Jersey too. We do the things the other exchanges do. And I used to wonder, I tell the story in the book, why the major exchanges are all the same. If you look at the rules, the listing standards of all the existing exchanges, they’re almost identical. 

(20:25): And when you ask people why something in the economy is the way it is, they always answer the same way. They say, “Oh, well, that must be the result of Darwinian natural selection because the market selects for value creation. So whatever you see must be the best.” This is maybe the most untrue thing that is commonly believed about markets in the whole world. And I got to learn this the hard way because we were very stubborn when we were trying to get LTSE off the ground. This was many years ago now. We raised money. I had an incredible team who had quit way more lucrative jobs to come on this crazy quest with me. We tried to get this new thing approved and we had partners that we had to work with. We got them to agree to adopt our standards. 

(21:03): We had this petition before the SEC and then we got ambushed. I’ll make a long story short. A group of hedge funds, governance experts, policymakers, and people who were opposed to what we were doing did not want to see us succeed. And they made it really clear. They called me and were very bold about it. They didn’t seem to think there was anything wrong with this or even unusual, which made me think, “Do they do this all the time?” They said, “Look, we are going to see to your destruction. We don’t want to see this happen.” And the first time they said this, I was like, “Look, I’m sorry they don’t like it, but this is America. We’re going to run this experiment and we’re going to compete.” They said, “Your thing is doomed.” That’s okay. 

(21:40): If it’s doomed, why don’t you just sit back and watch it fail? Why are you bothering me? They’re like, “No, you don’t understand. We will lean on every one of your partners and make them cancel their contracts with you because every one of your partners needs stuff from us that they care about more than this.” And I was like, “Again, why are you going to such efforts? Do you think there’s something wrong?” They were like, “No, it’s not that we think your ideas won’t work. It’s actually that we think they’re too good.” I know this sounds ridiculous, but they were like, “We’re worried that if you succeed, you will take attention away from the reforms we want to see happen. We want the markets to go in a certain direction and we can’t have an unauthorized person like you messing up our plans.” And I was so naive. 

(22:23): They leaned on one partner after another and the partners would call me and say, “Listen, can you just give these people what they want?” And finally I was like, “I don’t even know what they want. They want me to die. How can I do that?” I tell the story in the book: they timed it perfectly. I was away from my team, thousands of miles away, in the wrong time zone. It was the middle of the night. They finally called me and said, “Listen, all these problems can be made to go away.” Oh, really? Just a small thing. We just want you to change your listing standards to be the same as everybody else’s. And if you do that, why don’t you live to fight another day? And I was like, “Oh, now I understand why everything is the way it is.” 

(22:59): So I gathered my team. It was the middle of the night. I said, “Everybody, look, here’s the deal. I think if we say no, we’re going to go bankrupt. I really don’t see how we can survive. It’s a very small compromise they’re asking for. I wouldn’t blame any of you if you want to do it.” From the career perspective of all the people on my team, just getting any exchange approved would be a really big deal, a feather in their cap they could trade on for the rest of their careers. On the other hand, we had built this company to stand for something. We built it so that we would help other companies stand for something. We didn’t realize those tools would save us first. So anyway, I asked everyone on that team that night, yes or no, and every single person said no. No deal. 

(23:40): And I say in the book, I wish I could say it was my visionary leadership that got us through that night, but of course I was the one curled up on the bathroom floor. That line about being on the bathroom floor, when test readers who were not founders read the book, they were like, “What’s the big deal? I don’t understand why you were on the bathroom floor.” And everyone who’s a founder understands immediately. They were like, “Why is it so…” I was like, “My body thought I was going to die. That’s what was so bad about it.” 

(24:14): When you become ego-identified with the thing you make, what happens to it happens to you. And so I thought we had died to save a principle. Now it turns out, as these things often are in retrospect, this was the best thing that ever happened to the company. Because of these principles, we were able eventually to recover, to get something approved. And like I said, we make money, we list companies, it’s a going concern right now. Yet it left me with this feeling that there was a lot more going on in the economy than I previously understood. And I think that was a big important part of what led me to want to understand: how do these systems work, and what is the role that we as founders play in this ecosystem? 

(24:54): And I think actually we are the ones propping this whole thing up. It works the way it works because we permit it. 

Rob Walling (25:00): Right. And in the book you talk about a more complete definition of profit. Can you share what that definition is and why it’s so important? 

Eric Ries (25:13): So if you ask any founder what it means to be a for-profit company, they look at you like, really, everyone knows what that is. You’re like, but indulge me, what does it mean to make a profit? Easy. Take a $50 piece of wood, turn it into a $200 table, I have $150 in profit. Revenue minus expenses, come on. But if you’ve taken an economics class, you will know that there are some bugs in this definition. For example, ask people: is a Ponzi scheme profitable? And they really don’t want to say yes. What I’ve found is we have an intuitive understanding, what I call the builder’s intuition, about the right way to make money, but we carry around a mental definition of profit that is not aligned, and the divergence creates real cognitive dissonance. 

(26:02): Builders are like, “I don’t want to say that a Ponzi scheme is profitable.” Okay, well, what’s the problem with it? Well, if they think for a second, they’re like, “Well, it creates massive deferred liabilities that have to be paid out eventually.” So yeah, it’s revenue minus cost, but you have to take all costs into account. Not just the current period, but costs out into the future. But does that mean a company that creates a toxic waste dump and gets away with it is profitable? I’m like, of course it’s profitable, but is it? If they’re going to have to pay for the cleanup, isn’t that just a deferred liability? They’ll be like, “Oh yeah, I guess you’re right.” But now what if instead of putting a toxic waste dump in my backyard, I dump my pollution in the river and the town downstream gets sick and people die. 

(26:45): Imagine I get away with it. Is it profitable? They’re like, “Yeah, of course it’s profitable. You’re not responsible for their healthcare.” But did that really create value? You said before that if I moved the expenses in time, they still count. Here I’ve moved the expenses in space. I’ve moved them from my books to the books of the town downstream. Does that make them any less real? Most people are like, “Oh yeah, I guess not.” In economics, this is called negative externalities. If you’ve taken an economics class, these bugs are well known. The conventional definition of profit ignores negative externalities. But if you’re willing to accept that negative externalities have to be counted as part of the profit definition, now we have big problems. Because what if my product is addictive? What if it is damaging to the health of my customers? What if their communities are fragmented or destroyed? 

(27:26): It’s starting to get complicated. And it actually gets even worse. I said before I take a $50 piece of wood and turn it into a $200 table. But what about this: what if I steal a $200 piece of wood and make a $100 table? Is that profitable? Again, imagine I get away with it. No one ever finds out. Most people will be like, “No, because you didn’t account properly for the input factors of production.” Oh, what are those? Well, you have to account for the value, not just the cost, the value of everything that was consumed in the creation of the thing. The second you admit that you have to make this accounting move, now you have a new problem. 

(28:13): What if a human life is one of the input factors of production? People say, “That’s absurd. Nobody does that.” I’m like, “Okay, imagine I make a hitman-for-hire dark web business. Give me Bitcoin, I’ll kill anybody you want. Is it profitable?” People hate this one. They’ll be like, “It’s profitable, but unethical.” Then they’ll be like, “Oh, it’s illegal.” I’m like, “Okay, but what if I made so much money on the dark web that I could lobby the government to have it made legal?” Now is it profitable? It’s not ethical, but is it profitable? And eventually people will pretty much always admit that it’s not profitable, because of course a human life is precious. If it’s destroyed to make $6,000, how is that a good trade? But then you’re like, 

(29:00): “So you’re saying that Philip Morris International is not profitable? Are you sure? Data says that tobacco companies make about $6,000 per death, so that’s how they value a human life.” And as soon as you say, wait, if Philip Morris isn’t profitable, you’re saying that hardly any companies on this planet are profitable. Yeah. So we have to have a better definition of profit, one that we can use as an operating goal, a North Star as builders. What I think is the better one: to make a profit is simply to maximize human flourishing. If we leave human beings better off than we found them, we have created profit. Otherwise, we have destroyed it. That solves every one of the problems we just talked about. And although that sounds abstract, it’s super concrete. If you enact this as a company’s mission or purpose, it helps with so many situations that most companies run into today. 

(29:49): It makes it much easier to build a company that people can trust. Most company charters, if you’re a Delaware C Corp, say: “The Acme Corporation is hereby incorporated to pursue any lawful act or activity.” Any lawful act or activity is pretty open-ended. So I say, go tell your lawyer that you want to narrow it. You want to write down, “I want to maximize human flourishing by making a thing.” Your lawyer will be like, “Listen, keep your options open. Maximum valuation is to be had by maximum optionality.” And if they say that, I want you to ask them: “Does that include the option to turn my customers into Soylent Green and eat them?” Most normal people will be like, “Of course we should write that out of the charter.” But most lawyers will say, “You never know what you might need to do.” 

(30:44): And we’re like, “Why don’t people trust me?” So instead we want to write into the corporate charter that the company exists to do a thing, to make a thing. Tim O’Reilly calls this “create more value than you capture.” And when we do that, we’re by definition making the world a better place through our own profit. I call that the builder’s intuition: the intuitive understanding that the best way to make money is to create a bunch of new value in the world and capture some of it for yourself. But this isn’t a surprisingly radical statement. Because once you admit this, if you tell me that your goal is to do something as humble as to make a great product or bring a little efficiency or beauty into customers’ lives or improve health, you are already a business revolutionary, whether you admit it or not. You are building this company in a business culture that treats all forms of making money as equally good, and therefore extraction and exploitation are its watchwords. 

(31:43): So yeah, proceed carefully. 

Rob Walling (31:45): Someone listening to this, I think it’s an amazing definition. As you spelled it out, it starts off pretty subtle and then by the end it’s like, “Oh no, this is very different from the way corporate America runs these days.” Someone listening might think this is very idealistic and no company runs this way today. But you talk in the book about some examples of companies that do. You mention Patagonia, Costco, Anthropic, you have several examples. As we wrap up, can you give someone an example of a company that you think is already living this way? 

Eric Ries (32:18): Oh, Patagonia. 

Rob Walling (32:19): Patagonia. Yes. But also like Costco. Anthropic. You have several examples. As we wrap up, can you give someone an example? 

Eric Ries (32:31): Can I illustrate with a story? 

Rob Walling (32:33): Please. 

Eric Ries (32:33): Maybe it’s more valuable than an abstract concept. I want to tell you the legend of Saul Price, who many people today don’t remember, but he is actually the father of modern retail. He’s so influential that when Sam Walton was thinking of getting into the retail business and trying to figure out what he should name his company, the reason he chose Walmart was as a tribute to the company Saul Price had created: FedMart. Let me tell you about FedMart. Saul was a lawyer before he became an entrepreneur, and when he was a lawyer, he was trained that he had what’s called a fiduciary duty to his client, meaning you have to put the client’s interest before your own. That’s what we all want from our lawyer. So when he became a retailer, he asked himself a simple question: “Who’s my client?” And he said, “Oh, the customer is my client.” So he had what’s called a fiduciary hierarchy in his philosophy: customers first, employees second, shareholders last. 

(33:24): You will find this pattern in a lot of the greatest companies in history, shareholders last. Unfortunately, we live in the era of shareholder primacy where we’re taught to put shareholders first. So what did it mean to be a fiduciary to the customer? Saul believed that his job was to look out for the interests of his customers no matter what. So for example, when his competitors would try the loss leader strategy on him where they would dump products below their own costs to drive people out of FedMart, Saul would post signs all over FedMart saying, “Hey, don’t buy this product from me. You can get it cheaper down the street.” Can you imagine anyone doing that today? It’s extremely rare. That was FedMart. So customers loved FedMart. They would drive way out of their way to shop there. Company grew, it was a huge success. 

(34:08): So successful that he took it public. But when he was a public company, he felt this financial gravity always pulling on him trying to make him more mediocre, force FedMart to act on best practices. Investors constantly were on him for higher prices and lower wages, but he believed in low prices and high wages. He’s like, “This is the engine that makes this work. Why are you trying to ruin it?” So as a lot of entrepreneurs have tried over the years, Saul took the company private again, buying out all the investors and bringing in new investors. They owned 51%, he owned 49%, and this solved exactly zero of his problems because his new board was still in the hypnotic spell of these best practices. They wanted higher prices, lower wages, faster growth, retail best practices. 

(34:57): So Saul was a completely uncompromising SOB and would not give them what they wanted. So one day in 1975, Saul comes into work and he can’t get into his own office because they’ve changed the locks on his door. He doesn’t work there anymore. What happened next is like one of those natural A/B test experiments you see in business history sometimes. In the A corner, we have the FedMart investors. They got what they wanted. Saul was gone. FedMart was converted to conventional best practices and within seven years, they had driven it into bankruptcy. It took Saul 20 years to create what they were able to destroy in seven. In the B corner, we have Saul. Now, did he retire? Did he complain about how unfair life as an entrepreneur was? No. Saul took two weeks off and then he was back at work. 

(35:44): He leased the office upstairs from FedMart headquarters and started a new company, which he called the Price Company. Their product was called Price Club. And when I was a kid, Price Club was like the dominant retailer I would shop at with my family. Costco and Price Club were the two. 

(36:01): But most people don’t remember Price Club anymore because, as you’ve foreshadowed, one of the people who left FedMart to go to Price Club with Saul was a guy named Jim Sinegal. He had worked his way up from stockboy to executive at FedMart. Saul was a big believer in promoting from within, which is why his companies had such coherence to them. Saul and Jim both understood that there was an engine that made FedMart work, and once you break the engine, destruction follows. But the positive side of that is because they knew it was an engine, they knew they could do it again. So they created Price Club. Price Club was a big success, and with Saul’s blessing, Jim left to start his own new company. And eventually the two companies were merged to create a company they called Price Costco. 

Rob Walling (36:44): I remember that. Clunky name, but I totally remember. 

Eric Ries (36:47): We remember. 

(36:48): Now it’s just called Costco. Today, Costco is a $400 billion public company. To get a sense of how big Costco is: Costco is so big that its house brand, Kirkland Signature, if that was a standalone company, would be bigger than United Airlines, Procter and Gamble, or Coca-Cola. And that’s just their house brand. Costco is massive. But why was FedMart destroyed while Costco hasn’t been? Costco’s been going for 40 years now. Jim Sinegal has long since retired, yet the ethos endures. Why? This is the double mystery of this book. First, why does this happen? Why would investors kill the golden goose? People say, “Well, it’s inevitable.” But if it’s inevitable, why are there exceptions? Why is Costco the exception? So to build an incorruptible company, one that can be one of these exceptions, we need two things. 

(37:36): We need the ethos of Saul Price, the fiduciary commitment to customers and employees, not just shareholders. We need the trustworthiness that that way of working creates. But we also need the integrity of Jim Sinegal. When Jim took Costco public, he encoded the company inside a governance fortress that protects it from outside meddling. That’s why when I say Costco is a high-integrity company, I don’t just mean they’re ethical. I mean they’re able to make and keep promises, an ability that most modern companies cannot. So that’s incorruptible in a nutshell: ethos plus integrity. 

Rob Walling (38:12): Amazing. Eric, thanks so much for joining me on the show today. As I mentioned at the top of the show, incorruptible.co if folks want to buy the book, it is out today. And if folks want to keep up with you on the internet, they can scroll down to the bottom and put their email address in to subscribe to your list. 

Eric Ries (38:29): Please do, please join the mailing list. We have so many cool bonuses for those that order today or this week: a secret chapter, implementation guides for those that want that, reader’s guides for those that want that. So we tried really hard to make it as worthwhile as possible to act now, not wait. Thank you very much. And if you feel like it, on the website you can also see lists of many, many independent booksellers all around the country that are carrying the book. So you can buy the book in hardcover, eBook, or audiobook, wherever books are sold, but if you want to support your own local community at the same time, maybe buy at an independent bookstore. 

Rob Walling (38:59): And you’re doing a book tour. If folks want to see where you’re at and read news stories and see if you’re in their city, how is incorruptiblegoing.com? 

Eric Ries (39:10): Yeah. All the latest and greatest will always be there. 

Rob Walling (39:14): Thanks again for joining me, Eric. 

Eric Ries (39:15): My pleasure. Thanks a lot. 

Rob Walling (39:17): Thanks again to Eric for coming on the show. And as a reminder, if you want to order the book, you can search for it on Amazon or head to incorruptible.co and it will be for sale wherever great books are sold. Thanks so much for listening this week and every week. This is Rob Walling signing off from episode 834.