Reflections on a movement | Eric Ries (creator of the Lean Startup methodology)

Eric Ries (00:00:00):
People act like having a startup fail is the worst thing that can happen to you. And man, that's not even in the top 10. It's bad, I've done it, it's awful. It's really bad, but far worse is to be in a company that won't die, a zombie, undead company that you hate, but you can't leave. Oof, have I met people like that, and we're having a mental health crisis among founders that's not talked about enough. People have started to talk about the downside mental health risk, obviously the stress of being a founder is hard, but look what's happening to the people that are so-called successes? When you build a company and you sell it out and it becomes something that you find abhorrent, man, maybe you get rich, but it's not good. And so building a company you hate, that becomes a maligned force in the world, that you have to go pretend you weren't involved with or like you feel complicit in... That's way, way worse, and I wish more founders would take that more seriously early on.

Lenny (00:00:58):
Today, my guest is Eric Ries. If you're not familiar with his work, I would be shocked. He is most famous for creating the Lean Startup methodology and movement and also his incredibly influential book, The Lean Startup. He also coined more terms and concepts that are part of the tech culture than anyone I could think of. He currently spends his time advising founders and startups. He was a former founder and CTO, and currently is the founder and executive chairman of the Long-Term Stock Exchange.

(00:01:24):
This is now my favorite episode of the podcast and I can't wait for you to hear it. In our conversation, we cover a lot of ground, including the current state of the Lean Startup movement, where he sees things heading, what Eric would redo if he could do it over again, misconceptions about the methodology that frustrate him most, how AI will likely impact product development in startups, how to think about MVPs correctly, when to pivot and when to stay the course, also, how to build a business with values that are aligned with human flourishing. Also, tons of amazing stories and lessons, and there's just so much gold in this conversation. And so with that, I bring you Eric Ries, after a short word from our sponsors. This episode is brought to you by Sanity. Your website is the heart of your growth engine. For that engine to drive big results, you need to be able to move super fast, ship new content, experiment, learn, and iterate, but most content management systems just aren't built for this. Your content teams wrestle with rigid interfaces as they build new pages. You spend endless time copying and pasting across pages, and recreating content for other channels and applications, and their ideas for new experiments are squashed when developers can't build them within the constraints of outdated tech.

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Eric Ries (00:04:50):
Thanks for having me.

Lenny (00:04:51):
This just feels very surreal to have you on the podcast. It feels like a surreal experience. You're such a legend in product and in startups, and I'm just really excited to get to learn from you and for listeners to get to learn from you. And my first question, what are you up to these days? I know you work on the Long-Term Stock Exchange. What else is going on in Eric Ries' life?

Eric Ries (00:05:10):
If you can believe it, The Lean Startup came out in 2011, so it's been a little while now and it's been such a crazy ride. And basically every year since it came out, I keep thinking, "All right, that's the end. Surely that's enough." And just each year it gets crazier and crazier, and new things come my way. So, I'm building the Long-Term Stock Exchange, LTSE, I'm sure we'll talk about, and I spend a lot of time still with founders and with big company execs trying to answer their questions about how to build companies in the right way.

(00:05:41):
Obviously, been sucked into a lot of AI stuff of late, as everybody is, and one of the interesting things that actually surprised me is I spent a lot of time the last 10 years working on the issues of governance and corporate governance and how companies should be structured, not really with an eye towards technology in particular, but just with long-termism and humanism really at its core, and it turns out that those questions have just become really acute for AI companies. So because of my work on governance, I wound up meeting with and getting to work with some of the top AI companies, so that's been really interesting, but I feel like I go where the issues that are on people's minds go, and it kind of pulls me into new and really interesting things all the time.

Lenny (00:06:23):
Amazing, so I'm going to want to talk about all those things as we get into this. Something I wanted to mention is I feel like people don't give you enough credit for how many core concepts of startups and product building you've either invented or popularized. So what I know, obviously Lean methodology, then there's the term MVP, then there's the term pivot, and then also I think A/B testing, customer development, continuous deployment, vanity metrics as a term, I'm guessing there's many more, and then the Long-Term Stock Exchange. And I think the theme I get from this is there's a lot of first principles thinking that you've done, and so just a couple of questions here. One is, did you think you'd have this much impact on startup culture and language? And then just, where do you think this comes from, this first principles thinking that you seem to be really good at?

Eric Ries (00:07:13):
Well, first of all, thank you for saying all that. That's giving me too much credit, but I like the idea that it's going to balance out the too little credit I ostensibly get somewhere else, that's great. To answer your question, no, I didn't know this was going to happen. This is so embarrassing to admit now, but just to give you a sense of how different the world is now than at the time of the financial crisis, I was so embarrassed to be blogging, that I didn't put my name on the blog. I published it anonymously because it wasn't a thing that people did and people told me it would be career suicide. And there were so few startup bloggers at that time, that the top three all reached out to me personally because they saw it in their referrer logs on their website. That's how little traffic they got, that when a new person started writing about their thing and linking to them, they were like, "Who is this guy? What's going on?" It was a very different time.

(00:08:07):
And I had just finished a startup. I had left a startup that was being successful, and I had this reputation among VCs that I could make engineering teams be supernaturally productive. I had the magic pixie dust. And so, they would ask me to come in and work with their teams and I would be like, "No, listen, honestly, I'm not that special. It's nothing to do with me. It's just this framework. I have these ideas that are helpful on a team when they adopt them." And they would pat me on the head and be like, "Yeah, kid, I'm sure that's great, but can you please bring the magic pixie dust to my company anyway?"

(00:08:38):
And I would go and have these meetings, and I'm not making this up, people would yell at me in the meeting. I would get yelled at. In fact, I would be asked not very kindly to leave, and I'd be like, "I don't understand. What are you yelling... Why are you mad at me? You asked me for this meeting." And they'd be like... I'm just telling you what I witnessed with my own eyes. We at IMVU, we shipped product 50 times a day on average at a time when people were lucky to be doing it monthly if they were really advanced. Remember, it wasn't that long ago that we put the year the product came out in the name of the product. That tells you what cycle times used to be. That was considered normal, and people were like, "That's impossible. That could never work."

(00:09:15):
And at that time, I wasn't even propounding a theory or anything, I was just explaining what I had seen and people couldn't believe it. And so I had this great idea, if I write some of these stories down, then when someone asked me for these... I was doing these meetings all the time. I didn't understand the way Silicon Valley worked at that time, I didn't understand why this was happening to me, having these meetings, and I said, "I'll write the story down and then I'll send people the essay, and if they think it's crazy, then we don't have to have the meeting and I won't get yelled at." That was really as far ahead as I was thinking at that time. And then it basically took over my life, and I was being asked to speak, but people really wanted to unmask the anonymity. Who is this person? And so I came clean, I identified myself and started writing and speaking and working with companies, and it became a whirlwind.

(00:09:58):
The first principles part of it, I don't know, I've always been wired that way. I feel like maybe I'm a failed scientist. I wish I was actually good at chemistry or something. I could have actually been a real scientist, but I always really had a respect for the truth for scientific thinking. That was a big cultural value that I was raised with. My parents are doctors, it was just definitely part of my upbringing, and I was really into reading stuff that worked that way. So, it was very natural for me. I felt like as I had success as an entrepreneur, I wanted to know, why does this work? And people gave me advice. All the advice used to be of the form, "Steve Jobs once did this thing, so if you do it too, you'll be like Steve Jobs." And it's like, well, he also wore the black turtleneck. Is that also part of the... Help me understand, why does it work and is it still appropriate? Does it make sense for that industry or not? I didn't like these just so stories.

(00:10:44):
And I realized looking back, I didn't have this understanding at the time, but looking back, I feel like first principles thinking, it really has two components that people pretend are one thing, and it's more one than the other. A lot of my work is just descriptive. It's not actually telling people what to do, it's simply giving a name and a concept to a thing that already happens. That's the funniest part. In the early wave of criticism against Lean Startup, people were very angry at the idea that I was saying that a startup is an experiment like, "You can't treat a startup like an experiment." I was like, "Well, you could treat it however you want, but it is an experiment." People would like, "Well, people don't like the concept of pivot." This anti-pivot people, anti-MVP people every once in a while come out of the woodwork still to complain about it.

(00:11:25):
It's like, "well, I'm not telling you that you should pivot. I'm just saying that is what it's called when you change the strategy, but try to have fidelity to the vision." It needs a name because we do it all the time and even when we don't do it, we talk about doing it. We can't reason about it, we can't... And so this is descriptive part, and then that's the real work, honestly, is just saying what is... To me, the big question from the beginning was, what is a startup really? Why is it so different from a big company? Why are none of the best practices that I learned in my career work? It was like a survival mechanism, I want to know. And then once you've identified what it is and laid out the original principles of what you're trying to do, the prescriptive parts are just a matter of deductive logic.

(00:12:10):
It's like, "Well, given that we've made this hypothesis, what are the implications of that?" And of course, the prescriptive parts are important because that's how you learn whether your hypothesis is correct. So, that's the other thing I think people don't appreciate. People call me a first principles thinker, which I love that, it's a big compliment, but I feel like it conjures up for people this idea that I sit in a cave for years and years and conjure up the magic idea. It's like, no, I wish people had all the outtakes of all the concepts I've tried. Lean Startup was not my first try, the conceptual vocabulary. It's not the first time I got it right. It came through a lot of trial and error, a lot of trying to figure out what works and doesn't work, first in my own career, in my own work, then trying to give advice to other people and trying to translate what worked for me to see what would work for them, and then to answer the questions that I thought were the natural ones.

(00:12:57):
Under what circumstances does it work and when would it not be appropriate? What predictions does the theory make that we could then go see if are true or not true? And then the bigger picture thing is, what are we really doing here? What does success even look like? That, I think, is the thing we all really grapple with is it's very easy to come up with a theory or a method or a process that produces the maximum of something, but then it's like, "Is that thing good? Is that actually helping us accomplish some kind of goal?" And so, I think that first principles thinking is very helpful for that too, but I don't know. I guess to really answer your question, the true answer is I don't know. I've just always felt like I was wired that way. I have a love of ideas and want to know why things work.

Lenny (00:13:39):
So to me, a couple of takeaways from what you just shared. One is just you're wired to think in this specific way of thinking very logically, scientifically, I have a similar feeling where someone tells me a story... The way I started writing partly is people kept asking me questions about how Airbnb did stuff because they're building their marketplace. I'm like, "Here's what they did, but who knows if that was the way to have done it?"

Eric Ries (00:14:01):
Exactly. Did they succeed because of that or in spite of that?

Lenny (00:14:05):
Let's dig into the Lean Startup method and methodology. It feels like we haven't heard an update on just how things are going, where it's going, how popular it continues to be. I'm curious just, what's your sense of the state of the Lean methodology in the Lean Startup movement?

Eric Ries (00:14:21):
Oh, it's an interesting question. We used to do a Lean Startup conference every year, and then I stopped because of COVID and we haven't resumed yet. So, it was like we used to have an annual opportunity to bring people together, assess the state of things, hear the latest updates and stories, and then I really feel the lack of it, I miss it. We tried to do online versions, but it didn't feel right to me. And that's partly COVID and the thing that our world has been going through the last few years, but it's also partly I didn't understand what it would be like to start a movement until I'd actually done it. And I remember the first conferences we did, the first events we did had the feeling of a religious revival. People were like, "We've got the new thing. We are going to stick it to the man."

(00:15:04):
And I really thought, "My job is going to be to lead these hordes into battle." I really had a martial metaphor. I used it just a second ago, combat of ideas. I was ready for, the old ideas are going to fight us to the death and we're going to win it, and it's not like that at all. We charge onto the field and no other army ever came to charge us back, just we won by default because the people who were doing it the old way didn't really like it or want... It was very few defenders of the old way. There were very few people who came out and said, "Actually, no, Stage-Gate is actually still the correct product idea. You've got it wrong." It never happened, and in fact, the fancy startup people went from dismissing it as totally pointless to complaining that it was overhyped and over before ever passing through the intervening stage of finding out what it was. That was really interesting. I'll never forget, TechCrunch had an article, this is years and years ago about how Lean Startup is overhyped, and I was like, "You haven't even talked..." That was the first entry point to talking about it. I was like, "Could you at least learn to use the word pivot correctly and then criticize it for being overhyped? Is that all possible?" So, it went from insurgent revival to just the default thing that people did. Even the people that disagree have to carry the meme in order to criticize it. So, it was fascinating to find myself on the other side of this thing, and I would meet young founders coming into the industry for the first time, and they're like, "It seems obvious," and I'm like, "It was only five years ago that people thought this was so crazy they're yelling at me, now you think it's obvious?"

(00:16:48):
It's really interesting to have something go from controversial to obvious, and of course, tons of people who were really opposed to it at the beginning came back. Now they say that they knew it all along and they were my big... You see how it changes people's minds. So, it's hard to generate that religious energy and excitement around something that everyone views as obvious, and it really was hard for my... Just as an ego matter, I want the validation of the winning and the this, and I realized at a certain point that the victory is not that this fancy company used it or whatever, the victory actually is in the stories that people tell me about how the book was helpful to them.

(00:17:26):
That's the whole ball game. No one had to lose in order for us to win. People don't do this as much anymore, but occasionally someone still who wants to make a fight between Lean Startup and Agile or Agile and design thinking or this and that... And I tried really hard. If you look at Lean Startup, it's full of citations and connections to Six Sigma and lean manufacturing and design thinking and customer development and DevOps and software craftsmanship and everything I could find. I really wanted to show how these things work together, and then we went through a phase where people wanted me to make it into a religion for real. People used to write me and say, "So-and-so on the internet is right about Lean Startup in they're wrong. You need to make them stop." It's like, "What power do you think I have to make someone stop writing? I think they can write whatever they want."

(00:18:13):
And then the other thing that people said was, "Well, Lean Startup is about this particular set of practices. If someone finds a new practice, they're at heretic and need to be excommunicated." And it's like, "Guys, no, no, no. I wrote extensively in the book... Did you read? It's a scientific theory, which means that whatever works is Lean Startup. So if someone comes up with something new and it works, we can't be threatened and upset about it, we have to adopt it." Well, when you have that attitude that whatever works is the thing that the truth is what matters and people's quiet moments of helpfulness, that's our metric of success, it kind of takes the hype and drama and stuff that drives press coverage and what takes it all out of it, and I don't miss it at all. I feel much happier doing that than I ever did when... I used to travel a lot and do a lot more public stuff, and I think partly, again, one of the changes of COVID and conferences went away for a while, so it was a quiet time, but I feel like it's actually been really amazing. That's what victory looks like. They don't throw you a parade and say the thing... And even though people who are your critics will still grumble about it, but at the end of the day, the new entrepreneurs who come in just take for granted that this is the conceptual vocabulary of entrepreneurship, and then they do with it what they will, and I've learned to really appreciate that. As much as my ego, of course, likes to get into fights with people. It's like, "No, that's actually better, and that's what winning looks like."

Lenny (00:19:41):
It's so interesting that it's just you've done so well in communicating these ideas that it's just become part of the culture, and people don't even think about, "Oh, Eric Ries came up with all these things." I also feel like people push back at you on the things they disagree with, and then they never give you credit for the things that work great. It's only like, "Oh, no, MVPs don't work anymore."

Eric Ries (00:20:05):
Once a year at least, someone still writes to me and says that we should have used a different term for MVP, that the misconceptions around MVP are driven by the choice of the term. And I always write them back and say like, "Please tell me the better term and popularize it and I'll use it. It's a great idea." I'm more aware of the limitations than anybody else. And I'll tell you another thing that I think people don't appreciate enough, everyone wants to be a thought leader these days. It's like a disease. When Clay Christensen died, I knew him and admired him a great deal, and his endorsement of my work was one of the most important...

(00:20:39):
For me, from the old guard of management thinkers, for him to say that it was worthwhile was really a big deal to me. And yet there was this big debate, it's now a little bit older now, about whether he's responsible for all the bad things people have done in the name of disruption. And the first part of me is like, "That's an outrageous slander on Clay. That's so unfair, a bunch of tech bros like use disruption as a code word for all kinds of dumb stuff has nothing to do with his theory, has nothing to do with his work." It's like, "Have they even read the work, man?" I was one of his defenders, and especially after he passed, I was very emotional about it, it's not fair.

(00:21:16):
But then the more that I've sat with it, the more I thought, "Gosh, maybe we are a little bit responsible for the things we put into the world," and it's terrifying because of course, you can't control what people do, you can't control... A lot of people are willfully ignorant. Whenever someone says something where I'm like, "Gosh, five seconds on Wikipedia, and they could have found out the truth about the thing they're talking about." So, we live in an era where ignorance is optional, that's cool, but also a little bit scary. So I think taking on that responsibility, this is true for anyone who makes a product. I think it's not actually unique to authors at all. When you make something, put it out into the world, on the one hand, you don't have any control about what happens next, and yet I do think we bear a certain responsibility about, was it in fact a net positive? Was it helpful to people?

(00:21:59):
It's part of what motivates me to try to really get it right and not just get it right for my own satisfaction, but get it right as evidenced by what happens when people use it. And that's why testing and experimentation is such a big part of my life and my theory. To me, that's how we square the circle of our responsibility in a highly uncertain world is you go find out what happened when people use the idea and if it's not right, even after their misunderstandings, it's still not right, then you've got to make it better and find a way to communicate it more clearly, so it's kind of an eternal challenge, but I think an important one.

Lenny (00:22:35):
Along those same lines, is there a misconception of Lean Startup or any of the other things you put out that just really frustrates you, that just is a recurring misconception that people just continue to get wrong?

Eric Ries (00:22:47):
I wrote an article, God, five or 10 years ago. God, I can't even remember how many years ago now. It was like Top Misconceptions About Lean Startup, and it was like, "Number one, lean means cheap, so if you're doing Lean Startup, it means you're not raising money." And it's like, "That's not true." And then kind of I remember what they are... And they're all still prevalent, nothing's changed. I could write that same article today. It's like, "Lean is opposed to having a vision. If you were really visionary, you wouldn't do experimentation. Experimentation leads to local maxima," and whatever.

(00:23:20):
I read it in somebody's book that that's what Lean is about. And I was like, "Man, did I forget to write it in the..." I was so gaslighted that I actually went back and cracked open a copy of the Lean Startup, and I was like, "On what page do I address this?" It was like on page nine in the introduction, one of the first things in the book, I was like, "Phew, I did say it," so that's pretty common, that turn the crank thing about optimization, that's pretty common, and then pivots, people perennially misunderstand what a pivot is, and again, whether that's a descriptive or a prescriptive thing is really tricky.

(00:23:54):
I feel like at this point people are just being willfully ignorant. It's okay to criticize Lean Startup, that's no problem. It doesn't bother me. I think it's good to do, it's healthy to do so, but to just trot out those same old things, how does that advance the state-of-the-art? And how does that help entrepreneurs in any way? And I'm not even really sure what they're trying to accomplish by doing that. That's the thing that I've grown confused about is, what is the purpose of this discourse, other than just to kind be reflexively contrarian? I don't know.

Lenny (00:24:23):
And get some likes on Twitter/X.

Eric Ries (00:24:27):
Maybe you're right.

Lenny (00:24:29):
So along those same lines, so you wrote the book 12 years ago. If you could go back and change something in the book, is there something that you would want to change?

Eric Ries (00:24:39):
Oh man, I would change everything about it. It's actually why I won't let myself do it. When I was a consumer of books, I hated it when authors would come out with a second edition that would destroy what was beautiful about the first edition, including the mistakes because in their attempt to put disclaimers on everything and make everything more nuanced, you'd totally lose the thrust of the argument of the thing they were trying to do, and their own becoming famous really messes with you psychologically. So, you don't want to expose your readers to that. Go get therapy, don't destroy the thing that made your book amazing. So as an author, of course, I think so many elements of it could be improved. The one that is the most glaring to me... Well, I guess there's two. I'll mention two just because they're relevant.

(00:25:26):
One is I'm a little embarrassed, there's a chapter towards the end of the book where I talk about the scaling of Lean Startup. So it's like, "Okay, you've had success. Now, what are the principles for how you scale up a big enterprise now that has many Lean Startups within it?" And stuff like that, and I don't think I wrote anything wrong in that section, but I really cringe to read it now because it's so blithe and just like, "Step one, do this. Step two, do that." It makes it sound so easy and so simple.

(00:25:53):
And of course, I've subsequently written a whole book longer than Lean Startup just to illuminate those principles and explain how they work in real life because I actually had the privilege of getting to go do that with companies at really extraordinary scale. So, I'm a little embarrassed now to be like, "I made it sound so easy." I hate to mislead any entrepreneurs into thinking any part of entrepreneurship is going to be easy because it's just setting people up for disappointment. And the other funny bit is, you know that meme on Reddit, the Star Wars meme where Anakin Skywalker says, "I'm going to change the world for the better," and then pause, and then she's like, "For the better, right?" I feel like that is the meme of our time for the tech industry. Every company was about changing the world and we forgot to ask, for the better? I always just took it for granted that our goal was to make the world a better place. That's the values I was raised with. That's what I thought we were doing, and I was railing about it for a while. I would get depressed. Remember, don't be evil? And there's been all these moments in the tech industry where it seemed like we were going to really do something extraordinary, and then just the things that these companies become is so depressing. And I was like, " Well, I at least made it clear." And then I was like, "Did I?"

(00:27:04):
Again, I actually went back and reopened the book and I was like, "Did I tell anybody that they should change the world?" And if I did, I assume I specified for the better, and it's actually right there in black and white. Right in the introduction of Lean Startup, one of the... It's like a throwaway line, "This is the technique that will give the entrepreneurs of tomorrow the tools they need to change the world." And I'm like, "No, I should have said for the better. I didn't know I had to say it. I thought it was obvious. I thought we all agreed." So, I kind of feel like that is also a major oversight and I'm making light of it now, but it's had catastrophic consequences. Not really, I don't think Lean Startup has led people in that way. I think it has much more to do with other social forces, but I feel bad that I missed my chance to take a stand on something that has turned out to be quite important.

Lenny (00:27:47):
So, you saw me tweet a call for people to ask questions.

Eric Ries (00:27:52):
Yes, I'm really excited.

Lenny (00:27:53):
So, I have a few questions from the audience. The first is around the concept of MVPs. So Karri Saarinen, who was actually on the podcast recently-

Eric Ries (00:28:03):
Oh, great.

Lenny (00:28:04):
... Founder of Linear, had a question around MVPs. And his question is essentially, If you still believe that MVPs, essentially shipping very basic versions and iterating is the way to go, given that user expectations have risen a lot in any markets, iOS apps, for example, web productivity software, things like that.

Eric Ries (00:28:22):
I love that question because first of all, I get it a lot, and also it's important for us to really understand. People think that MVP is about a specific tactic. So, an MVP is like a bare bones, stripped down the thing that will crash your computer, but it's not anything to do with MVP. MVP is simply for whatever the hypothesis is that we're trying to test, what is the most efficient way to get the validation we need about whether a hypothesis is true or not? And so, part of a successful test is to understand what are the demands of customers in our market. Now, the funny part is people have a real fear of failure in product we all have this deep, deep, deep fear. So the first answer is, you think user expectations are high in the iOS App Store, you should try the purchasers of battery backup systems for data centers or people who build deep sea oil drilling machines or jet engine.

(00:29:22):
I've worked with companies where the standards are actually really high and it makes iOS apps seem like pretty basic. It's like, "Well, nothing blows up like your app," but even in these really high end industries in really high stake situations, the cost of offering someone to buy something that they don't like, it's really not that high. They just say no, and a lot of MVP is just about containing the liability of making a mistake. So yes, one of the things I really encourage people to do is go find 10 customers, not 10 million, but find 10 customers. Get them to use the product and have them tell you what's awful. That's okay, and I used to be so upset... When I used to launch a product if customers would argue with me, people used to be like, "You idiot, I can't believe you launched this product without features X, Y, Z. They're so essential."

(00:30:11):
And I would be like, "You're wrong..." I'd got to get mad at them, but then I got a little smarter. I'd be like, "X, Y, Z, you say?" And I'd be like taking notes, "Oh, interesting." Now, sometimes X, Y, Z would be the exact next three features of my roadmap, and again, I would want to argue with them as, "I know knew that..." And I eventually used to be like, "Oh, thank you for that wise feedback." And then when we launched X, Y, Z, they would feel a sense of ownership. "Wow, I'm the one who told him to do that. He wouldn't have even done it." But of course, the thing we're really afraid of as entrepreneurs, I think if we're really honest, it's not that people say, "You idiot, you didn't launch without X, Y, Z," people will say, "You idiot, you launched without A, B, C."

(00:30:44):
And you're like, "What the hell is A, B, C?" Never heard of that. That's the much more common response that I get. So, let's grant the premise of the question that expectations are high, and if we launch an app and it doesn't meet people's expectations, they won't like it. First of all, what really are the consequences of that? In an early part of Lean Startup, we had to do a lot to explain to people the difference between a product launch and a marketing launch. And you can launch the product to customers without telling anybody that you did that. It's okay. No one's going to find out, it's not going to be big news. And of course, once you're a big successful company, that's a totally different issue where now you put your corporate brand on stuff, but if you're an actual startup, nobody cares. So, it's okay to try it.

(00:31:29):
But the other thing that I think people don't appreciate is that MVP is very flexible. So, if you tell me... When I work with entrepreneurs, I'm like, "Listen, I'm sorry, our customer is... The bar is here and the thing just has to be that good." I'm like, "Excellent, and it can't have very many features, I guess, can it?" They're like, "Well, what do you mean?" "So, you just told me the bar is way up there, so we better do just the one critical feature at that level of quality, and then if that works, we'll do the next one." And then of course they're like, "Oh, no, no, no, I need to do all the features at all the quality." It's like, "Well, then what are we testing?" It's like, "By the time you find out whether that's any good..." And if you look at the pivot stories, I'm sure you found this too.

(00:32:06):
Very often 90% of the work in the first version is thrown away no matter how high quality it was. In fact, as an engineer, that was part of my original disillusionment with the Agile software movement then ultimately with Lean Startup is that people promised me that if I followed these best practices, I would eliminate waste from my work, but if I build something that customers don't want, that's the ultimate waste and nobody protected me from that. So, I don't really care how high quality the initial MVP is because quality is defined by the customer. And if we don't know who our customer is, we literally don't know what the word quality means. So, that's where I think founders really run into trouble and everyone's like, "Well, I'm Steve Jobs, I'm this, I have the magic taste." And it's like, "Well, first of all, do you have the years and decades of failures and experience from which that taste derives?"

(00:32:55):
If you do that then I'm like, "I'll give you the benefit of the doubt." And if you don't then, "Definitely don't rely on that, definitely do some experimentation. Go get those scars." But even if you have a taste, if you're completely right, what can it hurt to double check? My view was like, "Oh, let's have 10 customers look at it and have them throw up about how it's so horrible, that at least confirms that we're on the right track."

(00:33:13):
And then we call it establishing a baseline when we talk about innovation accounting and the metrics side of Lean Startup. Let's go find out how bad the situation is right now, so that we can then know that we improve from it. Because the thing I actually see from people who in the name of quality will wait a long time to ship a product is they ship it with really high quality and nobody uses it, and now we don't know why. Is it because our idea of quality is wrong? Is it because the value prop is fundamentally... I feel like building a high quality wrong value prop is nothing to be proud of. There's no craftsmanship in that. I once had a company that built a really beautiful product, amazing land, everything was awesome, but there was a JavaScript error where when you clicked the download button, the signup button, whatever, it didn't click. So, they launched this thing and it had 0% signups.

Eric Ries (00:34:00):
... click. So they launched this thing, it had 0% signups and they're like, "It's a catastrophe. We made the wrong value prop." It's like, how do you know? From one experiment you can never know. You have to be willing to do a series of experiments. Again, the logic of MVP is just, products take time to build. The best products in the world, everything takes time. It takes a month, a year. AI will mean I could build any product I want instantly. But it's not instantly, it's going to take time.

(00:34:28):
During that time that the product is under construction, there's going to be some moment in time when you have half the product. Just logically speaking, you first have 10%. When you have half the product, let's have customers use half the product. Well, it doesn't cost you anything extra. You had to do it. You build a natural experiment anyway. Have them use it and tell you it's only half as good or it's unusable, because it's so bad. Excellent, good.

(00:34:51):
The startup literature is littered with examples of people where less is more, where the crappy small thing they did turned out to be more valuable than the competitor. I'll just give you one example, one of my favorites. I come from 3D graphics and avatars and metaverse stuff, which of course, now is bad. It's one of these things goes through these hype cycles and I'm like, "Are we actually in the hype cycle or are we the drops?"

Lenny (00:35:12):
I think it's trending up right now.

Eric Ries (00:35:14):
Are we trending up again?. It's really hard for me to keep track. Even while I was working on it, every few years it was either the future or nobody wanted to do it. I bet sales of [inaudible 00:35:25] crash, you'll probably have that cyclical thing to them. When it's hot, people read it, otherwise not. Anyway, we built a version, our first version of IMVU we built with 3D avatars in a cafe or in a scene. The avatars were all anchored in place because we didn't have the technology called inverse kinematics. We didn't have the technology that would allow an avatar to stand up and walk. When you do this 3D grab, it has to work perfectly. The feet have to actually glide along the surface and it doesn't look right. You wind up in the uncanny valley and people find it horrible. So we're like, "Can't have that." So we just have the avatar to sit there. People felt the product was claustrophobic. They would always be like, "The Sims lets me move around. Why am I stuck here in the chair?"

(00:36:01):
That was a very common thing in customer feedback. We were like, "We can't afford to do the expensive thing. We couldn't do it, couldn't do it." One day as a hack, as like a little demo, I was like, "Well, I'll just change it so that when you click in the scene to a different spot, we'll just stop rendering the avatar in the first place and we'll put it in the second place." We didn't even do the proper cut. The camera would zoom over there. It was really ugly. I was really embarrassed about it. I was like, let me just play around with it and see what happens.

(00:36:29):
We shipped it to cut and I was like, this is below the quality bar. I felt bad as the engineer. Everyone involved felt really bad, but we had committed ourselves that we're going to try to experiment with stuff. We're going to see what happens. This is before Lean Startups existed. We didn't even have the concept of MVP. We're going to try it and just see what happens. We shipped it and nothing happened. No one cared. I was like, whew. Then we used to do these daily tracking surveys. We'd just sample people and ask them what they think of the product. In the tracking surveys, people started to say that IMVU was the most advanced avatar product they'd ever used.

(00:37:03):
People would be like, we used to be compared to the Sims unfavorably. Now people would be like, more advanced than the Sims. I was like, what does this mean? How did we get more of, did we improve our 3D graphics design? No one could understand why they were saying that. We used to do customer interviews. Finally, a customer was like, "It's so great, man. In InView, when you want to go somewhere, you teleport. The Sims, you got to wait for the guy to get up and walk around. It's so annoying." We were just like, "Oh, my God. Embarrassing." We didn't do inverse kinematics for a really long time.

Lenny (00:37:35):
I love that story. Something that I'm learning as you talk about MVP is that the idea of minimum is very fluid and very context specific. Essentially, the message isn't, build something low quality and simple. It's, figure out what is that minimum bar for your market and product. The message is just build as little as possible, whatever that is for you.

Eric Ries (00:37:57):
Yeah, as little as necessary. It's fascinating. I'm not joking, I've worked on jet engines and robotics and cancer therapies and all kinds, I've worked on stuff anyway, and LTSE, it took us 10 years to build the MVP for LTSE. So it doesn't necessarily mean cheap low quality. It's just whatever your hypothesis is, whatever you actually believe is going to work, let's put that thing to the test. That's all I really want. When I work with companies, first time founders especially are usually very stubborn about this and they don't want to do it. It's like, "Look, you tell me what you believe. I don't have to be right and I want to just double check that you're right by however we do it." And then once people actually start to turn that idea over in their mind, they often will be like, "Well, you know..." A classic one is like, we can't sell the thing until we build the physical equipment.

(00:38:48):
It's like, is your product bought in a showroom where people see the physical equipment? No, they buy it from a brochure. So it's like, "Okay, well how about we send them a brochure and ask them to pre-order it?" And then it's like, what? I can't do that. I can't have a crappy brochure. It's like, who said a crappy brochure? We can build a really high quality brochure in a tiny fraction of the time it takes to build the actual machine. And then it's like, well then what are you talking about, it has really good fonts and it has pretty pictures? Maybe. What's your theory, right? You tell me what do you believe about... And they're like, "Well, actually what matters is the quality of the specifications of the equipment in the brochure." It's like, now we've got the leap of faith assumption. Let's go find out.

(00:39:29):
And they're like, but hold up. But we don't know what those specifications are going to be yet. It's like, well, I saw this 500 page plan over here. What do you want it to be? It's like, well, it'd be really great if customers would accept this set of performance characteristics. Well, let's go promise that because maybe they'll be like, "That's great." And I'll give you one example. I was mentioning data centers. There's a team that sold equipment and data centers. They had a serious high-end team of PhDs working on research to make the thing way more efficient and they're going to win a Nobel Prize in material sciences in order to make this product a reality. And I convinced them, instead of paying three years and $18 million, so you don't make the thing, let's go take a brochure, take it to some customers.

(00:40:13):
And I'll never forget, they took the thing into the brochure, they took it into customers and customers laughed them out of the room and it was nothing to do with anything they cared about. It was nothing to do with efficiency where they're like, we would never buy this. And they were like, "But you haven't even looked to page two to see how efficient it is." They were like, "We don't pay for efficiency, we build data centers. How much they cost to operate is somebody else's problem." You're like, "Oh my God."

(00:40:37):
That's the thing people don't appreciate, is these insights are so obvious in retrospect that everyone's convinced that it won't happen to them. When I teach students at Lean Startup, they're like, "This is so dumb." They do one case after another in business school and they're like, "Dummy, dummy, dummy, dummy, dummy, right?" They're like, "I would never make that mistake." And I'm always like, "Look, you don't have to argue with me. Just call me back when you get a job. And when you make one of these mistakes, remember we had these conversations and go read the book then." And I guess by random chance there are some people in the world that just never made a mistake.

(00:41:11):
The dice, you roll enough dice, somebody had the experience that dice came up double sixes every time. Okay, so there are those people and they give a lot of the advice in the world, but I don't know that it's necessarily those of us who don't have the double six luck should necessarily be following it.

Lenny (00:41:26):
This will be a really good segue to talk about pivots because again, a big part of your message is a lot of the work you're doing is just going to go to waste anyway. Why spend all this time building it? But just to put a final point on this idea of MVP, because a lot of questions came in around just like, what is an MVP? Ben Silbermann, the co-founder of Pinterest, has this quote, he didn't ask a question in our thread, but he has this quote-

Eric Ries (00:41:47):
[inaudible 00:41:47]

Lenny (00:41:46):
Yeah. And his quote is, the hard part about MVP is that you don't know what minimum is. You don't know what viable is. And so just to give founders who are trying to figure out what that line is, some very succinct advice, how would you describe just helping them understand, here's how far you should go with your MVP.

Eric Ries (00:42:05):
He didn't say, you also don't know what product is. That's true. I can't tell you how many times a service has turned out to be a product or vice versa. People embody their insight about customers in the wrong way all the time. That's super common. That's funny.

(00:42:20):
All the criticisms of MVP are really just people expressing their frustration with how uncertain startups are. It's like, yeah, it really sucks. This is not a good way to make a living. If you want to retain your mental sanity, if cognitive dissonance, if you find that painful, this is not the right job for you. Because it's really hard to hold in your head, I have this ambitious vision. I know what's going to work. You got to do confidence, get everyone together. There's no substitute in this world for a human being stepping forward and just saying, "I am going to make this thing happen." And if you do that, you're putting yourself away on a limb. It's really difficult. It's really hard to admit that. And I also do not know how to make it happen. That's the truth. Whether you admit it or not, that's the truth.

(00:43:02):
So that's why I say let's just double check. So simple, succinct advice. The first tip is, write out the list of features that are necessary in your MVP. Cut it in half and cut it in half again and build that. Honestly, if you just do that, that's really not that bad. The nice thing about MVP is it's one of those U-shaped curves where if you get even in the vicinity of optimal, you're going to be fine. And most people's natural idea of what is necessary is so laughably wrong. People are naturally off by usually one or two orders of magnitude, right? Very common for you to meet a team that is trying to do 100 times more work than is necessary to test their assumption.

(00:43:38):
So first thing is just, try being uncomfortably small in the thing that you actually make. And if you're having trouble with that in the startup way and the SQL Lean startup, I really go through because it's really more for a corporate large company audience. I really go through, okay, if you want to have a process for determining what to do here, you should first brainstorm your leap of faith assumptions and categorize them this way and select them like this. Okay, now for each assumption, brainstorm the metrics you might use. Select the metric you want, what is your learning metric, and then from there, brainstorm, MVP, score them according to this formula and then use that to help people.

(00:44:17):
Anyway, people can follow that if they want. The thing I learned is that if people are having trouble coming with MVP, the problem is usually upstream in the chain of deductive reasoning from the vision down to the MVP. Usually people are just not super clear on what do I want to learn, and the most common reason is because people don't want to admit that they don't know. So as an entrepreneur to say that we want to test to find out what customers want is really hard.

(00:44:41):
I'll give you an example from my own experience. LTSC, I said, it's taken us 10 years to get the thing approved and going. It's a really very difficult product to build. One of the early iterations of it that didn't work, we were building on partner infrastructure. It was a very different product back then. I don't want to get into all the legal nitty-gritty, it's kind of dry. But anyway, it took us six whole months. It took us time, we had to raise the money, build the team, do all stuff, get all the lobbyists and lawyers, everything in place, and then we had to go do this partnership agreement. The partnership agreement itself took six months to get in place, and then we had to go to the SEC and get approval. And so it was a very complicated multi-stage process. Probably took, I think I just described two years of my life end to end there.

(00:45:23):
And the whole time I was talking to the team about our goal with this whole thing is to learn what is actually necessary to get customers to list on our stock exchange. Our goal was learning. People were like, but I thought our goal was to get this contract done. I thought our goal was to, it's like, well, yes, but the reason we're doing those things is so that we can learn whether this is actually going to work or not. And so I remember, I'll never forget during the contract negotiations, people were like, we got to take an extra week to deal with this point, and I'd be like, "We don't have an extra week." It's like, but this thing's taken two years. What's a one week? I'm like, "No, every day is so [inaudible 00:45:54] we have to get the learning as soon as possible." And I was constantly haranguing everybody involved.

(00:45:58):
We got to go faster, faster, faster. You've got to give on this point, people were walking all over us. We were getting just destroyed in the negotiation. I was the weakest lamest person, rather just like, we got to raise the money, anything to get speed. Anyway, long story short, we get all the way to the end. We get the thing approved by the SEC staff and then we get ambushed. And long story short, the SEC withdraws their approval and the whole thing is dead. The partner, we have to break up the partnership agreement, everything goes to hell. And I thought the company was going to die, and it was a totally miserable time. It was one of the worst things that ever happened to me in my life. I was totally upset. And in retrospect, I can laugh about it because it turns out, of course, it was the worst thing that ever happened to me, but it's actually the best thing that ever happened to me, as a lot of startup things are.

(00:46:39):
Because from that, we were able to pivot into the thing that ultimately got us approved. The reason I tell this story is every bit of work we did that went into that partnership agreement for almost two years turned out to be a waste of time because in the end, the partnership agreement fell apart. So if we had won a few extra [inaudible 00:46:58], my margins would've be higher if we'd extracted more fees from the partner or we would've had less liability. People always like, well, we have the liability for this and liability for that. And I think about all the things, this thing was 100s and 100s of pages long to document. None of it mattered. In the end, the partnership was never consummated, no customer, nothing ever happened.

(00:47:15):
And the interesting thing and reason to the story is that the people who went through that experience with me were so much faster on the next thing that we did. It was really amazing to see because they were like, "Now I understand what you mean." Most people live very coddled lives that have not actually really dealt with this kind of failure in their business career. Obviously in their personal lives, they'll have all kinds of trauma. And you know, they'll work at a crappy company and have a horrible experience, but they haven't experienced this specific thing where you are the hero of the hero's journey. You are the protagonist of the story. And the thing is not just a setback, but you just die.

(00:47:48):
It actually fails. It's so psychologically damaging that even people that have had that experience, a psychological defense mechanism is to tell themselves that that didn't happen. And you know it better than anybody, how many startup founders are adamant that they didn't ever fail, they didn't pivot. Everything's exactly the way they saw it at the beginning. And it's like, I've been around enough startups to know how often that is just not true, but we need to tell ourselves that story. But anyway, the number one lesson of the scientific method is if you can't fail, you can't learn.

(00:48:19):
And so if you set yourself up in a position where psychologically you can't admit that something didn't work, you can't learn. And that really is the essence of MVP. It's just like whatever the catastrophic thing that's going to destroy your company is going to be, we just want to find out as soon as possible so that there's still time to do something about it. We don't just die and move on.

Lenny (00:48:38):
I'm actually seeing this a lot right now. I'm an investor in a bunch of startups, and so many of them are failing right now, and they built such beautiful products, such amazing products that they spent years just like crafting, making so great. And then it's all for naught. And there's actually been a theme on the podcast recently around the importance of craft and design. And I'm curious just to get your thoughts on just when it makes sense to invest deeply into the craft and experience of a product versus the minimal viable product approach. Do you start very simple and then invest, anything's there?

Eric Ries (00:49:17):
Yeah, well, I think that's a great question. People use the word craft to refer to so many different things. I personally find a tremendous beauty in simplicity. So I would much rather people do one thing extraordinarily well than 20 things half-assed personally. And how many products do you use? You're like, God, there's like 92 buttons on here of which I only ever pressed one. Could you have made that button have a really nice feel? I would've sacrificed all this other stuff. And I've actually worked on microwaves and refrigerators and stuff with actual physical buttons. And even your crappy kitchen microwave that you paid $60 for at Walmart or whatever, if you've never seen one of those things manufactured, actually the amount of craft that goes in behind the scenes to wire up every one of those buttons that are never pressed by a human being, it's actually really painful if you start to think about, wow, that's a lot of human energy being wasted.

(00:50:08):
So the elements of craft I think are critically important. First of all, part of craft is perfection. Perfection is an attribute of quality. And we have to go back to the first thing. In order to know what perfection is, you have to know what the customer believes. You have to know, you have to be perfect for some purpose for some person. Some people will just say, "Well, I'm just going to build for myself and that way I solve the problem." That's totally fine, if that's true, if that's you, go nuts, you might only have a market of one, but you'll be happy. So be it. And there are startups like that where it's like, well, I don't care how big my market is. I'll just build for all the people like me and I have a huge tribe, then I'll be hugely successful. If not, I'll just be an artist doing my thing. I have total respect for that.

(00:50:44):
That's like the ends and the methods are totally aligned. Where people get into trouble I think, is when they want to use craft as an excuse to not get any feedback. So what I tell people is first of all, there's an element of craft that is just like whatever you do, how are you going to go about it? Whether you're building an MVP or a fully featured whatever thing you're doing, I'm a software engineer by training. My code is a certain way, I have a certain craft in the way that I write software because I think that's the best way and that produces the best outcomes. I will never compromise that. And compromising that in the name of going fast is stupid. Write crappy code. You spend more time firefighting than you do writing code in the future.

(00:51:23):
So a certain amount of craft is just about keeping your options open. And actually it's very much favorable to speed, using the right primitives, having the right abstraction layers, using the right tools in the right way, having high quality people in your team, all those things that you go faster, not slower. And a big part of Lean Startup is about helping teams get into that optimal configuration by acting as a speed regulator. Because there's such a thing as optimal speed, which we can get into if people are interested.

(00:51:48):
But another part of craft is just an excuse for just avoiding feedback, making things pretty in the way that I want them to be because I want them to be that way. And even there, when I meet people like that, people are just like, "Sorry, my artistic ethos is this and it has to be this way." Then I'm like, "Excellent." Then that's not one of your leap of faith assumptions that you're willing to test. So be it. Don't pretend to test it, just be like, I'm not, we're just going to do it this way because that's how we do things and it's fine. And I think when company has a core value, I'd rather go out of business than violate my core value. I also respect that too.

(00:52:25):
But then that to me, that means having a respect for craft, for design, for perfection, that increases the need for experimentation and testing for all the other stuff, because we've already invested a huge amount of our energy and force into this thing that we really care about. Well, then the other stuff, and do we also have to do this fancy press campaign? Do we also have to go put the founder's face on billboards and put them up around town? Are those all part of your craft? I just feel like people use that as a catchall excuse to do all kinds of stuff.

(00:52:55):
But I think the idea that craft is a signal to your customers about the things that you actually care about and that you're going to take care, it is part of making a promise to customer that they're going to believe. If that's your thesis, that doing an MVP that lacks craft doesn't test the thesis. So I think people want to set up a dichotomy here that doesn't really exist. I'm totally in favor of that when people have that authentic desire. But I also meet a lot of people that are just faking it. They don't have taste, they don't have a design ethos, they don't have... So if you don't have that stuff, where are you going to get it from? Well, good news experimentation will get you there if you let it, because you'll eventually learn the habits of mind, the patterns of the things that work, that make sense.

Lenny (00:53:38):
I really like that advice of, as a founder, build the company you want, if you want to build, why create a business and a company you're not excited to be working on? And if you end up failing, it's on you. That was a big mistake it turned out, but at least you tried and you're not building a company you don't want to work at. And then as a product leader, I don't know how much, if you have as much control to build a product the way you want, but try basically.

Eric Ries (00:54:01):
I always tell people to just get fired for doing it the way you think is right. There's nothing that was a faster career accelerator than being known in the industry as the person who stands for that principle so much that you got fired over it. The people that magnetizes to you are going to be way happier. You're going to be so much happier being a place that appreciates that. That was a big career accelerator for me. Not that I actually got fired, but I was willing to be fired for my beliefs. And I remember sitting there, I was going to a board meeting where for sure I was going to be fired. And I was like, "Well, I just don't believe in building products the conventional way." This was again before Lean Startups. So I was like, I didn't even have a language for it, but I had a strong conviction that the way I was doing it was the right way.

(00:54:41):
And I was like, well, I'll be known as the guy that got fired for that and eventually someone will want to work with me because that's what they want. If nobody wants that, then I'll go find a job in a different industry. I don't want to be an industry that doesn't... That's how I want it to be. And I think that people don't appreciate the extent to which... People act like having a startup fail is the worst thing that can happen to you. And man, that's not even in the top 10. It's bad. I've done it. It's awful. Okay, it's really bad. But far worse is to be in a company that won't die, a zombie undead company that you hate but you can't leave. Have I met people like that. And we're having a mental health crisis among founders that's not talked about enough. People started to talk about the downside, mental health risk. Obviously the stress of being a founder is hard, but look what's happening to the people that are so-called successes. When you build a company and you sell it out and it becomes something that you find abhorrent, yeah, maybe you get rich, but it's not good. And I mean, the other day a friend was telling me about a friend of his who sold this company, exited for, I say $300 million or something, made a lot of money and committed suicide not that long later. People follow the Tony Hsieh story. I knew Tony, it was a horrible tragedy. What's going on? So I just feel like there are worse things than having your startup fail. And so building a company you hate, that becomes a maligned force in the world that you have to go pretend you weren't involved with or you feel complicit in what... That's way, way worse. And I wish more founders would take that more seriously early on.

Lenny (00:56:16):
That is such an important point and something I see a lot too, just companies, the founders started that are just alive, but they were almost never going to succeed, and they're kind of stuck. They don't want to shut it down, they don't want to give money back. What advice do you give those sorts of founders that you feel like are just stuck in a zombie company like that?

Eric Ries (00:56:35):
It's really hard. I mean, of course if it's going to fail, you should shut it down. But everyone's like, but I thought it's always darkest before the dawn. And it's like, sometimes it is. But you know what else that's really dark? When you're dead. So everything comes back to, I used to tell people, the most uncomfortable laugh line in my early talks about lean startups, when I talked about, people used to talk a lot about steep jobs in the reality distortion field. And I would be like, okay, you're in the reality distortion field. You're on the flat part of the hockey stick. How do you know the business plans? I actually lived through this once. There's a business plan, the business plan says six months after launch, we'll have almost no customers and almost no revenue. And that's when the hockey stick will commence. And I remember being there in month six being like, we are on time, on budget this plan is cheap.

(00:57:24):
Everything's happening just like the plan, hockey stick to commence. I'm walking to my watch. And then we just stayed on the flat part into the far horizon and people would laugh and I'd be like, okay, now if you're following a startup leader, or you yourself are in the reality distortion field and you're on the flat part of the hockey stick, how do you know if it's ever going to stick? Or you're just going to be... And people would be like, "Ha ha ha ha." And that is a really scary situation. It's like we all have these moments of doubt and sometimes the right answer is to overcome the doubt and go for it. And it's actually part of the genius of the startup system. People people criticize venture financing and all the problems with the Silicon Valley and of course, we do it to ourselves so there's plenty of things to criticize.

(00:58:10):
One of the genius things about it is at the end of the day, you do run out of money. You're forced to declare bankruptcy, that's actually a really positive feature of the system. So a lot of founders just can't do it. But I will say, the thing I try to ask people to do is really take some time to introspect and just ask yourself, do you actually want to be here? If you could magically wave a magic wand and you were to start a new company right now, would it be this one? If it's not, there's no indentured servitude anymore. It's okay. It's okay to move on. And then the question is, then everything moves into a tactical conversation about shut it down, give the money back, do a really hard pivot into the new thing.

(00:58:51):
It depends a lot on the specific factors of the situation, but I think we do founders a disservice if we act like this is easy, or I mean, and it's gut-wrenching and it's really difficult and not to be too spiritual about this, but it really goes right to the issue of ego identification. For so many people, they are their company, and so for the company to die, they also must die. It feels like you're going to die. And I think that's part of the mental health problem. So people as they get older, as they mature, as they have a spiritual practice, I hope they can learn to dis-identify with the company and not feel like it's so personal, so that it is possible for the company to die without them dying. And then they can take what they learned into the next company or into the next pivot or the next iteration of what it should be.

(00:59:38):
Or sometimes the right thing to do is just to step aside and let a different CEO take over. There's so many ways you can go about it. But as with any pivot situation, the hardest part is always just to admit the facts as they are. And then you do it yourself versus just like, what is the situation? Is it working? I can't tell you how often people just can't accept it's not working. And you get investor updates. How many investor updates have you ever received where it's like, we're crushing it, everything's going great, and the very next investor update is, we're out of business, giving money back. It's like, well, your last investor updates said you were crushing it. There was absolutely no indication there was any problem. No, of course it wasn't an indication, but we're just lying about it. So don't be that person.

Lenny (01:00:18):
That's actually an amazing segue to where I wanted to move to, which is around pivoting. So I've done a bunch of research on consumer startups, B2B startups, and the numbers I see, and I'm curious if you see similar numbers is around a fifth of consumer startups, ended up pivoting to a completely different product and almost half, like 40% of B2B companies ended up pivoting to a completely different product. Does that sound right from your experience?

Eric Ries (01:00:42):
Yeah, that does sound right. So it's interesting, I used to do this exercise for founders where I would tell them the story of IMVU two different ways. The first way is one in which we got everything completely wrong and just sounds like we were to complete idiots and we had to pivot so many times. And then I would tell the same story again, but where we got everything right and we were geniuses and everything that happened vindicated. And then people wouldn't believe me. I was like, "Both stories are true." Choosing which elements of what actually happened to emphasize and where to put your weight, you can tell the story. So yes, I would say there's the percentage of people that know that they pivoted and then there's another percentage of people that didn't admit it, but they actually did. And it's really hard to assess from the outside.

(01:01:25):
I mean, I know this from having worked with enough startups where I know the outside story and I know the inside story, and they're just really different. I mean, Paul Graham used to boast about that as one of the features of Y Combinator, that the founders they would get to come to the dinners would tell you the true story of what really happened, and that was critical information you couldn't get anywhere else except at Y Combinator. And I was like, wait a minute, is he saying that everyone just lies on stage when they tell the story publicly? I don't know if that's something to boast about. You're calling all your guests liars. And then I've hosted a lot of those events. I'm like, oh yeah, people lie on stage. I see. So I think part of the problem is just trying to find out the truth of what happened is really challenging. But there's another element that I think is interesting, which is, so pivot is defined as a change in strategy without a change in vision. So we have this idea that the founder has the vision, then they try to figure out how to make the vision happen and they find a different way, but the vision stays constant. But the truth is a little bit more complicated than that, because the founder's vision also evolves. Founders discover what the vision actually is through the process of building the company. So again, not to be spiritual about it, but I actually believe that building a startup is in large part a process of self-discovery. You actually are discovering what is true about the thing that you yourself believe. And partly that's because when we fantasize about the vision that we never have to make any trade-offs, the product is infinitely popular, infinitely cheap, everything's great.

(01:02:50):
It's just like there no trade-offs to be made, where real life forces us to make trade-offs. And then you find they're like, "Oh, I have to choose?" Would I rather have a high-end product only for really rich people or would I rather have a product for this industry or this sector or this group or that group? It can be painful, but also founders learn to talk about the things they care about over time.

(01:03:12):
So I mean, go on YouTube. If you've never watched the interview with Zuck on his couch at Stanford talking about Facebook, it's remarkable. Just some college news person just happened to catch an interview with this guy at a critical moment in his life when he just didn't know what he was talking about yet. And now he's really ambitious. Now Facebook's vision is this really ambitious thing and people are very at pains to say that he always had that vision from the beginning. And he talks about it all, and that may be true, but the documentary evidence exists, and I'll just give you one of my own stories about that.

(01:03:48):
In one of my companies, we moved offices relatively early on because we started out in a really, really crappy small office and we moved to a larger space. And I remember sitting in that office when there was just five of us and we sat down and we had a meeting where we specked out what we would now call the MVP as well as the longer term vision for the company. And we had this whiteboard and all of us debated what features should be in and out or what should be on the whiteboard. And I can remember writing down, I have a visceral, I have a physical memory of writing down the things that were going to be necessary for the company to succeed and being right, and my co-founders arguing with me about not having their perspective and their being wrong, and I'm like, good thing.

(01:04:29):
It's one of the things I remember telling this story. Anyway, we moved offices shortly after that time and that whiteboard was lost, and then years later we moved offices again and someone was cleaning out an old storage closet and that whiteboard was just happened to have gotten shoved in the closet. Someone pulls it, they're like, "What's this?" And I looked at it, I'm like, "Oh, that's the whiteboard we used to hang in our main conference room, and it still had the notes from that meeting sitting there on the whiteboard." I was like, this is so cool. Historical moment. I'm taking a picture. And then I'm like, wait a minute, this is weird. It's in my hand. It's recognizably in my own handwriting, but many of the things that I'm writing there are horrible ideas. I'm like, that's not what I thought back then. I was on the other side. That's my co-founder's bad idea. That's not my idea.

(01:05:20):
And I had this realization that it's not just that I learned something through the course of building this company about strategy. My own understanding of the vision of what we were doing was different, but the thing that's so critical to understand is I even to this day have no psychological memory of having changed my mind about it. I still have the original memory of writing those things on the whiteboard, and I really thought someone was playing a trick on me at first because what I could witness with my own eyes on the whiteboard contradicts my actual memory of the thing. And I was like, which of us is right? And of course, I had to admit, the physical evidence, you got to win out.

(01:06:00):
But I think it's important also to understand how much that is true. And that's like, again, go back to why science is so important. Why do we write all the elementary things about science? We write our hypothesis down, we subject our things, we do that because human psychology is so buggy and people who are fighting with their generative AI chatbots and stuff are starting to see, those are nothing but a reflection of human theory of mind. So we're starting to see it in alien creature that, wow, our intelligence has all these weird behaviors and gaps and things, and of course we want our robots to be perfect, but it's like, well, first look in the mirror and realize that you yourself carry all those cognitive biases and you've got to put in place a structure to get around them or they're going to destroy you.

Lenny (01:06:42):
That is an incredible story. It makes me think about, I think it's exactly what you said, not only are the stories you hear often intentionally not accurate or true, and they're kind of a myth that have been created, but also you forget exactly what happened and you tell a story that didn't really happen. That's wild. Imagine a place where you can find all your potential customers and get your message in front of them in a cost-efficient way. If you're a B2B business, that place exists, and it's called LinkedIn. LinkedIn ads allows you to build the right relationships, drive results, and reach your customers in a respectful environment. Two of my portfolio companies, Webflow and Census, are LinkedIn success stories. Census had a 10x increase in pipeline with a LinkedIn startup team. For Webflow after ramping up on LinkedIn in Q4, they had the highest marketing source revenue quarter to date.

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Eric Ries (01:08:00):
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Lenny (01:08:22):
So you talked about pivoting. I never knew this about the term pivot is that you keep the vision the same. And I actually have this list of companies, B2B companies in this case, that pivoted. In their cases it was very different. Let me go through them real quick. And I'm curious, what do you call it if they don't keep the vision consistent? Segment started as a university classroom lecture tool. Loom, which just sold for a lot of money to Atlassian, started as a marketplace for companies to hire subject matter experts. Slack famously started as a game called Glitch. Box apparently started as a box to put photos and content in on Facebook. And Retool started as Venmo for the UK.

Eric Ries (01:09:04):
That one I didn't know.

Lenny (01:09:05):
I found that out through Twitter where one of the YC partners replied and shared that story with me because I also didn't know. And I think that's a good example where no one ever tells you that fact.

Eric Ries (01:09:15):
Right.

Lenny (01:09:16):
[inaudible 01:09:16].

Eric Ries (01:09:15):
It's like well, that's an important part of the story to know. Exactly, exactly.

Lenny (01:09:19):
I think it was a quick pivot. I think they got to YC and they're like "No, let's do something else."

Eric Ries (01:09:22):
This is why it's so hard to evaluate from the outside because oftentimes there is a thread of connectivity that from the inside makes sense why we went from this thing to that thing. And it's often something unusual. It'll be something like well, while we were building the game we had to do this thing first because our values were like, you can't build a game without this thing. And then this thing turned out to be more valuable than the game. And then you're like "Oh, why are we building this game? This is the thing we actually really care about." So people are like "Well, I thought your vision was to build a game." I was like "Well, maybe but why did they build that thing first? Other people build games without building that thing." So that's why I say it's a process of self-discovery. Oftentimes the vision is discovered more than chosen in these stories. And from the outside it can seem really, really weird. And part of it is also that some people really need the failure of the first thing to appreciate what is great about the second thing.

Lenny (01:10:22):
I think Segment is a good example where they tried a bunch of stuff and then they posted this random thing on Hacker News and it just blew up.

Eric Ries (01:10:28):
Sometimes it blows up so much that you're like wow, that's amazing. But oftentimes the new thing will get 100 signups. And if you'd started with that as your first thing you would've be like "100 signups who cares." But if you've done 20 things in a row with zero signups, man, you're like "God, somebody likes this thing." Sometimes it's your first try but sometimes not.

(01:10:46):
And again, not to go back to Facebook all the time but that's such a famous story that people know it. In the movie, there's that famous scene where they live in the house in Palo Alto and they run into Sean Parker and does the ... Apparently that's real, and they really were living in that house. They really were working on Face ... But the thing that gets missed from the story is that Facebook's already started at that point, it's already being successful, and they're on the break between semesters on the summer. And Dustin Moskovitz, and Mark Zuckerberg, and Adam D'Angelo, and I forget who else are living in this house together.

(01:11:18):
Someone told me this story about what they were actually working on at that time. It wasn't Facebook. Zuck and D'Angelo had already moved on from Facebook and decided it wasn't successful enough and they were like ... One of them was working on a system where you could use gestural controls on your webcam to program computers because they wouldn't get carpal tunnel. They were sitting on Facebook and it was ... I should ask Dustin if this is true. I believe Dustin Moskovitz taught himself to program so that he could keep up with the demand of people who wanted to open Facebook at new schools because the virality was so insane. And I was like wow, you can be even building Facebook and not know. People are like "Well, if I told you that story without telling you the name of the founder you'd be like that's no visionary." I'm like "No, it's Mark Zuckerberg." No one has ever accused him of having a lack of vision, but somehow this is true.

(01:12:13):
So I feel like part of this is about just admitting the complexity of these stories is a little bit more ... There's more to the story than you really realize. These are imperfect people. And the pivot is really about learning, right? The original idea of the pivot was one foot anchored in the thing, one other foot moving from basketball, right? Anchored in what you've learned and yet so connected. So if it was truly a complete shutdown, start over again, nobody and nothing in common I would be like, that is not a pivot. But that's just actually quite rare.

(01:12:42):
Usually, there's some critical insight or element of the first thing that is carried over into the second thing. And if you were there, if you know the story, you'll be like oh, wow, that makes sense in retrospect. And again, I think this cuts against our whole idea. The thing we think it's like to be a visionary is you just ... You know all the answers. You're like a biblical prophet who sees the future. But that's not what it's like. It's really much more about having the courage to see the world as you think it ought to be and then dance with that wherever it takes you. I think it's a much more element of courage than of intelligence or anything else.

Lenny (01:13:19):
You're so full of amazing stories, Eric Ries. I never knew this Facebook story. Thinking about a founder who is maybe going through a period of considering a pivot ... There's a lot of startups right now just not struggling. Not struggling but struggling.

Eric Ries (01:13:35):
The 2021 Vintage is having a rough time.

Lenny (01:13:37):
Exactly. I'm curious just what advice you have for founders that are trying to decide, is this time to pivot? Should we give up? Should we stay the course? Just any tactical pro tips.

Eric Ries (01:13:49):
So first of all, if you're asking whether you should pivot or not you probably know the answer already. That's the first thing to just straight up say. People call me sometimes they're like "I want to know if I have product market fit." Well, the fact that you have time to call me and ask me this question already tells me the answer. If you have had product-market fit you would not have time for this. When it's working there's no time for naval gazing, there's no time for ... If you've never lived through a company going through product market fit it's such a rush, it's such an insane thing. The whirlwind of it is so amazing and so horrible at the same time. There's just no time for anything else. If you're not sure you're sure. So that's the first thing is just can you admit it to yourself? Can you do it?

(01:14:29):
If you admit that it's not working then what do we do? What I really ask people to do in these situations ... It's like give yourself a fixed period of time to take some decisive action and see if it feels better. If you can't agree that it's not working then okay, can we take six weeks to try to make it work? We have this assumption, we're going to try to test it, and we're going to ... Instead of working on the 29 other things that we have to do in the future, can we just spend all of our time 100% on the one and only one thing that matters right now? And just go heads down on that for a fixed period of time and see can we move ... Is it possible to move the needle in that thing?

(01:15:07):
Because one of the things that is true about startups when it's not working is that they're stuck in this law of diminishing returns where you just ... You can test yourself. Everything you try doesn't work, nothing works. It's like Thomas Kuhn and his theory of scientific paradigms. One of my favorite things that he talks about is that when an old paradigm is replaced with a new paradigm it's usually only because the old people die out and the new people replace them. A lot of researchers are like why does that happen? It's not that the new people are magically smarter than the old people, it's just the old paradigm gets to the point where there's no more experiments to run that are fruitful. And young, ambitious people want to run productive experiments. And the new paradigm gives them a thing where every experiment reveals something really amazing and they just naturally gravitate. It's not actually a formal process of abandoning the old and going to the new.

(01:15:55):
And that's true here too. Most people are not consciously able to let it go, they can't do it. So okay, find yourself a paradigm where the experiments are productive. I can't tell you how many startups I've been where they're like "It's up to the right." I'm like "Oh, really?" It's like "Yeah. At first it was 10%, now it's 10.5%, then it was 10.6%, then it was 10.65%, then it was 10.657%." You're like "Guys, yes, it's up and to the right but it's not what you need it to be for this to work." So give yourself a fixed amount of time on the current thing if you have to. Once you say, "Okay, the thing's not working." Do we have enough time for something new? Could you give yourself six weeks to try the new thing? If you're a bigger company you'd be like okay, we're in a ... Maybe you can't have a whole company work on it but can we have a team? Somebody, at least one whole human being, not a part-time committee. Somebody is full-time heads down trying to make the new thing work on a deadline.

(01:16:52):
And if you're a small team and there's only three of you, can you just put the whole thing on pause for a minute and give yourself a fix? If it was one weekend, that would be better than nothing. What can you actually afford? It'd be nice if it was six weeks but if it's only one weekend, no problem. What is the new thing you want to do? Now that you've agreed among yourselves that you're going to do that for a fixed period of time, everyone go around the room and say, "If I could start this company over again the thing I wish we were doing was."

(01:17:19):
And no one wants to go first, but since everyone's going to have to do it you're like "Okay, I wish we were doing this other thing." "Why?" And sometimes the first person goes and everyone's like "I've been wanting to say that same thing for months." And it's like "Wait, we all actually secretly want to do this other thing but we all are afraid to let the others down." It's like "That's actually great new" ... "Well, good." Don't mourn that 18 months of your life you just wasted, be excited about the fact that you actually are on the same page about the new thing.

(01:17:49):
Anyway. Everyone says the new thing. See if one of them stands out to you, do that one. If you all agree do that one. If you have three things that you're equally excited about do them in order. Everyone gets one month. We've got three months of money left, well, the first month we'll do the first thing, second one we'll do ... And we'll just see if anything sticks. And then sometimes people do that and they're like "I'm just exhausted, I just want to die." If everyone goes around and says, "I'll just give the money back it's okay, don't die. Let the company die it's all right." When you raise too much money, and you've got your cap tables all messed up, and you ... I feel like for our 2021 Vintage brothers and sisters, sometimes you just need to try again with the right capital structure, it's not possible. Make the structural changes you actually have to make to give yourself a chance to do something you care about. If you don't have that what are we doing here? Life's too precious for that.

Lenny (01:18:43):
That is awesome advice. Very tactical, very real. On the point you just asked of what would we be doing? What would you want to be working on? I imagine many people today would be answering AI-related products. And this is a good segue to where my next question is just, how are you seeing AI change the lean approach, product development, the way teams are run? Trends and changes you're seeing in all of the stuff that we've been talking about?

Eric Ries (01:19:10):
I mean, we're entering into a really interesting phase of humanity, and technology, and civilization. To know the right answers to those questions requires empirical knowledge that nobody has. That's exciting about it. And also, of course, some people find it terrifying. What I'm seeing so far is that, first of all, people are afraid of AI. But not really afraid of AI they're afraid of corporations with AI. AI doesn't do anything by itself, it has to be embodied and deployed by humans who have bad alignment. And so everyone's talking about AI alignment. I'd be a little more sanguine about AI alignment if the company's doing the aligning were better at aligning their human intelligences. I'm blanking on whose law it is. Always these named laws. So the idea that your software comes to reflect the organization that produces it is somebody's law. Conway's law maybe.

Lenny (01:19:59):
Let's call it Ries's Law.

Eric Ries (01:20:01):
No, please don't. I forget whose law. Anyway. That is going to be true on steroids in AI where we're training in machine intelligence and we're transmitting values to it. Those are going to be our organizational values. And tech has severely underinvested and neglected in creating governance and alignment structures to have those values be explicitly embodied in the organization which is why so many of our companies have become disappointments, and so many people feel betrayed by the companies they themselves help build. It's actually sad. So AI is going to force us to take those issues seriously no matter what.

(01:20:35):
You asked about how it affects lean startup. At the end of the day, AI is a management technology. The thing it does is manage intelligence and other intelligences. Watch people struggle to make AI agents work. It's been really interesting to me how often I've played with a lot of those tools myself. It's amazing how often you program the agent and it will be like okay. You give it a task like go take over the world or whatever, go make a really successful ice cream stand. Or you give it any task you want and it'll be like whatever. These AIs are programmed to never say no so whatever you say it's like no problem and it'll be okay.

(01:21:08):
First step, write a business plan for taking over the world, and that will spawn a new agent with a new AI. Be like okay, your job is to go write this business plan. And sometimes it'll go try to write the business plan, but oftentimes it'll spawn ... The subtask will be like oh, first thing I need to do is spawn an AI agent that knows how to take over the world and have it write the business plan. Everyone will just pass the buck to somebody else. It'll go into an infinite regress. It's like, first thing we need to do is research this. And then the thing that comes back, and now we've learned to research that we need to research 10 more things. Each of those 10 things require researching 10 more. So many ways this can go wrong.

(01:21:44):
And anyone who's been a middle manager who reads these transcripts will be like "Tell me about it, buddy." I once was doing an AI agent and I wanted it to write me a 30-day course. A transcript or a 30-day course for teaching people lean startup. Someone had asked me to do that. And I was like great, I'll have the AI do it for me. And it was amazing. It was like okay, no problem. Day one, what is lean startup? How does it work? Day two topic, what is an MVP, how's it work? Dot, dot, dot continue like this for 30 more days and you'll have a 30-day course. I was like yes, because I know that but could you please fill out the other 30 days? It was like no problem and it spawned a new subagent. It was like, given these two as an example please fill out the other 30 days. And it was like got it. And it was like how to do a task in 30 days.

(01:22:27):
Well, first look at these two tasks, then create similar things for 28 more days, then return the results. It's like no, no, I'm asking you to do that. If you ever watched the Monty Python no, can't guard him If he's a guard skit, it's like that. We're talking past each other. It's really interesting to see how AI, as we learn to understand it we will be able to develop different ... It will really change management a lot because it changes the individual span of control quite a lot.

(01:22:58):
One of the most hard problems in management is that in order to touch a lot of things we need a lot of hierarchy because just the expansion factor of each one has this many reports, has this many reports, this many reports. That's what's required in order for us to summarize a large amount of information. If you have 100,000 employees they're having 100,000 ... Doing 100,000 things, the CEO needs to know what's going on, that's really difficult. So there's this massive amount of human labor required just to summarize and understand what's happening. Well, AI's really good at summarization, it's actually one of its main strengths. In the not to distant in future it'll be very easy for someone to just be like "Summarize for me everything my company is doing." You won't need tons of middle managers to do that for you it'll just know. We don't even know what we would like to build organizations where those powers are available to everybody.

(01:23:49):
The last thing is, people are very focused on whether this is going to lead us to utopia or dystopia. Most people have a very firm conviction about what's going to happen, and therefore what needs to happen now to prevent something bad from happening. So you have the people who are like "We have to stop, pause, blow up the data centers because it's going to be this bad thing." People who are like "We have to have government intervention to prevent research on this thing, we have to ban open source. For every one of the things somebody wants to do somebody else is saying, "That is actually the thing that leads to the dystopia," right? Banning open source is what leads us into a corporately controlled autocracy that's even worse than the thing that you were afraid of.

(01:24:26):
A very common question I've been getting from people in the industry who are having an existential crisis about what should they do with their life in the face of this AI. And as you say, all the people whose startups are failing are like I want to be working on AI. Okay. For everyone who's got a grass is greener attitude about that ... The people that are actually doing it, and quitting their jobs, and going to work on AI, the first thing they confront is What should I do that will have a positive effect? It's actually really difficult to find out some ... Everything I propose doing someone's telling me that that's actually the evil thing to do and vice versa. A big part of lean startup has been ... For me, it's been just about learning how to deal with uncertainty in my life, right? So how do you deal from a business perspective? How do you deal with situations of high uncertainty? And it could be scientific, it could be experimental, it could be ... Just all these different values that are about coping with uncertainty.

(01:25:18):
And so the question people are asking me is basically, how do you take ethical action in the face of high uncertainty? And so the framework that I've been using I found very helpful and I hope other people will get something out of it is ... The aperture of possible futures that AI makes possible is so incredibly wide. And Predicting it requires a really deep understanding of a bunch of empirical questions, as far as I can tell, nobody knows the answers to right now. So given that it's not knowable what's going to happen ... You're not an expert enough. As far as I can tell nobody knows. The people who are most expert are actively doing the research to try to find out the thing that will help us predict. There's nothing you can do about that, you've got to wait for someone to go find that thing out. The thing that makes sense is to pick actions today that make ethical sense in a wide variety of future scenarios and do those. And what's really interesting is that takes people out of total paralysis about it into there's actually some very clear things that we should do. Whatever your doomsday scenario is we need more transparency right now, right? That's critically important. We need more state capacity, we need more competent leaders, we need companies who are committed to certain values. It changes the way that we think about these technologies in relation to ourselves as individuals.

(01:26:34):
And that's really my goal, in my work here, is just like how do we get people off the sidelines and into the fight doing things that are actually likely to be worthwhile? As I'm talking to you I'm like oh, it sounds a lot like the idea that most of the work you do in a startup is going to be thrown away after you pivot so don't do that work. It's not really a special unique insight it's just taking the same approach to coping with the uncertainty of entrepreneurship and now applying it much more broadly because everything's about to change.

Lenny (01:27:01):
It sounds like this connects a lot with the work you're doing now around governance and long-term stock exchange. And I want to get into that. But before I do, I'm curious if personally you're finding AI to be useful in some part of your life using a tool? Or, if there's a more interesting example of a company using a lean startup approach with AI integrated, is there anything that comes to mind of just something that you've seen to be practically valuable with some of the AI tooling?

Eric Ries (01:27:26):
When GPT-4 was first launched, I saw a friend of a friend just was posting a friend of theirs. A story about someone who was using it for cold sales outbound right when it first came out. They had downloaded a list of 10,000 Shopify stores with metadata, which I googled you can buy that for 100 bucks. They just told GPT to the roll of Python script for each store. GPT-4, please pitch this store owner something that my outsourcing company could build for them and be really creative about it. He didn't even read the emails he just sent them one after the other. And when the person would reply he would look in the email to see what he had pitched them and then talk to get the person on the phone.

(01:28:12):
The things that it pitched were so wildly creative and cool, it was really interesting. They were in the tone of the store, they were really ... They used clever puns. So he was showing me screenshots of the person writing back being like "You had me at blah, blah." It was very good sales prospecting. So okay. That's an incredible story about experimentation at a super high rate. We could never have done anything like that even five minutes ago and now it's going to become completely routine.

(01:28:41):
But it's also a story about how all of our communication channels are about to be supersaturated with AI-generated experimentation whether we want it to or not. If this technology holds the way we think it will, it's pretty clear that every company is going to be sending just huge volumes of AI- generated email such that people are going to need AI-generated email clients to read the email for them and summarize it for them. People make jokes about, I'm going to write three bullet points, my AI will turn that into an email, send it to you, your email will redact it back to the three bullet points. Couldn't we have just exchanged three bullet points in the first place? We're wasting a lot of silicon. A lot of GPUs were burned to move these three bullet points from point A to point B.

(01:29:24):
I don't think that's as silly a story as it sounds. I actually am excited about the possibility of AI-powered marketplaces to be far more fair than the way we do it today. Because if you think about that story, the problem fundamentally is that you have a massive number of people who could create things for store owners. And if all of those people emailed every store owner on the planet every day what they could do, it would be an overwhelming amount of information. So neither side is really capable of doing that. But AI is capable of doing that.

(01:29:56):
So imagine a world in which everybody is required and it's also ... But it's also really easy to do, to define a procurement policy. What am I interested in buying, right? What problems do I want to solve? What am I interested in buying? What information do I want to have? And my agent reads my inbox for me with this filter and applies the filter completely fairly. It doesn't matter if I played golf with so-and-so last week or whatever, just if the proposal comes in and it's credible, and the AI is really diligent about making sure it's not spam, then it will bring the thing to my attention. But it won't show me the email, I won't be tricked by its clever Al Ries-style positioning nonsense.

(01:30:34):
It will give me the essential information that "Hey, did you know that there's this thing that could actually save you a bunch of money?" You're like "Oh, okay, great." That is so much better than advertising could ever be. And it's also way more fair. We could then say, "Okay, actually, we would like every conceivable vendor to send every ... As many emails as they want at any time, just blow me away with all the things your thing could do. Let your AI go crazy trying to convince my AI that your thing is actually good. That's not wasted time, that actually create a lot more fairness in the world, and create a really even playing field for procurement for information. Think about journalists and pitches. You just see so many situations where we've established hierarchical gatekeeping structures because that was the only way to manage the volume of information that had to be processed for that thing to happen. When those limits are removed it could be terrible but it could be really awesome.

Lenny (01:31:27):
I love your optimistic vent on all the things we're talking about, I really respect that. And that might be a good segue to the final thing I wanted to chat about which is just the stuff you're working on now. So you talked about you're working a lot on helping companies with their governance. Also, I think you work on company culture, and helping companies make money, and profit, and build real businesses. And then that, obviously, connects to long-term stock exchange. Can you just talk about what it is you're spending your time on there and where you see big opportunities?

Eric Ries (01:31:54):
Yeah, sure. I mean, I think it's one of the big, big, big issues that we're grappling with. If I compare the questions I get asked by founders today versus 10 years ago, these issues are so much more in people's minds than they were back then. When I work with a founder for the first time, we'll often do a thought exercise that's like "Okay, we've talked about culture, we've talked about the company, it's like okay, great, why should anybody trust you?" They're like, "What do you mean?" We're talking about companies now building stuff that is so invasive into people's lives, so much more powerful than it was before. And really honestly, this is just about taking seriously the rhetoric about changing the world.

(01:32:33):
And so many tech companies, when they're raising money are going to change the world in fundamental ways. And when they're being asked to take moral responsibility they're like "I'm just a little database vendor." It's like you can't have it both ways, buddy. Are you the Superman who's reordering the whole world to your whim? Well, then you have moral responsibility for the outcomes. That's a hotly debated point right now but I feel like it's actually super ... People have already made it clear in their rhetoric where they stand there, they're just trying to evade that responsibility.

(01:33:02):
So the next gen of founders aren't ... Don't find this complicated at all. People feel a real sense of responsibility to make the world a better place for the real things. Okay, great. I'm working on so many companies that are straight out of science fiction. I mean, the company that does travel from San Francisco to Tokyo in one hour. And you're like, it's unbelievable. Actual weather changing. The real thing where you're like, we're going to change the amount of habitable land on the planet and solve famine and drought forever. Obviously AI, there's these just incredible possibilities and ... In nanomaterials and quantum computing. I could go on. There's just so many cool things going on.

(01:33:42):
But they all have really dire consequences. I mean, I was talking to a really advanced biological AI company where ... Imagine having an LLM. Imagine ChatGPT but for biological compounds. We'd be like "AI, could you just synthesize for me a molecule that has these properties just described in natural language?" And it's like "Sure." That could be incredible. Think about the cures and the diseases. That's going to be an amazing transformation on technology. But it has such obvious risk and downside that we have to take it really seriously. Why should anyone trust you with this power? And people always say the same thing, "Well, I'm a really good guy. I'm your bro, man. I've got good intentions." It's like "Well, who gives a crap about that, you could die, you could be replaced. Some investor could sweep you."

(01:34:28):
How many stories can I tell you about startups where the investors change management involuntarily? The fundamental problem is that no individual person can ever make promises on behalf of an organization, it's not possible, it's a category error. You're replaceable. And the reason is because organizations are actually alive. They are superorganism with their own soul and their own life. We are their selves and organs when we make them. Founders don't create them we birth. And that's different. We don't own them, they're not slaves. We nurture them. That's different. If you want your organization to be trustworthy, the promises it makes ... If you want to win the public's trust by making promises they can believe, you have to embody those promises in the structure of the organization itself so that even if you weren't there the promise would be kept.

(01:35:20):
And people act like that's impossible but there are lots of examples. I mean, think about the code of medical ethics and the Hippocratic Oath. In the US if you want to do healthcare you have to have a care delivery organization that is staffed and run by doctors, not by private equity guys. There's all these things. Where we know how to build structures that are organized around some purpose, so what should that purpose be?

(01:35:44):
I was talking to a former Googler ... I hate to pick on Google because they've always done a lot of good things in the world. But they're, I think, the locus of a lot of tech people's disappointment in the world. And so this is nothing unique to Google but I just happen to be talking to an ex-Googler. And he was talking about the values, and the company, and his disappointment, and what had happened in the many years that he'd been there, the good and the bad. I said, "Okay, answer me this question. I'm going to ask you two different things, and for each thing I want you to tell me, what is your assessment of the probability that this thing will happen in the future? Thing number one. What do you believe is the probability that Google will file its next quarterly report on time?" He was like "100%." I was like "How 100%?" I'm like "As certain as the sun will rise, bet your life on it?" He's like, "As certain as the sun will rise 100%." I was like "Excellent, I agree."

(01:36:26):
A second question. "What is the odds that Google would be complicit in something that would make them money but at the expense of murdering somebody?" He's like, "They probably wouldn't do that." I was like "Probably, 100%. As certain as the sun will rise." He's like "Well, no." I was like "Oh really? What do you have?" I said, "Well, come on, what if they're running a self-driving car as they kill somebody and they cover it up? What if they will a social media product and it's conflicted in a genocide? Facebook went through that." He's like "I don't think they would do that on purpose. The difference between the thing that is certain and the thing that we don't know." I was like "Okay, why is that?" We treat that normal. Of course, companies file that report sometime. Is it because in the human heart fidelity to finance rules is hard coded, but care for other humans in their life is not? People don't give a crap about quarterly reports.

(01:37:14):
We have built a massive apparatus in these organizations to make sure that certain things happen. Companies are really good at things that they care about, and therefore we can learn something interesting about the things that they care about by what they choose to be good at and what they perennially are not good at. My view is that what it means to be a for-profit company, we've gotten it wrong. We're basically incorrect. Making a profit is actually about maximizing human flourishing. That's what it means to be for profit. So our current category says that Philip Morris is a for-profit company, and the Smithsonian is a not-for-profit but that's just backwards. Smithsonian does a lot more good in the world than the Merchants of Death at Philip Morris. I think we've just gotten confused. All forms of making money are the same but we all know that that's not true. There's exploitative extractive ways of making money, and then there's truly additive ways of making money that actually create net new value.

(01:38:08):
And so if companies are dedicated to human flourishing and they want to be the company that will create net new value, and they don't want to become a bureaucratic nightmare, they don't want to become a rent-seeking blob of discriminate math. We don't want that to happen. We have to encode those promises into the company in a deep way. And I think that's really what governance is about. The whole ESG movement, all the discussion about this has gone totally off the rails. Philip Morris has actually great ESG scores it's absurd. How can that possibly be right? We have to find a better way forward.

(01:38:43):
Again, going back to lean startup and first principles. Once you go back to that first principle and say, "What would it look like if every person in a company felt a fiduciary duty to promote human flourishing? How would you do it? And what would be different?" I've started to meet founders who are building companies like that and it's almost unrecognizably different. I've been framing this, of course, in terms of the big things. Obviously, if you think about the weather control startup. That needs to be right, not just because if a super villain and got their hands on it would be really horrible but also because you can easily imagine ... They got bought by some private equity firm who's like "This is awesome. We can now put every town in a zero-sum competition with their neighbor for the good weather and extort them both from" ... That would be just as horrible. We don't need superviliany for this. None of us should want our technology to be used in that way so we need to prevent that from happening.

(01:39:33):
So when we put that in that ethos, we make that part of every decision, we finally can create the environment that people really want to work in just to make great products. I feel like most people I meet just want to work on something awesome. And we act like giving, that just happens. But I've worked with so many companies now, even the ones that are really truly great ... You go meet a team who says, "We had the island of freedom, we had the full" ... We were able to do it exactly right. That's one of the most satisfying experiences in my career.

(01:40:06):
You ask people, "Why was it" ... "How was it made?" And they're like "How was the product made?" "No, how was the island of freedom that you lived on made?" And they're like "I don't know, ask my boss." I've done this exercise. I've asked the boss, and the boss's boss, and the boss's boss. And sometimes I'll go all the way up, and it'll be like "Well, actually the founder of the company, who's still around, made it so." But sometimes no one knows. And you're like "Who's in charge here? The board is in charge.? They're like "I don't know. The CEO asked me to serve on the board." The company chose its own board, the board chooses the C ... It's all self-referential. And it's like where did it come from? We view it as an accident, it just happens sometimes. But that's because we're not engineering these beings to create the outcomes that we really want. And I just think this is a blind spot.

(01:40:52):
As company builders, we're so focused on the product and not nearly focused enough on the organization. We tend to say at the surface level stuff like culture, we don't get into the deeper stuff. So, yeah, I think as builders, as an industry, we need a new movement to say. "We are going to build companies where human flourishing is the thing at the beating heart. We're going to wield that as a competitive advantage to not only change the world for the better but also make a lot more money."

(01:41:17):
That's the crazy thing about it is these companies are worth a lot more than their competitors. Without naming the company, I talk about a company that is an incredible ethos of love and just ... It actually loves their customers, it's amazing. Everything cascades down from that central premise, including the instruct ... Every CEO I meet is so frustrated all the time. I can't get people on the same page. I tell them what to do but they don't listen. It's like maybe part of the reason you're having trouble with this is the strategy you're communicating does not actually make sense to people. Well, this one really makes sense. Treat your customer like you would treat your own parents. People are like "Oh, that's actually really easy and clear, I understand exactly what that means." And so their customer loyalty is unbelievable. Can you imagine what their retention is like if you-

Eric Ries (01:42:00):
And so their customer loyalty is unbelievable. Can you imagine what their retention is like, if you actually felt... You call customer service and it's like you're reaching your guardian angel rather than some bored customer service rep? It's amazing. So their competitors are like, "This is not fair. It's unfair to compete with this. This thing is a monster."

(01:42:17):
But when you're going to a customer like, "Hi, would you rather work with a company that's owned by some private equity schmuck, or a company where some of the prosperity you helped me generate gets reinvested in you and your community?" It's a competitive advantage to do the right thing. So I feel like that we're going to have a new wave of founders who take that seriously, who are going to just... They're going to steamroll. It's going to be really awesome to watch.

Lenny (01:42:42):
I can see how you started a movement, maybe accidentally. I am mesmerized, I am sold. If people listening are also sold and want to build a company this way, what can they do? Is it work with the long-term stock exchange? Is there something they could do to help move their company and product team and business in this direction?

Eric Ries (01:43:00):
I feel like there will come a time when there's a lot of resources about how to do this, and there aren't a lot right now, so it's a bit thin. I'm working on it, but we're still trying to figure out the right way. But I am hoping to start doing some events and some things to talk about this stuff, so people should feel free to reach out or follow me on the usual places.

(01:43:19):
If people want to do it themselves, talk to your lawyer. This is definitely one of these "talk to your lawyer" moments. I've worked with enough companies, I've actually been around long enough that I've worked with multiple companies that have gone from zero to IPO and beyond. So I have personal friends who've taken their company public who are now extremely wealthy, and who sometimes even call me and are like, "Hey, I run this massive multinational company. Can we talk about this very specific situation that's come up at work?" I still am involved in those companies. I still get to hear sometimes what it's like to actually do it.

(01:43:49):
And one of my main takeaways of that entire process is that it's always too early until it's too late. So what happens is people hear something like what I'm saying, like, "Oh yeah, we need to make sure... Here's some things you can do." Obviously you can become a public benefit corp or a social, what's it called, in California, a social purpose corporation. There's legal designations you could take. That's fine. You could talk to a company that, because their startup involves building a technology out of something that comes out of indigenous cultures, they took 10% of their company and they put it in a foundation, the trustees of whom are tribal leaders from the cultures that they interact with, and those people that has an economic role and a role in governance. You can establish a foundation like that.

(01:44:31):
You can do what's called the board mission pledge where the people on your board are required as a condition of being on your board to pledge that they'll use their business judgment under Delaware law to support the mission, not just the narrow interest of shareholders. You can build, we call it an LTSPV, which is basically a financing instrument that operates like a regular SPV, but every LP in the SPV has to sign a contract to say that they will support the mission of the company if you ever want to do something like a B Corp version, or if there's ever a situation where it's unclear whether they're in favor of you doing the thing that's right by your stakeholders long-term, they're pre-committed to that, and we assign trustees to oversee those shares rather than just the narrow interest of the shareholders.

(01:45:10):
I can go on and on. There's all this stuff you can do. So I get companies, I got founders excited. I've been getting founders excited about this for a long time. I've now been long enough at this that the founder will go to their lawyer and the lawyer will say, "Listen, sounds great, but you don't need to do that right now. You can always do it later." And they're like, "Okay." And then the companies going bigger and they'll do some financing round. Each financing round, it's like, "Is this the time?" "Ah, that's fine, we could just do it later." And then it's like 18 months from the IPO, they've hired a CFO and there's a bankers and the whole thing's on rails, and the CEO's like now, "Hey, did we ever establish that foundation thing for our non-employee stakeholders?" And they're like, "Huh?"

(01:45:44):
"The thing, remember we talked about, you said it was too early?" "Oh yeah, I remember that. Have we done it?" "Oh no, it's too late." "It's too late?" "The thing's on rail, shareholders wouldn't like it." The banker's like, "Oh, you don't want to put that in your IPO prospectus." It's like, "Wait a minute, when was the right time? You're telling me that 18 months ago, July 3rd through 7th, there was a four-day window and it was the right time? It's never the right time. Why is it never the right time?" And I've seen founder after founder after founder get steamrolled. One of the only exceptions I know is a mutual friend of ours who actually stopped the IPO process and was like, "No, I won't file the paperwork." They tried to steamroll him and file the paperwork without him, and he said "No, until I see this thing in there, we're not doing it."

(01:46:24):
And it was a very contentious thing, took a tremendous amount of political capital. I admire him immensely for doing it, but most founders don't. Most founders just go along, and the thing never gets done. So the most important thing is to sit down with your lawyer and just take them through a few hypothetical situations and ask them, are you properly protected against this specific thing? For example, if tomorrow Philip Morris shows up... Pick your favorite evil. I've used Philip Morris because my dad's a pulmonologist, so I grew up as Philip Morris as the ultimate of evil corporations. But pick your favorite evil corp. If they show up tomorrow and they offer you $1 per share more than your company is currently worth to buy it from you and your investors in order to use it to sell cigarettes to children, do you have a fiduciary duty to say yes or a fiduciary duty to say no?

(01:47:11):
Believe it or not, if you went to a fancy law firm and they filed for you the standard articles of incorporation that are used in Silicon Valley, most governance experts upon reading those documents would say, "You have a fiduciary duty to say yes." If that doesn't horrify you and make you want to jump out a window, I can't help you at all. And if you don't care, fine, I got nothing to say to you. If you don't care, you don't care. There are really sociopathic people in this world, and they build sociopathic companies, and I can't help you.

(01:47:39):
But if you do care, sit down with your lawyer and just be like, "Hey, is this true? Could this happen to me?" And they'll be like, "Yeah, obviously." And you'd be like, "If I'd like to prevent that, what could I do?" And they'll be like, "Well, your investors might not like it. Investors like it this way. It maximizes their returns." And you're like, "Yeah, but that's not what I asked you." And your lawyer is good enough to know the answer to this question. What can you do? And if they can't go back and rewind the video that, Lenny, I just had named a bunch of things. You can do founders preferred shares, you can do all this stuff.

(01:48:10):
Just ask them about some of that stuff. And don't ask them, "Should I do it?" Ask them, "Tell me for each thing, can you give me the pros and cons of doing it?" And then they'll be like, "The pros are it might actually allow you to save your company's soul in a dire situation like this. The cons are investors might not like it too much." So sit there and be like, "Hmm, I'd like to do it. That sounds good. Thank you for advising me on the pros and cons. You work for me, you're my lawyer. I'd like to implement this thing."

(01:48:33):
And honestly, just pick a few of them to get started with. And over time, what you need to do, last piece of advice, every founder wants the one weird trick, this is how Lean Startup started too. People were like, "Can you just tell me the one weird trick to keep my company innovative forever?" It's like, there's no one weird trick. You want to do the right thing, it is a relentless and constant process. We need to build a structure of the company so that at every level, at every moment, every decision the company makes, somebody in the room making that decision feels like they have a fiduciary duty to do the right thing.

(01:49:06):
If that's the outcome you want, then this is going to be a perpetual process of constantly trying to find ways to create the alignment that is needed between the governance, the management structure, and the actual operations and culture of the company. Those are not separate things. They're actually only one thing, because it's just one being. You have a skeletal system, a muscular system, and a circulatory system, but those things are not separate. They work together to produce you, the being. And the same thing is true for these governance structures. So I think most founders are under-indexed, under-invested in that, and that's why we get to these horrible outcomes.

Lenny (01:49:38):
To give founders a little ammo in doing this, because as you said, investors are not going to be excited to sacrifice profits, employees may not be. Other companies that you can share that have done this and have implemented some of these things that are public? And if not, what confidence can you give founders to be like, "Many, many amazing companies have done this and it's actually not that hard"?

Eric Ries (01:49:58):
I don't like to name specific company names in venues like this, because then people always are like, "Well, but what about..." It's just, people like to do the whataboutism thing too much. And also I like to let companies speak for themselves. I have way too much confidential information, and I just have to be really careful about it. But nothing I'm describing here is hypothetical or unreal. I have witnessed this many, many, many times myself, and every story I tell, it's a real company that you can meet. They're real people that are out there.

(01:50:24):
And they're not always the loudest. The loud voices in our industry tend to be the ones that have something to sell, and these companies are just quietly doing the right thing. They don't really need to tell you about it because they're doing it. So there's an inverse proportion to the loudness and controversy and meanness of the thing, and how likely it is to be accurate, unfortunately.

(01:50:47):
What I will say is this is kind of an open secret in the world. So here's the thing that really surprised me. I thought the way that we build companies, like the standard corporate governance practices that we all do, must be well established in research. They must be well backed up. It must be the only and best way. But when you start studying these things, you find the exceptions really fast. I got into this because of Toyota, only because I called the thing Lean Startups, I wanted to borrow stuff from lean manufacturing, I studied Toyota.

(01:51:18):
Well, Toyota has a really weird corporate governance system, which is part of the old Japanese keiretsu system where the Toyota family is intertwined in its ownership with their supplier... By modern standards, it's a terrible rat's nest of disastrous corporate governance practices. But if you look at the literature, everybody who studies Toyota is like, "Well, the reason they're able to do this awesome stuff is because they have a philosophy of long-term thinking." I used to be like, "Well, how can you have a philosophy of long-term thinking if you're subject to quarterly returns?" And they'd be like, "Oh, they don't pay attention to that stuff because they have this other structure."

(01:51:48):
I'm like, "Oh, that's weird." So for a while I was like, "Oh, I guess it's just Toyota. We should build more Toyotas." But then there's all these family run companies out there where the family has produced this outcome. And then I started to meet foundation controlled companies. It's funny, OpenAI is the hottest new thing. OpenAI is a nonprofit foundation with a wholly owned for-profit subsidiary. I thought that was like, "Wow, OpenAI." That's actually very common. There are a lot of companies like that in the world. In certain European countries, it's actually 20 or 25% of the companies, public companies, are all structured that way. So it's actually totally normal.

(01:52:21):
And I did a talk for one of those companies a few years ago, and it blew my mind, because when I would go there and talk to them, I was talking to their CEO and their leadership and I was like, "Oh, what's it like to deal with the public markets and quarterly?" And they were like, "Well, we don't do that." I was like, "Oh, is that a major source of competitive disadvantage? You guys are a nonprofit." And they're like, "Are you kidding me? We crush our competitors, because they have to waste time on all that stuff. We don't waste time on it." I was like, "Oh."

(01:52:48):
Anyone ever heard of Warren Buffett? Why do his companies have a competitive... People are always like, "Oh, if you're giving up profit, your investors might not like it." I'm like, "These companies are world destroyers." What are we giving up? That's why I go start with the wrong definition of profit. We'll actually make a ton more money if we do it this way. And Amazon, for all of its flaws, the long-term thinking and the customer centricity, that's a major source of competitive advantage.

(01:53:14):
And I've worked with Amazon, I've worked with many of their competitors, and the funny part with competitors sitting there, they're like, "Oh man, Amazon's entering our market, and we need to do X, Y, Z." And I'm always like, "Do you think Amazon's doing X, Y, Z?" And they're like, "Oh no, they don't have to do that stuff. We have to do all this bullshit that our investors require and the activists and whatever." It's like, "Well, if you're competing against them and they don't have to do that crap, maybe you should try doing it their way." And they'd be like, "Oh, our investors wouldn't like that."

(01:53:36):
I was like, "Your investors want you to get your butt kicked by Amazon? Are you sure?" So I actually think... One of my realizations here is that the investor centric view of corporations, what's called the shareholder primacy theory of corporations, it's just wrong. It's wrong even if all you care about is maximizing returns for shareholders. Shareholders have this propensity to be the person who killed the goose that laid the golden egg, and it's been going on for 150 years. These case studies go back to the 19th century. This is an old, old, old idea.

(01:54:03):
And the solutions are actually all hidden in plain sight. So I was reading a research paper the other day that studied some of these, I think it was in Denmark, foundation controlled companies versus level matched public companies that are not foundation controlled. And they found the foundation controlled companies outperformed from a financial performance perspective.

(01:54:19):
And I was like, "How is this not the most incendiary result ever?" If this is true, so much of the indoctrination we've all received about what it means to be a for-profit company is just wrong, because those companies should be riddled with slowness and agency problems. I know the theory so well, I can tell you all the things that ought to be true. If those things are not true, what's up? And then I was like, "Wait a minute. I've been to these foundation controlled companies." I've been to Hershey, it's just controlled by, the founder donated the shares to a foundation that runs a school.

(01:54:51):
I've seen it with my own eyes, and even having seen it with my own eyes, it took me a while to realize, "Wait a minute, this is an open secret." So I was kind of horrified to find out that this is well-known, and yet was never offered to me. How come no one ever offered me the chance to build a company this way? And if you study even OpenAI or any of these companies that are now structured this way, it's always very idiosyncratic. They were on the standard path and then something happened that allowed them to do something unusual. And I was like, "Well, I don't understand why we have to wait for it to be idiosyncratic. Why don't we do it on purpose?"

(01:55:20):
And so I started to conceive of this idea, I call it the spiritual holding company, basically the thing at the center that is responsible for the soul of the overall ecosystem of companies, that is the enterprise. And you can see that obviously in the OpenAI example, if anyone has studied the anthropic long-term benefit trust, it is not coincidentally structured that way, but you see lots of examples where that's what's done.

(01:55:47):
And I started just pitching it to founders and said, "Look, let me try to show you what the benefit of this would be." And I've been amazed how many founders break down. I've had founders start crying with me where they're like, "This is what I always really wanted to do, but I never felt like... No one would talk to me about it. I didn't think it was possible. I want to put... There's a critical stakeholder I want to put at the center of everything I'm doing, or there's some reason why we're doing this, and I want that to be the thing." I was talking about a startup who's trying to get... And again, it's not like a Kumbaya thing, do-gooder whatever, virtue signaling bullshit. It's a competitive issue.

(01:56:20):
There's a company that is working to recruit academic researchers to leave their lab and come work for the startup full-time. It is one of the most difficult recruiting challenges there is, because it's not talking about kids out of some school. It's tenured professors who are leaving behind a very good life to go do this thing. They would only do it if they profoundly believed in your mission, but they're not naive.

(01:56:41):
And the first question every one of those people ask is, "How do I know this technology's not going to be used for evil? I have complete academic freedom. I'm going to give that up for you. Make me believe that this is the real thing." And if you're like, "Well, we believed in some manifesto and we're good people and we got money from some investor who's promised you he's going to be a good guy," that is not going to cut it.

(01:57:04):
And so they're having to do the whole thing, sit down with their lawyers. "What do I have to do to make this promise real for these people to make them want to join?" And I've just seen that over and over again. If we have the courage to do it, it can solve what are really today considered insoluble business problems. So it's cool, but I think it's scary for people to feel like they're doing something different. And so I think over time we'll get more of these stories on the record. There'll be more precedent for it. But I got to say, not to hearken back to Lean Startup too much, but I'll never forget sitting with early people who were like, "What's the proof? What big company is doing this?" And I'll be like, "Just wait. If you don't want the competitive advantage now, you can get it later."

(01:57:46):
And many of the people... Look back on who was profiled in those books. Many of the early Lean Startup adopters are very successful people today because they didn't feel like they had to wait. They were able to think for themselves and apply the principles in their own life. And I don't ask anyone to take this on faith. This is not like, "You have to do what I say." It's more just like, think for yourself. If this makes sense to you and no one can explain to you why it's a bad idea in ways that you find compelling, give yourself permission to at least try it and see what happens.

Lenny (01:58:13):
What a beautiful example of first principles thinking, looping back to our very first question. I think this is going to be the longest episode we've done yet, which is amazing. Also, I think it might be my new favorite episode, so that's a good conversation.

Eric Ries (01:58:13):
Thank you for saying so.

Lenny (01:58:27):
With that, we've reached our very exciting lightning round. We'll see what sort of lightning we find. Are you ready?

Eric Ries (01:58:34):
I'm ready.

Lenny (01:58:36):
What are two or three books you've recommended most to other people?

Eric Ries (01:58:40):
There's a book called "The Enlightened Capitalists" that is just a hundred years of people trying to fix this problem and failing, and the detailed case studies, and no founder should ever read it end-to-end. It's too depressing. But it's important to know some of these stories of founders that they're willing to talk about their regrets on their deathbed that they wish they had done differently. And for those who think there's one weird trick, this will help disabuse you of that notion, but it's helpful to understand that mistakes have been made before so that we can do better going forward.

(01:59:11):
On a happier note, I really want more people to read Ken Liu's "The Dandelion Dynasty". It's a silk punk fantasy series, but it's written by... He's a wonderful writer and it's like, if you want to see what real optimism about engineering and the ability of engineers to change the world, but transformed into a totally different environment, it's just such a great read. The audiobook is really good also, and I've been kind of plugging that lately.

(01:59:38):
And then if you want just something that's pure fun, it's not really the season for a summer read, but also a really good audiobook is the Murderbot Diaries by Martha Wells. She's just such a great writer, and I know it's a very frivolous thing on the surface, but there's actually a lot in there, and I won't ruin it for... Nothing I would say would be a spoiler, but there's actually a surprising amount of depth for what is really just a fun action adventure kind of read. I can't wait. I hope it is someday made into a movie. If they do it justice, it'll be really terrific.

Lenny (02:00:12):
What's a favorite recent movie or TV show?

Eric Ries (02:00:15):
I really have been try... I don't have time anymore. I have young kids, so my media consumption days are extremely, extremely limited. But I've been kind forcing myself to slog through a bunch of the Disney+ Star Wars series, which have been almost universally disappointing with the exception of Andor. For those that have not seen Andor, it really is very good. Not good for a Disney+ Star Wars show, it's actually good for television, which I couldn't believe when I saw the premise of it.

Lenny (02:00:41):
Also a huge fan of Andor, and I've recommended it many times. And I feel like now every new Star Wars series, I'm just comparing it to that bar, and it's not...

Eric Ries (02:00:47):
That's the problem. It's like, if they would just make that creative team or they would just let them make shows, it would be okay. It would redeem all the rest of their failures.

Lenny (02:00:56):
Yeah, or just keep making sequels. I'll watch them all. What is a favorite interview question you like to ask people when you're interviewing them?

Eric Ries (02:01:03):
My favorite interview question of all time is to ask people to describe a best practice that they learned in their career and to really get into it. Like, "Tell me the story of how you learned the best practice," you just let them go on, and then you'd be like, "Great. Tell me a situation where that best practice would not be applicable." Most people can't do it.

Lenny (02:01:23):
So interesting. What is a favorite product you've recently discovered that you really like? Whether it's an app or something physical.

Eric Ries (02:01:31):
I was just singing the praises of a product to a friend. It's the most boring and stupid product ever. It's just a humidifier. And you'd be like, "Okay, how can you mess up a humidifier?" But actually, it's very difficult to get it exactly right. There's all these little attention to detail craft. We were talking about craft, it was on my mind. It's a very humble appliance, and it's actually, I've gone through 10 different models trying to find something that doesn't drive me...

(02:01:58):
Because you want to run it at night, but if it has a light and it's on all night, that's really annoying. If it makes a noise, that's no good. There's all these things where you're like, "Boy, if anyone had used the jobs to be done framework for one minute on what this physical device is supposed to be, this is the product they would've built." And I can't believe... It's so interesting in modern capitalism, there's so many categories where there isn't a product like that, or there's just one. You're like, "How come every product is not like that?" And the forces we've been talking about are the reason why it's funny to see it represented in such a humble object.

Lenny (02:02:30):
What is the actual humidifier that you found?

Eric Ries (02:02:33):
It's the Levoit 300S ultrasonic humidifier. Lavoit 300S. It's just a really well-made $60 appliance. It's nothing special.

Lenny (02:02:45):
They're about to see a spike in sales. Go Lavoit.

Eric Ries (02:02:49):
Somewhere, somehow, there was a product management meeting where they talked about how to make this thing, and I can picture it right now. Somebody was like, "Look, the way we make these things sucks. Can you please let me just put the thing that's normally on the bottom, let me put it on the top and let me put this in there and put that in there?" And someone was like, "Who cares? That's going to add 3 cents to the cost and reduce our margins by whatever." And someone was like, "No, really think we should do it right." So we like to reward people like that.

Lenny (02:03:15):
Yeah, and this is going to take us off-topic potentially, but I've been thinking more recently about how most often the best stuff comes from just one person's singular control over how to do that thing over and over and over.

Eric Ries (02:03:27):
Yeah. There's actually, if you study Toyota production system, they have this job that's called the chief engineer. I wish more founders knew about this, because when you become large, it's important to be able to empower the founders that work for you and not just only see yourself as the founder. So the chief engineer is the person with the moral authority over an entire line, like a car from start to finish.

(02:03:47):
And I don't know if this is still true, but back in the days when people were writing a lot about Toyota, inside the company, the car is not called a Toyota Camry. It is called "so-and-so san's car". And the thing about the chief engineer is they have no reports. Nobody works for them, they just have what's called the big room, if you've studied that whole thing. There's a place where they are, and they have a small staff, but they have the design and the car, and as the number of people who work on a car, it swells up and then it comes down. Because you have the design phase and then you go into production, and eventually the number of people goes back down.

(02:04:21):
The most important thing you have to do in a product is make trade-off decisions. And if you just let people make their own trade-off decisions, it's totally different. It's really difficult to have any kind of coherent design like thrust. So the idea is like, "This is the person who makes those." If there's a fight between two departments about how much the thing should cost or if someone asks a question, like, "Listen, I can improve the aerodynamics of the thing by this much, but it will cost this much, and it will mean we have to take this button and turn it from metal to plastic," you have someone who can actually be like, "No, that button has to be metal. We made a promise that this is going to be." Or "Button doesn't matter." You just need someone who knows that thing. It has to be that you can keep it in somebody's head. So yeah, called the chief engineer.

Lenny (02:05:00):
Just when I thought we were done with golden nuggets in this episode. That is so interesting. I think that makes so much sense, and I also agree that should happen more often at companies. Wow.

Eric Ries (02:05:09):
Yeah, it's very much missing structures.

Lenny (02:05:12):
[inaudible 02:05:12] All right, two more questions. Do you have a favorite life motto that you like to repeat yourself, share with folks, something that you come back to often that helps you do the right sorts of things?

Eric Ries (02:05:22):
Well, I won't get into the whole explanation. The motto is that nothing real can be threatened, and nothing unreal exists.

Lenny (02:05:30):
We'll have a whole other episode just unpacking that. Amazing. Final question, you invented a lot of terms, a lot of concepts. Is there one that you don't think caught fire and that kind of spread as much as you thought it should?

Eric Ries (02:05:44):
Oh, yeah. Yeah. I got tons. I got tons, man. The cutting room floor is full of so many things. I went through a really extended period of trying to use... But it was before Lean Startup, I tried to use cell biology as the metaphor for a startup. It should have been... I wanted something more biological and less mechanical. I never got one person to understand what I was talking about. It did not work.

(02:06:06):
But I'll tell you the one that surprised me the most. This is such a small one, but I really thought that this would take off and people would be way into it. I did a lot of writing about it and then I couldn't get it to stick. So everyone knows viral loops. There's also engagement loops, and I was like, "Oh, just like we have viral loops, which is about how products grow, we should also have engagement loops, which is about how people stick."

(02:06:28):
And there's a science to stickiness, and people have written about that from the point of view. "How do you make your product more addictive?" But that's not really what this is about. This is about being able to model the dynamics of how customers flow through. And a version of that is in the Lean Startup. We have what I call the law of sustainable growth, which is a situation where new customers come as a natural side effect of the actions of past customers.

(02:06:52):
And so that is obviously true of the viral loop. Everyone knows the paid engine of acquisition where you have, whether your marginal profit per customer drives your ability to invest in customer acquisition. But there's also what I call the sticky engine of growth, which is kind of like the vestige of this idea that made it into the Lean Startup. But I actually think that that's a whole really interesting thing where, if you think about, the way to think about it is if someone is living their life, having a happy time, then for some reason they use your product, why did they use your product? What made them come back to your product?

(02:07:24):
And it's actually, there's not that many things it can be. It might be because you gave them a synthetic notification like, "Hey, please come back to my product," and they did. It could be because some kind of organic notification took place, that is, like, they got an email from a friend on your platform that was like, they got a notification that was driven by... One of the most successful customer emails of all time is PayPal's, "You've got money, click here to take the money." It has a very high click-through rate, maybe second only to Facebook, "Someone has tagged you in a photo, but we're not going to tell you which photo it was. So you better click, right?"

(02:07:58):
So something happened. If it's not one of those two things, then it's got to be because of positioning. Something in your brain on its own told you to use that product. Why did you go start playing World of Warcraft? Did you have to get a notification to remind you? You like playing it, no one had to tell you. You like you doing it, or something happened in your life that made you need, you're hungry so you went to the thing to get the food.

(02:08:25):
Because those are the only ways by which people come back to a product, those all can be measured, studied, and understood to the same level of precision as we have with viral loops. I can't for the life of me understand why viral loops gets all the attention and no one is remotely interested in the science of engagement. I was a time when I thought engagement loops would make me way more famous than Lean Startup ever would. I was very, very wrong.

Lenny (02:08:49):
This also reminds me that you also, I think, were the first person to talk about growth as loops and these specific loops and a growth engine, which now a lot of people talk about.

Eric Ries (02:08:57):
Yeah, [inaudible 02:08:57] growth is mine, yeah.

Lenny (02:08:59):
Yeah. So wow, we discovered another one. I imagine there's many more. Eric, this was incredible. I definitely think this is my new favorite episode. Thank you so much for being here.

(02:09:07):
Two final questions. Where can folks find you a line if they want to reach out potentially? And then how can listeners be useful to you?

Eric Ries (02:09:13):
You still find me at theleanstartup.com. I'm @ericries, E-R-I-C-R-I-E-S, on all the usual places, although I really don't do a lot of social anymore, so joining my mailing list at theleanstartup.com is probably the best way to keep track of the major things that I do in my life. And then, yeah, I do try to get on some social from sometimes to make some announcements. And if people want to reach out, I'm just eric@theleanstartup.com.

Lenny (02:09:35):
How can listeners be useful to you?

Eric Ries (02:09:37):
Oh, that's really sweet. Honestly, people need to just take these ideas and do something with them, and then you learn something from it, and then tell me what happens. That's all I want in exchange. Just tell me what happened. Even if you... The people I've learned the most from are the people that tried to use my ideas, thought they were the stupidest thing they ever heard of and doesn't work and they're mad. Tell me, I want to know all about it, because really my job, the way I see myself is, my job is just to try to understand these things. I just want to know the truth. If I'm wrong... I don't like being wrong, I'm as attached to my ideas as anybody else, but I try really hard to find out what is true. So if you discover something new, please tell me. That's all I ask, is let me know.

(02:10:18):
And if you don't try, then how are you ever going to discover anything new? Every day I meet people who've just heard about Lean Startup for the first time. For me, it's so old... Every day people read the book for the first time and they have a question about... So if that's where you're at and you just discovered it, excellent. I wrote a couple books. You can go read them, please [inaudible 02:10:38] for those ideas. If you're someone who's jaded and you're like, "Oh, I'm so tired of hearing about Lean Startup," I mentioned a few new ideas in this conversation. Go try one of those. And even if it doesn't work, or if it does work, or even the people I've learned a lot from are people who, they tried it, and in the process of it not working, they had another even better idea, and then they went and did that.

(02:10:59):
Well, go do that. All I ask is you tell me what happened. I want to learn from people who are making this happen. And I hope as we come together as a, not just as a Lean Startup movement, but as a startup movement, as a group of people who fundamentally believe that we can make the world a better place through the building of organizations from scratch. We have that as our belief, that the future is not scary. Newness is not something to be feared or opposed, but there is a responsible, methodical, value-creating way to make positive change in the world. That's an ethos that is not universally shared, and that if someone's listening to your podcast, my assumption is you're in our tribe. So we have a collective responsibility to think about, "What do we stand for beyond just my company, my founder, my story, but what do we as a group? What are our shared and collective values, and how do we make those manifest in the world?"

(02:11:53):
I'll leave you with one last idea. We collectively have so much power it's crazy. Because the system the way it works now, what I've learned about our current, what they call late-stage capitalism, financialized engine of capitalism, is that it is value-destroying in so many ways. And although markets discipline companies and they require them to create more value than is destroyed to stay alive, new companies, the ones that we've built, are so valuable.

(02:12:21):
The core insight that makes the thing is so valuable that the being that you've built can withstand so much damage before it collapses. And yet, if you look at the average tenure of companies in public companies, you just look at average CEO tenure, all the metrics you look at are really grim here. We're destroying companies faster than we create them, such as that the total net number of public companies in America is down more than half from a peak that was in our lifetime. It's not that long ago. What's going on? Well, the system requires a steady supply of fresh meat to replenish that which it destroys.

(02:12:54):
And if you're listening to this podcast, you probably are one of the peddlers. So you're the manufacturer of the thing that the system requires for its basic survival. And so as a matter of fact, we as a group, we get to set the terms by which this is done. And so if we want to stop selling our beings, our babies, our children for money, we don't have to do that. If we want them to have a certain ethos themselves in the world, we want them to be trustworthy counterparties and do something for the people we care about, we can insist that that is the precondition upon which we will give our everything to.

(02:13:26):
And so I don't want to say that I know all the answers or that my values are the ones that should win out, but I do think that we do have a certain shared set of values that we ought to be more ardent in defending. And I hope your listeners will take that to heart.

Lenny (02:13:40):
A beautiful and empowering way to end this. Eric Ries, thank you so much for being here.

Eric Ries (02:13:46):
My pleasure.

Lenny (02:13:47):
Bye, everyone.

(02:13:50):
Thank you so much for listening. If you found this valuable, you can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. Also, please consider giving us a rating or leaving a review, as that really helps other listeners find the podcast. You can find all past episodes or learn more about the show at lennyspodcast.com. See you in the next episode.