Eric Ries, author of The Lean Startup and the newly released Incorruptible, joins Beyond the Prompt to argue that most founders misunderstand the most important decision they make: governance. As AI raises the stakes around power, trust, and control, Eric explains why companies drift from their original mission, why founders so often lose control of what they build, and why governance may be the highest leverage decision founders ignore.
Eric Ries, author of The Lean Startup and the newly released Incorruptible, joins Beyond the Prompt to explore why most companies drift from their original mission over time. The conversation dives into governance, shareholder primacy, Anthropic’s unusual structure, and why AI makes these questions more important than ever.
Eric Ries argues that most companies are built on a contradiction. Founders say they care about customers and impact, but legally, the company is structured to serve shareholders first. Over time, that mismatch tends to win.
The conversation explores what that looks like in practice, why it is so hard to fix, and how a small number of companies have tried to design around it from the beginning. Eric reflects on advising Anthropic in its earliest days and what it actually takes to protect a mission as a company scales.
A big part of the discussion is how governance gets treated as a legal formality when it is really a design problem. In the age of AI, Eric argues that the principles baked into a company’s structure early on may determine whether it stays true to its mission or slowly drifts away from it.
Key Takeaways:
Eric's new book:
Amazon: Incorruptible
Website: incorruptible.co
Socials:
X: x.com/ericries
LinkedIn: linkedin.com/ericries
The Lean Startup: theleanstartup.com
00:00 Mission vs Shareholder Value
00:32 Meet Eric Ries
01:37 Why Anthropic Needed Governance
06:47 The Long-Term Benefit Trust
10:00 Why Great Companies Drift
13:47 From Lean Startup to Incorruptible
18:14 Is It Too Late To Fix?
23:06 Governance As A Superpower
25:48 The Lies Founders Tell Themselves
28:49 The Rise Of Shareholder Primacy
33:09 The Unaccountability Machine
35:51 Profit vs Human Flourishing
37:24 The ROI Trap
38:26 The H-E-B Loyalty Story
41:14 Principles Beyond Metrics
42:54 AI, Thick Data, And Human Judgment
46:43 The Debrief
[00:00:00] Eric Ries: You may have a mission statement that says, "We're gonna, you know, build a high-quality product," but your legal charter says you're gonna maximize shareholder value.
And this disconnect between what you claim your mission is and what your purpose actually is means you are lying to your customers, to your employees, to everybody. You're probably even lying to yourself.
Founders who are naive about this often wind up feeling betrayed later, but it's their signature on the company's death warrant. They signed it the first day, but they didn't even read it
Hey everybody, I'm Eric Ries. Most people know me as the author of The Lean Startup, but now hopefully you will know me as the author of the upcoming Incorruptible, launching on May 26th in the United States, May 28th everywhere else. I'm really excited to talk about a topic that may seem a little bit obscure, it's called governance, but actually has shaped really profoundly all of the leading AI labs. I played a bit part in that story, which I look forward to talking about, and most importantly is the tool, the power, superpower we can use to prevent companies from turning bad, to prevent founders from losing control of their creations.
[00:01:07] Henrik Werdelin: Maybe we should begin with this question since this is an AI podcast. You done work with Anthropic. When Anthropic was fairly small, why do you think it was important for the founder team to get your specific, um, point of view in context of the, the new material that you're interested in?
[00:01:26] Eric Ries: Yeah. Oh, happy to talk about that. And, and to, for, you know, for the record, like I played only a bit part in the story, so I'm not trying to take credit for their incredible success.
They'll have an epic run for all time. But you gotta remember that now people see them as world beaters, but I knew them when they were just first time technical founders. They're trying to figure out what to do after they had left OpenAI. So it was a ra- a very much an open question what kind of company it should be or even if they should start a company or some other kind of entity.
Remember they had, they had joined the nonprofit lab, OpenAI, thinking that that would be the place to work on this technology to advance its benefit to all humanity and to deploy it safely. So that really was the, the question that we were talking about in those days. Like, what can you do to keep control of this technology to prevent it from being misused?
And I give them the credit, not me, okay? This is to their credit that they were able to foresee that if this technology worked, it would be worth trillions and it would be highly desirable to big companies, to nation states, to like every geopolitical actor of significance would wanna have their hands on the technology and shape it to their own ends.
So the question was, how do you structure a company to try and prevent that outcome? While at the same time they had this question of like, how do we build a company that's coherent? How do we make sure that everyone who's involved is a deep believer in the mission, so that we never have people around the table who believe in anything else?
So we all understand. And it wasn't that they were against making money. They knew they were gonna make a lot of money if it worked. The question was, how can we make sure that everyone who's in the company, on the board, on the cap table, at every possible configuration, wants to make money by achieving the mission rather than money by any means necessary?
So those were the questions that were swirling around at that time.
[00:03:16] Jeremy Utley: And how'd you resolve some of those things?
[00:03:18] Eric Ries: Well, again, the credit to them, not to me, but I walked them through the problems with the conventional corporate structures. Um, all the different-- I remember having like a, a kind of a-- I felt like I was being like a spooky ghost stories kind of, you know, meeting where I'm like, "Look, let me walk you through all the ways that even well-intentioned founders get defeated here."
You think you have completely aligned investors, but actually somebody blows up or turns out to be someone you didn't, you know, didn't, you didn't know. I had no idea, of course, that it would be FTX, it would be the thing that was about to blow up. But I foresaw that possibility, that kind of thing happening 'cause I lived through that a bunch of times.
We talked about what happens if, you know, you get into a situation where the board of directors feels like it-- they're in their fiduciary duty to do something profit maximizing that you think is morally abhorrent. What recourse do you have? And we talked about the tools that someone who wants to foment a civil war in your ranks and who wants to take control of the company, like what are the tools that they have at their disposal?
What are the vectors of that kind of attack? So we could think about solutions for each of them. To their great credit, first of all, they took this stuff seriously when most founders' eyes glaze over and just say, "Ah, corporate governance, who cares?" And they, like every other founder, surrounded by lots of advisors and lawyers and bankers and all kinds of people, who tell you not to worry about it, that you could always figure it out later, that, you know, don't be premature.
And, and I've had many founders who, after talking to me, go talk to their advisors, and the advisors say, "Man, Eric is such a downer." really believed in you and your vision, he wouldn't talk like that. This isn't gonna happen to you. You're the exception. So they did not sit there being like, "Well, we're the exception.
We're gonna be fine." They really did the work, the homework, to figure out how to make it, how to make it work. And I especially give them credit because dual class kind of emperor for life governance was not on the table at any time, because they understood that that was just as dangerous here. Maybe not just as dangerous, maybe slightly less dangerous, but still pretty dangerous because that would require them personally to bear the weight of this momentous decision.
They wanted something stronger than that, something that would endure even if they were to pass away or, you know, not, not be there anymore. So yeah, we did a bunch of things in those days to, to figure out how to recruit the right people, how to set the tone culturally, internally, how to get the right investors bought in, how to, you know, of course, I thought it was a public benefit corp, of course, and it eventually created this thing called the Long Term Benefit Trust, a two-tier, two-entity structure where you have outside trustees who have the ability to appoint directors to the for-profit board
[00:05:47] Jeremy Utley: For folks who aren't familiar with the governance structure, and some people I'm sure right now in our audience are going, "Wait, governance?"
Uh , y- you know, usually we're like hands on keyboard or mouth to mic- Yeah, yeah, yeah. Sorry ... this is a little bit different. N- no, no, it's great. It's amazing. It's perfect, and I, I do want to get to... I wanna hear a little bit of the Eric backstory, too. You know, from call it, you know, MVPs, which are, you know, very in the weeds, to governance, which is kind of at the highest level.
But just play through on the Anthropic example, especially for folks who aren't familiar with what did they decide, and is it advantageous in your perspective, and why so?
[00:06:19] Eric Ries: Oh, yeah. Yeah, so for most people listening, yeah, this doesn't sound like hands on keyboard. Sounds like something very abstract, but wrong.
Actually, this is the most hands-on-keyboard hand. This is the most consequential decision you will ever make if you're building a company. And not to exaggerate, I'm not exaggerating here, if you don't get this right, no other decision you make with your keyboard will matter even one iota in the future because you won't be there.
You're gonna be gone, and someone else will be making the decision, and they will be happy to undo what I believe- So,
[00:06:44] Jeremy Utley: but what i- what is the- Yeah ... what is the structure that Anthropic
[00:06:47] Eric Ries: kind of went going with? Yeah, so let me walk you through exactly how it works. Yeah. So this i- for, for most of your listeners this is gonna sound new.
They'll be like, "Wow, this is a bold new idea." No, this idea is very old, actually. Just to give you one example, the German optics company Zeiss, who makes most people's, uh, optical lenses in the world, they had this structure in like 1887. So it's not new. It's just been kind of forgotten, especially among tech, you know, new, new-fangled companies.
Because our legal advisors and our bankers and the kind of what I call the governance class of our society has just decided this is old-fashioned and no good. So a massive credit to Anthropic for taking this seriously. Here's how it works. In a two-tiered structure, you have the for-profit company. The profit engine is one entity, and you have a separate what is sometimes called a mission lock vehicle.
A separate entity who has the responsibility for making sure the engine stays on track. The mission is never lost. That's its formal responsibility. So we've debated lots of different ways that this can be done. You can do it with an employee trust. You can do it with a nonprofit foundation. Anthropic picked something that under the law is called a perpetual purpose trust Which is a legal entity that doesn't do anything else but guard the company's purpose.
Like, it has no other responsibility. And they put people on this trust who are true believers in the cause. The trustees are not compensated in Anthropic stock. They do not have a financial incentive to see that the company grow gigantic or whatever. They have the sole responsibility to look after the safety mission.
And for a lot of people, that sounds frightening because they're like, "Wait a minute, wouldn't you want everybody to be aligned with a financial outcome?" But it turns out that there's a lot of good academic research that this series of checks and balances is very helpful. In the same way that having, you know, an absolute monarchy is historically unstable compared to a multi-branch democracy where you can have one branch check the other.
So, um, that's, that's the structure. So, so Anthropic is itself a public benefit corp, meaning it has a legal mission to advance this technology for the benefit of humanity and to do it in a safe way. So if you were to sue Anthropic and say that they're doing something that's not profit-maximizing, I'm a shareholder, could win that lawsuit.
The board has, it's insulated. And they did it in a very elegant way, I think, which was, because this was new to the, to them. It was new to their investors. It wasn't something that everyone understood right away. First of all They built this structure over the course of two years. So the right to do it was written into all their legal doc.
I remember reviewing term sheets in the early days to make sure that the, the investors did not have a veto over the structure. Then, um, in the Series C, if I remember right, they established what they call the long-term benefit trust and appointed the first trustees, and the rules of the trust were such that over time, its control increases as Anthropic passes certain commercial milestones.
So it started off, I think, being able to appoint one of the directors to the board, but eventually will be able to appoint a majority of the directors to the for-profit board. That's how it works.
[00:09:41] Henrik Werdelin: And just as you explain this, 'cause obviously now with AI and with these foundational models, these things seem to be like very, you know, life or death, kinda like things we have to figure out.
But I think, you know, I'm a big fan of all your books, but also the new one, because I think, you know, just much more down to earth. What you articulate in that book, which is not as foundational as I think, you know, an AI model, is that you have all these companies that used to kind of be great, and then something happened to them- Mm-hmm
and then they just turn out not to be what you thought they were. And I think- Yeah ... from a user, most people understand that from like, "Hey, we used to have a relationship. I bought your stuff," and you basically had this underlying promise, and then at one point you start to break this promise, and now I don't know what to do.
You, you
[00:10:28] Jeremy Utley: changed.
[00:10:29] Henrik Werdelin: And I think as a founder- Yeah ... you sometimes see your own company turn against you a little bit, and then all the things that you trimmed, it would be, it's suddenly not becoming and it's turning into something else. And so maybe if you can also just talk a little bit about like from the person who of course obviously popularized MVPs and SMALL, like why is this important not just for foundational models, but also for the everyday entrepreneur who sits and listens to this?
[00:10:54] Eric Ries: Yeah, yeah. You, you said it yourself, which is we've all had the experience of being betrayed as a customer. Many of us have had the experience of being betrayed as an employee or as an investor, too. Um, companies lose their way. They lose the spark that made them worth investing in in the first place. Um, we sometimes call it mission drift.
We sometimes call it bureaucracy. We have, we have a lot of different words for it, but what they all have in common is that a company that you used to be able to trust is no longer trustworthy, and over time, companies go from being value-creating to value-extractive, meaning that they are trying to make money by whatever means necessary, and they often figure out that they can make a lot of money, at least in the short term, by betraying their promises.
Jim Sinegal, the founder of Costco, called this the business equivalent of taking heroin. He said that if they took a dollar bottle of ketchup at Costco and charged you a dollar and three cents, you wouldn't notice. Nobody would notice. In fact, they could do that across the board and raise prices on every item in the store by three cents and nobody would notice.
If they did that, it would double their net income. That's a lot of money. Costco's a $400 billion public company. So why don't they do it? Free money. Why not do it? Because he said, "If you do it once, you're gonna have to do it again." Raising prices is the easy way. They prefer to take the harder road of sticking to their principles, knowing that that is what wins them the trust long term of customers, employees, and everybody else.
So that trustworthiness they conceive as an asset, and I think this is really the important move for founders. If you understand that trustworthiness is an asset, you won't be so surprised that someone will try to steal it from you Of course they will. The more successful an organization is, the more valuable it becomes as a target for people to wanna control for their own ends.
And so if you're going around telling people that you have a mission, a mission statement, and it could be a lofty mission statement like Anthropic has to save humanity, or it could be a very humble mission like Costco's just about low prices, other companies are just about quality, just wanna make a quality product.
I wanna make a product that helps people's health and leaves them a little bit happier or bring a little beauty into their lives. You tell me what your mission is. If it's anything other than making money by any means necessary, you're already a business revolutionary. You already have a huge problem, which is that we live in the era of what's called shareholder primacy, where you may have a mission statement that says, "We're gonna, you know, build a high-quality product," but your legal charter says you're gonna maximize shareholder value.
And this disconnect between what you claim your mission is and what your purpose actually is means you are lying to your customers, to your employees, to everybody. You're probably even lying to yourself. That's not what the company stands for. And I think founders who are naive about this often wind up feeling betrayed later, but it's their signature on the company's death warrant.
They signed it the first day, but they didn't even read it 'cause their lawyers told them, "This is the good documents. Don't
[00:13:47] Henrik Werdelin: worry." Is there anything-- You obviously clearly have gone, you know, like on a journey from the early days of The Lean Startup and to this. Yeah, I've seen some things. Right. Um, how much was this just becoming more mature and having seen through the different phases of it?
How much, uh, if any, has this to do with AI suddenly entering the scene? Like, how would you contextualize your, your journey from, from there to here?
[00:14:16] Eric Ries: Sure, sure. Yeah, I learned a lot about this just from being around a lot of companies. But in the early-- I've been doing Lean Startup for more than fifteen years.
Book came out in twenty eleven, so it's been a long time, and I've probably helped hundreds, thousands of people start companies. Like, like I've been around a lot of companies. So I've seen a lot of people make a lot of money. I've personally helped people make literally billions of dollars. Um, I'm very proud of them.
I'm very happy that they're so wealthy. That's great. But I've also really seen the dark side of this, um, and this feeling that you lost control of your company either because you got fired or because, um, it ceased to reflect the values that you thought it did. Like, that is a really common pattern. And just like everybody else, for the first I don't know however many years of my career, every time that happened, I took it personally When it happened to me, and it has, I thought I failed as a leader.
When it happened to my friends, they would say to me, "I didn't trust the right people. I should've had different people. Um, I should've done this, I should've done that." We see it as a personal drama. I talked to John Mackey, uh, founder of Whole Foods, and he's like, "Yeah, the greedy bastards, they won." You know, like we personalize it.
It's this person did this wrong thing to me. I was inadequate. The press loves that story. Greedy investors versus naive founder. Who will win? Fight. Right? So unfortunately, when we look at the problem that way, we miss the systemic forces that are causing it to happen over and over again. And the question that haunted me, the mystery that is kind of at the heart of this book is Why, why do investors do this?
So many of the companies that I have been involved in and that I profile in the book, the... You know, for example, investors are keen to get rid of a founder. We have, really have a strong culture of accountability for founders. They make a mistake, they need to be fired. Whether they actually made a mistake or not seems to be, you know, besides the point.
But if they do, they, they get them out of there. A lot of companies after the founder is removed never innovate ever again. Like literally never. Like Polaroid, the famous, uh, R&D company that now all people only remember the instant camera, but they used to be, used to be one of the biggest R&D organizations in the US.
Tragic.
[00:16:16] Jeremy Utley: Tragic.
[00:16:17] Eric Ries: Steve Jobs idolized Edwin Land, and when he was fired, Steve Jobs literally called it the dumbest thing he'd ever heard of. Yet after he was fired, Polaroid never commercialized anything ever again. Not one invention. So I think we kind of like, we're looking at these personal forces. We're like, "Well, but why?
What is the incentive? Why would they do this?" It's like the parable... Why have, why have people been telling the, the Aesop's fable about the man who killed the goose that laid the golden egg? Why have people, why have we been telling that story for thousands of years? Why do people find it so compelling?
Because there's like a bug in human psychology. We can't help ourselves. We do this all the time. But capitalism was supposed to fix it by having a competitive marketplace that selects for value creation, except that's not what we have. You could build a competitive marketplace that selects for value creation.
That is possible, but we don't live in that world. We live in a world that is very different. So as I started to become aware of these problems, I went searching for solutions. I tried to build a solution myself called The Long Term Stock Exchange. I devoted a lot of years of my life to trying to fix this problem, and through the course of building that, I learned a lot about corporate governance.
I learned a lot about how financial systems actually work. I got to see the, the belly of the beast. You know, if you know the, the book Heart of Darkness, I kind of took that, that journey down the river, okay? I've been there. I, I'm here to report how it's going. Answer: spoiler alert, it's not going very well.
[00:17:39] Jeremy Utley: Very few people make it out, so thank
[00:17:41] Eric Ries: you. Yeah. I'm actually... Like I, and listen, I can't tell you how many times someone pulled me aside and said, "Listen, if you do this, you will never work in this town again." Which for most people who work on corporate governance would be a corp- like a literally a career death sentence that's being threatened.
And of course, I was like, "Well, I don't wanna work in this town, so that's, that's fine." Like no problem. It's not very well. But you have to understand, all the people that are successful in this career path of governance stuff, every single one of them has been threatened in this exact same way and had to say yes as a condition of their employment.
That's why we have such a monoculture in that world.
[00:18:14] Jeremy Utley: Can I ask just- Yeah, sure ... maybe f- you know, for a friend. Uh, say a friend who's realized that their company has gotten away from them, and they founded this company. There's, there's drift, as you say. In your book, you talk a lot about the person just has to leave, the person just has to start over.
Is there something that you can do while you're still in, or, or is governance an a priori condition that you actually have to create before anything else?
[00:18:40] Eric Ries: Yeah. Let me answer your question with a metaphor. I've been trying to figure out how to answer this question in a way that doesn't leave people depressed.
So I'm, here's, I mean, here's my attempt, okay? Imagine you meet an Olympic athlete, and you ask the Olympic athlete, like, "What's the key to your success?" And they're like, "Well, obviously, I spent a lot of time studying the luge. But far before I got to the luge, I had to learn to eat right and go to the gym."
And so then you're like, "Oh, got it. If I wanna be an Olympic athlete, after I'm an Olympic athlete, I'll have to go to the gym and eat right." He's gonna be like, "No, man You have to do that first. First, you eat right and you go to the gym, and you say, "Oh, I have to do that from a young age?" He's like, "That would definitely be helpful.
So it's too late for me. Like, is there something I can do? I guess I can just eat as much Doritos as I want." And you're like... He'd be like, "No, man. I can't promise you that you can become an Olympic athlete, but I know for sure if you eat Doritos, it, it ain't happening. Okay? You gotta get in the gym." And you're like, "Okay, okay.
Got it, got it. Well, I went to the gym one time. Now am I an Olympic athlete now?" It's like, "No. You gotta do it every day for your whole life. That's how it works." So like, and you're like, "Oh, if I do it, will I be guaranteed some outcome?" No, man, there are no guarantees. The great companies are our Olympic athletes, okay?
And going to the gym and eating right is the two dimensions of what I call the blueprint in this book. One is the internal alignment dimension. That's kind of like eating right, right? That's like the nutrients that make up the organization are the right ones. And go to the gym, this is the s- the making the organization structurally strong, the integrity stuff, the structural integrity of the company.
Now, is it too late for your, sorry, for your friend? I don't know. What I do know is that it always is gonna be harder later. So, you know, the, the proverb- Yeah ... is the best time to plant a tree is 40 years ago, and the next best time is today. So h- so here's what we wanna do if we wanna get back on track.
And, and you know, you read the founder mode discourse. It has a lot of good tips in here to just like blow the, blow everything up and fire everybody and do... You could do that, but that by itself will not do anything other than make the thing more malleable. You still have to figure out what imprint to put on it.
So for example, one of the really important leadership principles of the book is called Harder is Easier. For companies that are really aligned, have a mission that is aligned to human flourishing and a set of values that are committed to principle decision-making, they get these incredible benefits, like superpowers almost.
They get much higher levels of alignment. They attract better talent. They're able to raise money more effectively. They have lower partnership costs. There's like a ton of, of evidence that this happens. So companies that drift lose these powers, and companies that restore restore them. Like, you can get them back.
So that would be the first thing would be to try to figure out, like is there a pathway to change the leadership style of the company to get back on track to be more committed to a mission, to make sure that there's a, a, a principle decision-making framework? And, and I have s- I have tips in the book for, for how you do that.
On the governance side, you know, if it's too late, it's too late. But again, often in... if the thing is drifting, investors are dissatisfied too, and sometimes there's the opportunity to come back and say, "Listen, I think we can revitalize this, but in order to do that, we have to change the structure." Most conventional companies can change their structure with a majority vote of investors, sometimes just with a majority vote of the board.
Like, the, the fact that that seems impossible to people just tells you a lot about what they think of their own investors. But a lot of founders don't even try, and I think it's worth at least sitting down and having the conversation to say, "Look, I think there's- Yeah ... there's a way forward here, and here's the evidence, and here's why I think it's, I think it's good."
The other trick, this is a bit of a hack is for whatever reason, I guess because we live in the era of shareholder primacy, I guess that is the reason why, people are very deferential to a term sheet So every once in a while you'll have the opportunity to bring a new investor to the table and say, "Oh, it's a precondition of getting this money from this investor that we change our governance."
They're being real a- about it. Sorry. Just by tying capital to it, sometimes you can get unbelievable changes to be made. Now the biggest problem with that is the investor in question has their own lawyers, and I've actually...
I did this once where the investor who's being brought in specifically to do this, their own in- their own lawyers were like, "Well, I don't know. This is non-standard. Shouldn't we be doing..." I was like, "That's why you're here. We- th- that's why you're lawyers." They gotta undermine it. Yeah. You talk to the lawyers, you gotta watch out.
Lawyers have a really strong conditioning to make everything part of the business monoculture, 'cause that's important for their career. See, they don't wanna have the reputation of having done something funky and anti-investor. That might not be good for them, so you gotta be careful with that. But yeah, that, that's, that can be very effective.
[00:23:07] Jeremy Utley: I'd love to get your thoughts on this. So, uh, Henrik and I have a long-term mutual collaborator named Nicholas. And, uh, Nicholas and Henrik are building a business called Autos right now, which is helping a bunch of folks become entrepreneurs. Years ago, Nicholas and I wro- were kind of obsessed with this question of how do you help companies start creating capacity to innovate?
And we actually had struck upon governance as well. Yeah. And we had this idea around what we called an exploration committee that just like a, you know, a board has an audit committee- Oh,
[00:23:42] Eric Ries: yeah. Absolutely ...
[00:23:43] Jeremy Utley: or, you know. But to actually have... So, so I think there's an incredible leverage at the governance layer.
[00:23:49] Eric Ries: So much leverage.
[00:23:49] Jeremy Utley: Um-
[00:23:50] Eric Ries: It, it's, it's the most powerful lever in corporate life, and most leaders don't, not only have never, don't know how to pull it, but have never even heard of it. It's, uh, unbelievable to me how, how ignorant we are about the tools at our disposal. And it's funny that if you talk to VCs about companies, they'll be like, "You know, everyone knows that being non-consensus in, right, is the only way to make money in venture, and we have to be a bold contrarian."
And those same VCs, as soon as you're like, "Let's talk governance," they're like, "I don't know. Don't wanna be, be- Oh,
[00:24:20] Jeremy Utley: no. Yeah.
[00:24:20] Eric Ries: Exactly ... everyone else."
[00:24:21] Jeremy Utley: Delaware C Corp. You know, it's just like
[00:24:23] Eric Ries: you wanna keep the vanilla, right? Everything has to be the same. You're like- Yeah ... "Okay, where, where did my bold contrarian go?"
Like, what happened? So I just, I feel like founders have to take control of this themselves and just be like, "No, this is the kind of company I wanna have." I had a lot of founders do this. I coached them to, to look in the mirror every day and practice saying this one sentence until you can say it with confidence.
It's just like this: "As the founder, it is my judgment that an essential component of our business strategy is to be trusted by," it's a mad lib, fill in the blank. Customers, okay? Or whatever. Nurses. We need nurses to trust us. Okay. "And in order to earn their trust, we need to adopt- Technique X. We need to be a public benefit corp, or we need to have a long-term benefit trust, or we need to have a foundation that, you know, gives upside to the nurses because otherwise it's profoundly unfair.
Whatever it is. And what's critical about this magic sentence is it forces the person you're talking to to object to something specific. What exactly is your objection? Is the objection that I'm not the founder? That it's not my decision to make? That my judgment is flawed? That this is not our strategy?
That trust is not essential? That this technique won't give us trust? Like, which is it? And what you'll find is most people cannot do this because all they're telling you when they object is they've been vaguely told/indoctrinated into the idea that everyone's supposed to follow the best practices.
[00:25:49] Jeremy Utley: I think actually it's a really important point.
What you're saying is that a founder may say that in the mirror or otherwise, but not realize the internal inconsistency with their stated mission and their legal- Yes ... obligation. And you're saying there actually has to be alignment between what you're telling yourself, 'cause I guarantee, like, I mean, dude, 95% of the founders we know are saying that's true about them.
And what you're saying, actually, I, I don't mean to put words in your mouth, but what it sounds like you're saying is they're unknowingly lying to themselves if they've taken hook, line, and sinker these kind of vanilla governance structure. You're saying if you've taken that structure, you cannot look in the mirror and say this because there is at the heart of your business an inconsistency that is irresistible.
[00:26:33] Eric Ries: And the giant lie. You are lying. The worst lies are the ones that we tell ourselves. Can I tell you a story?
[00:26:38] Jeremy Utley: Please do. There's a
[00:26:38] Eric Ries: founder... I won't, I won't out this founder 'cause it's a little embarrassing for him, but I get the, I get to, like, the, the privilege of my life, okay? Like, the truly the most fun I get is basically every day I get to meet founders.
Like, people come to me with a crazy idea. You know, like, like Otto. It's like, "We're gonna do this thing." Like, that's insane. Most people are like, "Oh, what a crazy idea." I love it. Crazier the better. So people come to me and pitch me, like, stuff that is just completely wild, and they ask me for my help. But it's, like, it makes my life so interesting, and I get to work on projects with, like- Anyway, one day someone wanted to meet with me for like an autonomous agriculture something something technology, and I was like, "Sure, why not?
Happy to meet." So he's giving me this presentation, and he's got these robots that are like autonomous vehicles with AI that can fly, they can roll on the ground, they can walk through the air, they can float. They're just like very, um, you know, omni-terrain. And he's like talking about how they could be used for agricultural monitoring.
But all I could see was like every science fiction movie I've ever seen, which like you just- Right ... mount a turret on this thing and it's like, it's scary. I mean- Game
[00:27:44] Jeremy Utley: over.
[00:27:44] Eric Ries: Yeah ... even reminded me a little bit of the, of the white ball from The Prisoner. You know? I'm just like, "This thing, I, I, this is like the stuff of nightmares."
So anyway, I'm like, "Dude, just real quick, is there any possibility that these could be used, like, as a weapon?" And he like gets so frustrated. You could see the air go out of him. He's like, "God, why does everybody ask me that? Like, I swear I'm not trying to build autonomous murder robots, you know? I pinky swear promise."
And I was like, "Well, that doesn't really make me feel any better, because how do you know that they won't be used for that?" And he's like, "Well, I have such good intention." And not doing it for-
[00:28:20] Jeremy Utley: But is, if it's not, if those intentions aren't codified- Yeah, I was
[00:28:23] Eric Ries: like, "What
[00:28:23] Jeremy Utley: else you got, right?" ... in a legally binding document.
Yeah,
[00:28:25] Eric Ries: exactly. I was like, "Look, you want, you're trying to convince all these people to trust you with this incredible technology because you're so mission driven. But I would say you're more like mission hopeful. You're hoping that it all works out and that nobody will take this thing over and use it for something that you hate.
Are you prepared to make the tough decisions now to prevent that from happening?" He was like, "Not really, I just wanna raise money."
[00:28:47] Henrik Werdelin: Can I ask on the- Okay, well, good
[00:28:48] Eric Ries: luck. Good luck
[00:28:50] Henrik Werdelin: One of my favorite podcasts is this, uh, If Books Could Kill, where they go at lengths through books that you can buy in airports.
And at one point they went through Who Moved My Cheese? Which obviously is this kind of famous business book. Yeah, I know it well. And so I have not read the book, and neither do I know that, but they were talking about how basically optimizing for shareholder value is a relatively new concept that wasn't really kinda like populated until the '80s.
I'm throwing something out. Could you talk a little bit about that? 'Cause it seemed to be such a thing that everybody now just assumes is like that's how it's always been and should be.
[00:29:28] Eric Ries: Yeah, people have been taught that this is a pillar of capitalism, and it's so wrong. So first of all, for the majority of the time on this earth that there have been joint stock corporations, it was seen as completely obvious by everybody that those corporations should be created to do a specific thing: to make a railroad, to build a canal, to build an insurance scheme or something like that.
And therefore, the only purposes that would be allowed to have corporations form around them were ones that had a public benefit, what we would now call a defined public benefit. That's where the PB in PBC comes from. The idea that a corporation is not a vital, beautiful living thing, but merely a financial instrument to enhance investor returns, is a very new and super aberrant idea in history.
And what's bizarre about it is that it has no democratic legitimacy. Shareholder primacy was never, not even once in the history of the world, subject to any popular referendum or enacted by any legislature So we're living in this world of shareholder primacy, and you-- And people ask me, "Well, why is that?"
A very small cadre of lawyers, legal scholars, board members, and judges starting in the '60s and '70s got enamored of this idea, and they just decided it. Decided this is how it's gonna be. So what's weird is if you ask people, "Is shareholder primacy the law?" They're always like, "Well, it is, but not really, but it is."
[00:30:57] Jeremy Utley: It's like common law. Yeah. It, it kind of a thing, right? It's so, it's,
[00:31:00] Eric Ries: it's- What's funny is it's not even in the common law because it's happen-- Like the common law wasn't made in 1986.
[00:31:04] Henrik Werdelin: It's not in all countries, right? You know, I'm obviously from Denmark where for tax reason most of the companies that people know, LEGO, Carlsberg, Novo, are governed by trusts.
Yeah. And they have in their constitution that basically they have to do things for the greater good. And so while the sub-company, I guess it's the same way that now Anthropic is structured, can make money
[00:31:26] Eric Ries: fine. We all-- Exactly. Uh, Grundfos, uh, yeah, Carlsberg, um- You write about it in the book. Yeah. Yeah, no, Denmark is like the laboratory of this idea because-- Yeah, it's, actually it's very funny how it's like it, it's an obscure quirk of Danish public policy has caused it to be the epicenter of this structure.
But thanks to that structure we have a lot of data. Denmark is actually the leading provider of the data that shows that this is a better structure than conventional companies can achieve. But here's the thing that's really important. If you read the legal papers that defend shareholder primacy, and you cut through all the BS about is this the law or is it not the law, you eventually get to a bedrock idea where they say, "Look, at this point, whether it should've been the law or not, at this point it is now a normative consensus that this is how companies operate."
Normative means-- Like a descriptive consensus would be we all agree that this is what companies do. They are mercenary assholes, and there's nothing you can do about it. But a normative consensus is a dis-consensus about how companies should behave. Normative consensus means everybody knows that everybody knows That companies should behave this way.
They literally write stuff like this: managers not only can but should break the rules if it is profitable to do so. What's wild about this normative consensus is when I talk to people who build companies for a living, and I ask them, "Are you part of this normative consensus?" Everyone's like, "No. I think this is the dumbest idea in the world."
And I say, "Well, interesting. Apart from just now, have you ever told another living soul that this is what you think?" They're like, "Oh, no. I've-"
[00:32:56] Jeremy Utley: Right. And is this, is this documented? Is it actually- Yeah ... is it defensible in court?
[00:33:01] Eric Ries: Yeah, yeah. No, exactly. Everyone's afraid to say anything about it, and therefore, that's allows the consensus to continue. If people actually
[00:33:08] Jeremy Utley: just spoke to- They're complicit in the consensus.
[00:33:10] Eric Ries: Yeah.
[00:33:11] Jeremy Utley: Yeah.
[00:33:11] Eric Ries: The other thing that I think is very important for founders to understand, when we say that this is a new idea, let me just walk you through how this worked in the 19th century, okay? This is how it was in the United States until 1899 in Delaware.
So very recently. In the 19th century, let's say you were the world's richest man and there was a certain company that you wanted to control. Let's say it was a railroad or a canal, 'cause there was no social media, okay? You wanna borrow a bunch of money from banks and take it over. First of all, in the 19th century, the board of directors would've been seen as perfectly justified in fighting you tooth and nail to prevent this from happening.
There was no fiduciary duty to sell your company. 19th century observers would've found that ridiculous. But let's say you succeeded anyway. You take the company over, and you tell everybody, "I'm gonna change its corporate charter from making a railroad to enriching shareholders. That's its new purpose."
That would've been considered a crime And the courts would void your charter as beyond the scope of what was authorized. That's how far we've come in just over 100 years. And even for the great bulk of the 20th century when this system was reformed, because in, in the 19th century, to get a corporate charter, you had to make a petition to your local state legislature where you describe the public benefit.
That was cumbersome. Not, not saying we should go back to that. The idea was called general incorporation, which was that anybody should be able to form a company for any reason. We take that for granted today, but it's just over 100 years old. That's actually a very new idea in human history. It was paired with limited liability, also a relatively new idea, limited liability for shareholders.
And the idea was shareholders should be able to invest. Since they don't control what a company does, they shouldn't have liability for what it does, and anybody should be able to declare what their public benefit is and then form any company they want. That was fine. That actually worked really well for most of the 20th century because even though you could make a company for any reason, you still had to have a reason.
And investors, since they weren't in control of what you did, didn't have any liability. When we switched to shareholder primacy, we blew up this whole system, and actually we're causing a l- the deterioration of our economy thanks to this toxic idea. First of all, now whenever you confront a company and say, "Why did you do this sociopathic thing?"
Companies say, "Well, it's not up to us. We had no choice. We're just doing our fiduciary duty to investors." But then you're like, "Great, so I can hold the investors accountable for this action?" No, they have limited liability. So we've actually created what Anne Davies calls the unaccountability machine, where no one's-- It's, it's our- It's like,
[00:35:38] Jeremy Utley: it's this, it's
[00:35:39] Eric Ries: the Steinbeck
[00:35:40] Jeremy Utley: quote, right?
There's no
[00:35:41] Eric Ries: way- Who's the babe? There's no way the public- Who's the babe? Yeah ... in the long term will tolerate this state of affairs, and if you've wondered why have there been increasing calls for the corporate death penalty in recent years, this is why. It's actually a logical response to this idea of shareholder primacy.
[00:35:52] Henrik Werdelin: One of the reasons why I think, A, I think, you know, your new work is important for many reasons. But in the context of AI, one of the things that we talk a bunch about in this podcast is in order to scale yourself, you need to understand how to create autonomous agents that do the work for you. In order to do that, you need to be able to articulate what your operating system is, how you take decisions, all these different things, 'cause obviously otherwise the model would just kind of answer in a generic way, not in the way that you would.
[00:36:20] Eric Ries: Yeah, yeah,
[00:36:20] Henrik Werdelin: of course. Of course. And so I am-- have been on this tirade for the last, um, you know, few months to kind of really articulate my own stuff in, like, a persona.md file. I've been talking to a lot of people about, like, doing that. And so I think from Anthropics and the highest level of governance, I think all the way down to the most individual, I think increasingly we're looking at a place where people can do stuff to change things.
Like just adding into your governance structure of your own agents to say, "Here's like a little-- here's my, here's my integrity," kind of like five lines of principles.
[00:36:57] Eric Ries: Yeah, if you just put once... One of my ideas in the book is that we should redefine what it means to make a profit to be to maximize human flourishing.
That's literally what it means. If you put that one sentence in your agent document to say that, "By the way, my personal view is that to make a profit means to maximize human flourishing," you will be surprised how influential that sentence will be to its behavior. Governance is about coherence, coherence inside and out, high and low, top and bottom, everything together rowing in the same direction.
It's, it's very powerful.
[00:37:25] Jeremy Utley: I think, I think part of the reason this is so hard for folks, and especially, I mean, as a recovering MBA myself, I started in finance and s- I love a good spreadsheet, right? Dollars are very easy to measure. You know, uh, flourishing is very difficult to measure.
[00:37:40] Eric Ries: Yeah.
[00:37:40] Jeremy Utley: So our system is geared towards that which is easy to measure- Yeah
not necessarily that which is worth measuring. Hundred
[00:37:48] Eric Ries: percent. Th- in academic literature, this is called surrogation, where the metric becomes the surrogate for the thing itself. And you know how everyone's talking now about legibility, you need to make your life legible to the AI so that it can help you?
This is a huge part of the problem. Right now, this is not really an AI-specific thing. Right now, we are teaching people, for example, to stack rank activities by ROI. One of the earliest things you learned in your MBA program, I was taught it as a junior engineer, ROI rules everything. Except the most important decisions we make, the ones that build trust, are ROI negative by definition because the returns are intangible, but the costs are tangible.
So it's-
[00:38:24] Jeremy Utley: Say more. Say more. Give us a practical example of that because I really wanna make that
[00:38:27] Eric Ries: clear. Yeah, yeah. So let me tell, let me tell you a story. I'm gonna tell you a story about H-E-B, a grocery store in Texas. I, I like this 'cause it's very-
[00:38:32] Jeremy Utley: One of my favorite, one of my favorite retailers. It's incredible, for folks who don't know it.
[00:38:36] Eric Ries: Anyone who's ever been to Texas or spent time in Texas can't shut up about H-E-B. Outside of Texas, they're not that well known. What I loved when I was doing the research for this, the, uh, people in Texas mistakenly, frequently mistakenly think that H-E-B stands for "Here Everything's Better." But actually it's not.
It's even not, not the name of the company, it's just the initials of the founder's son. Anyway, the company's been going I think close to 100 years now, 80 years, something like that, uh, in Texas.
[00:38:59] Jeremy Utley: Remarkable organization.
[00:39:00] Eric Ries: Remarkable organization. And I tell this story in, uh, in the, during the pandemic, I think.
There was a, an ice storm in Texas, and one of the stores, the power goes out. Now I'm talking about hard power out, no backup generators, no phones, no way to call headquarters, nothing. The lights go out, and the reporters, you know, tell the story after the fact. They're like, "There was a collective groan in the store."
You can imagine why. Why, why are people upset that the power is out? Why are they in the store? It's an ice storm in Texas. They're obviously stocking up on stuff. So everyone's like, "Oh no, I'm not gonna be able to get the stuff my family needs." The store manager jumps up on a table and says, "Everybody gather around.
Just take your carts, go home." And someone's like, "How are we gonna pay for it?" "You're not gonna pay for it. Just go home." And people hear this story and they're like, "Wow, what a brave manager To defy the wrath of corporate, to give out all this free stuff, they mu- you know, they must have been very brave.
But no, as you pointed out, this is not a brave manager. This is something that H-E-B drills for, not for ice storms in particular, but for the idea that they are a fiduciary to the customer. They gotta take care of people, and if you have the opportunity to do so, you do it. So that-- to people, like, the customers are in tears.
The loyalty you gain from doing something like this, the people who shopped there that day, they're never shopping somewhere else. I mean, this is just a profound moment in their life this happened. Now, imagine they could have gotten corporate on the phone, and imagine they were in a conventional company that rules by spreadsheet and ROI.
You could easily imagine someone being like, "Excuse me, but what is the ROI of this activity?" And the manager being like, "I don't know, man. People are gonna be in tears being so grateful to the thing. But, but I can tell you exactly how much it costs to give them all that free stuff. It's gonna be exactly, you know, $25,333 and 23 cents.
How much is this loyalty you claim worth? How much is it worth?" And I've actually been in this argument many times in companies. I remember one time we were talking to a company that was, like, really recalcitrant about doing the right thing. I won't say what the thing was, but it was very, to me, very obvious they need to do the right thing here.
Company didn't wanna do it. They had all these people talk about the ROI, ROI, ROI, and we're like loyalty, loyalty, loyalty. And finally, the finance people are like, "Okay, fine. Fine. We agree getting this loyalty would be really useful." We're like, "Finally." "But honestly, now don't we have to consider the ROI of this action that you propose compared to what if we just have a loyalty program?
Wouldn't that be a more efficient way to get the loyalty?" And you're just like, "Oh my God, stop it with this."
[00:41:21] Henrik Werdelin: It's
[00:41:21] Eric Ries: a really critical idea. A really critical idea is, first of all, to try to make the intangible things tangible. We have a whole chapter about this, how, what, how to use metrics that can capture and hold- Which is a little
[00:41:31] Henrik Werdelin: bit difficult, like, what's the, what's the KPI of my life?
[00:41:35] Eric Ries: Very difficult. But also, we have to have certain principles that are not legible. I think this is something that is very d- I'm, listen, I'm Mr. Metrics. I'm very pro-metrics. But not every decision can be made by the metrics. Some decisions have to be made in an a priori way, including, by the way, the decision about what to measure and what not to measure.
The late, great Clay Christensen said in, in his last book before he died, he said, "It is easier to do the right thing 100% of the time rather than 98% of the time." And that is just an incredibly profound idea. When you take certain things off the table... Think about Steve Jobs. I love this story. He used to have fights with his engineers over the, the visual layout of the wires inside a case of a computer he didn't think customers should be allowed to open.
And the engineers would be like, "Man, who cares? No one is ever gonna know. No one will ever see this. So what, why are we arguing about this?" And he'd be like, "But we're gonna know We're gonna know
[00:42:33] Jeremy Utley: Coherence. That's a great example of
[00:42:34] Eric Ries: coherence. This is what we stand for, and that goes back to that harder is easier principle.
By making life more difficult for himself, he actually taught an important lesson to his team. This is what we stand for. This is who we are. And because they saw him do that in little ways, they started to believe he would do it in big ways, and that's why people were so insanely loyal to him.
[00:42:55] Henrik Werdelin: One of the things that I think is extra interesting in the age of AI about this is I feel a lot of us are now trying to figure out how do we offload stuff to AI, but then we're also trying to figure out when do we actually need a human in the loop, and what kind of human in the loop?
We have a-- Obviously, I'm the founder of BarkBox, and one of the things we do is we make these incredible dog toys, and some of the dog toys are funny for the humans, and they're incredible for the dog. And so we refer to them internally as they have Bark magic. Now, one of-- Our head of design, Derek, he's incredible of doing that.
Now, the irony is, of course, that I am not able to define what that means, right? And almost per definition- It's, it's
[00:43:33] Jeremy Utley: illegible. Yeah ...
[00:43:34] Henrik Werdelin: if I was able to, it-- I could probably outsource it to an agent because then I could just put on what the parameters that I, that I want. And so I think what I think Christian Madsbjerg in his book, um, Sensemaking called the difference between thick data and thin data, where the thick data is this thing that we humans understand.
The party's just getting started. The mood in the office is weird. Those are things that are easy for us to compute. But to your point, we have lived in a world for many years where those were kinda like touchy, feely kind of character traits that we- Yeah ... didn't really value. And so I think ironically, we're now forced to think much more about this on, like, the, the smaller level.
[00:44:13] Eric Ries: Yeah. Yeah, no, we-- everyone is grappling with this right now, uh, and, and rightly so. To me, this is like imagine you were in a car, a combustion engine car, and you didn't have a speedometer, and the o- and, and you're like, "How can I figure out how fast I'm going?" Someone says, "Look, it-- we realize that the amount of exhaust coming out the tailpipe is correlated with our speed So that's gonna be our primary KPI, exhaust coming out the tailpipe.
At first, it's not a problem because that is a pretty reliable indicator of speed. But then somebody realized, someone else says, "Oh, I heard that your goal as an organization is to have maximum exhaust out the tailpipe. Let's throw some sawdust in the engine." So the metric becomes the surrogate for the thing itself.
We have all been taught that when a company is healthy and growing, its share price will increase. Therefore, anything that makes the share price increase must make it more healthy. Wait, what? Makes
[00:45:01] Jeremy Utley: it healthy. Yeah,
[00:45:01] Eric Ries: exactly. Yeah. Where did we get that idea? So this, and this is AIs of course, are an amplifier of this tendency.
If you insist on only doing the things that are legible to the AI, you will, you will, you will live your life in this trap. On the flip side, if you view AI as a complement, as something that could enhance human agency and creativity, then you will never have this problem, and you will be able to use the technology in a really powerful way.
[00:45:28] Jeremy Utley: The last thing that I'll say, just 'cause I think it's actually related to the AI and your book, is, um, this governance issue is deeply relevant to the AI moment. What I, I'm reading right now The Infinity Machine, Sebastian Mallaby's book about DeepMind and Demis Hassabis, and these are conversations, the conversation you're describing at Anthropic and that you're kind of, uh, articulating more broadly-
[00:45:50] Eric Ries: Yeah
[00:45:50] Jeremy Utley: is animating the AI dialogue right now, whether people know it or not, right? And the question of governance, the question of what do we do when there's a lack of coherence or how do we ensure coherence, is something that the smartest people in the world have been thinking about for the last 20 years, and, and by the way, not really solving, I think yet.
Yeah.
[00:46:10] Eric Ries: Yes.
[00:46:11] Jeremy Utley: Um, so I, it's, it's-
[00:46:12] Eric Ries: Yeah,
[00:46:12] Jeremy Utley: absolutely ... it's a deeply, it's a de- uh, as far afield as kind of the topic of governance may seem to some folks, it's actually deeply inherently related to AI. And so I'm really grateful that we had the chance to learn from you some of, some of the things you've learned as you've been studying the last couple hundred years.
I think it's got tons of bearing, not only on the AI moment, but also on the founders and, and professionals in our audience. Thank you. I really appreciate it. So thanks for
[00:46:36] Henrik Werdelin: taking the time. Yeah. I hope, uh, I really hope this book will have as much impact as The Lean Startup, then, uh, I think it'll be a better world.
Yeah, definitely. Appreciate it.
[00:46:43] Eric Ries: Thank you. Thank you for saying so.
[00:46:44] Jeremy Utley: Henrik I wanted to start with a bold question for you to reflect. We asked Eric, what about the person who's already created a governance structure? They've already got a venture. What can they do? Is all lost? And he said, I love these three words. He said, "Why not try?" He said, usually you can just change your structure with a majority vote, you know, or with a new influx of capital.
So my question for you is, as a founder, you've got a company right now, how do you think about your own company's governance given that conversation?
[00:47:17] Henrik Werdelin: I mean, I thought a lot about it after the conversation. We're recording this like a, a few days after and, and it's definitely one of the statements that kinda like stuck with me.
I think he's right that you can probably, when you come back with new money, kinda introduce that to your investors, and so I, I think it depends a little bit of like, quote unquote, how hot your deal is. 'Cause obviously if you're going around, you're begging for cash, then you probably get even more restrictions, uh, put on you than, than you necessarily have the opportunity to negotiate, uh, kind of what we consider better terms.
Uh- Mm-hmm. But I definitely think it's, it makes a lot of sense, and I do think it's an incredibly important conversation, and it- it's not one that we've had a lot, I think, in the entrepreneurial space. It's obviously not one that historically has been promoted from the investment side. And so I think it's prudent that entrepreneurs look themselves in the mirror and, and say, "Hey, you know, I want to be able to deliver the promise to the customer that I serve.
And f- for me to be able to do that forever," which hopefully is the duration of their company's lifespan, "I probably have to think of some structures." And so, yeah, I mean, I, I, I greatly salute him for writing the book, very much saluting him for picking the, uh, of this kind of difficult conversation. And I think, uh, it's, it's on entrepreneurs now to, uh, to take that kind of baton and then kinda run with it.
[00:48:42] Jeremy Utley: One, uh, one follow-up thought that I had is you and Nick have Ottos, right? You're helping a bunch of entrepreneurs build new businesses. Is there any way to make good governance the default structure of a new business, right? Instead of bad being the default, why not make good the default?
[00:49:01] Henrik Werdelin: Yeah, I think so.
I mean, like a lot of the companies that run on ottos.com are not necessarily entities, and so we, they don't have the same governance structure as a LLC will have, but they do have principles and operations, and I do think that having good behavior is something that we can affect. And so this is something that we're also thinking about now as part of, of the platform, and I hope that Eric will help us promote more of that kind of attitude, uh, not just in our organizations, but across the organizations that we help build.
[00:49:35] Jeremy Utley: The last thing that struck me was the whole mirror sentence that he recommends founders say in the mirror, right?
[00:49:41] Henrik Werdelin: Mm.
[00:49:42] Jeremy Utley: Um, what stood out to you from the conversation?
[00:49:46] Henrik Werdelin: I think I'm kinda like was torn the whole conversation because everything he says I find to be true, but also very difficult. And so- In
[00:49:57] Jeremy Utley: what sense?
How do you mean difficult?
[00:49:59] Henrik Werdelin: He's talking about how basically that an organization structurally is increasingly set up to serve the, um, the return of capital, like so your shareholders, than it is being set up to serve the customer that you're serving, the one that pays you money. And so I think that insight is fundamentally true, and I think many of us, when we have been able to build successful companies, it's because we start up with thinking about how we serve our customers very, very well.
And then over time, that kind of erodes because we become bigger, and the interest of returning capital becomes much more kind of prudent and powerful. Now, it is difficult because, to his point, the organizational design and this governance design is then set up, and I would imagine many entrepreneurs will be met with kind of like very cold faces when they come back and saying, "Hey, here's the thing.
Next year, we're not gonna try to hit profitability, or we're gonna reduce profitability because we think that the capital that we made is best served in- Right. Right ... giving more value back to the customer." That is just such a foundational different belief system. And so I think he had a very prudent argument, and I do think in the long run it makes more sense to serve your customer because that's how you're gonna serve your shareholders too.
Um, but it is complicated, man, and, and I don't think it's easy. And so it's not just about a founder here and there kind of looking themselves in the mirror and kind of agreeing. It's a complicated fight that's a little bit more... gonna be a little bit more, uh, forceful than getting better values.
[00:51:42] Jeremy Utley: Yeah.
Well, you, you raise a really interesting point that I hadn't really thought about i-in regards to Anthropic, or I think about in regards to the example of Anthropic. Are you a price maker or price taker, so to speak, as a founder? And I think the Anthropic example, my, my sense is Dario and his team were probably more...
They were making the price when it comes to raising capital because of their pedigree and because of their history. They were leading OpenAI. They knew what they wanted to do, right? And so they-- Maybe, I don't know. Are they more of a price maker? I think so. I- Whereas they can-- Which is to say, like, to a VC, they can walk away.
And I wonder whether a lot of folks, maybe they have a more normal kind of a startup, they may be more hesitant to impose terms because they're just gonna not get funded, right?
[00:52:30] Henrik Werdelin: Yeah. And I think the same thing, you know, obviously Mark at Facebook has a famously governance structure that gives him a lot of power.
Right. And I think I've heard conversations with founders go like, "Oh, you'll be, you'll be very neat to have this thing set up," right? But again, I think when he managed to do that, Facebook was really on fire, and it was one of those rounds, like it wasn't a down round where he suddenly made those changes.
And so-
[00:52:54] Jeremy Utley: Mm-hmm. Mm-hmm.
[00:52:55] Henrik Werdelin: Yeah, I think, I think that's a, a good observation. Now, the, the beauty would of course be if we could find cases or examples where you could show that both benefit, that this is not a zero-sum game. This is not where you're taking away from the investor and giving to the customers.
This is where the investors get even more back because that they serve their customers well. Well, that has to
[00:53:17] Jeremy Utley: be the argument, right? That has to be the point. Uh, it doesn't work otherwise.
[00:53:21] Henrik Werdelin: That has to be the point. And I think that, but a lot of time, the company's lifespan is longer than maybe an, an investor's is in that company.
Yeah, that's
[00:53:30] Jeremy Utley: a good
[00:53:31] Henrik Werdelin: point. Yeah. And so they just want the next three... Let's say a PE firm. You might go, "Yeah, that might do well, that in fifteen years this will pay dividends, but I'm gonna be out in three or four years."
[00:53:40] Jeremy Utley: Well, and that's, that's the core of his argument, actually, is those kinds of sources of capital actually are making a sacrifice shou- you shouldn't be willing to make.
Yeah. You know? Or you shouldn't be surprised when the business is no longer what you want it to be.
[00:53:52] Henrik Werdelin: But also, like, I mean, like sometimes, you know, some founders, they will have to make decisions, and they might have been working for something for twelve, fifteen years and not made a lot of money doing it, although on paper it's worth a lot.
And so then a liquidity event comes around, like you sell to a PE firm, then you have to be cut out like a very special cloth to then go like: You know what? I'm not gonna do this deal if you don't do XYZ. But I think back to the original point, that is the conversation that we need. And I think in many ways, customers and society at large is asking founders to increasingly take that posture.
And- I'm like obviously looking for like how do you get a little bit of help taking that posture because it's not gonna be an easy one to take.
[00:54:36] Jeremy Utley: I wonder if the, if the opportunity space is actually for investors who want to see a different kind of governance. If you take as a premise as an investor that you're going to create more enterprise value as an aligned organization which really deeply connects to the mission, maybe instead of the, the burden being placed on the founder to fight for their rights, maybe there's a new kind of invest...
I don't wanna say vehicle, but a new style of investor who says, "This is actually a better way of doing it, and we as the investor are going to impose proper governance on the companies that we fund."
[00:55:09] Henrik Werdelin: I think that makes a lot of sense, and I think it's interesting, and I do think that there would be a market for it, and like if there's any of those investors out there, they can give me a call.
If you take Founders Fund, for example, they at the time famously was fully pro founders, right? They were basically-
[00:55:24] Jeremy Utley: Mm-hmm. "
[00:55:24] Henrik Werdelin: We don't fire founders. We are in support of secondary transactions so the founders can take money off the table along the way," and all these different things, which at the time was kind of unheard of.
And so-
[00:55:35] Jeremy Utley: Right ...
[00:55:35] Henrik Werdelin: I think it's a super interesting kind of point that maybe there's like a new investment opportunity of being the ones who go and say that. Now, back to the point of Anthropic's, I mean, as I understand it, one of the reason why they got funding to start with was because a bunch of people basically felt there needed to be a company that were thinking more about safety than what was out there.
And so they might have been talking to, uh, a group of investors that was already kind of open for that argument.
[00:56:02] Jeremy Utley: Yeah. Yeah. Great conversation. I thoroughly enjoyed it. Uh, uh, and I agree with you, Henrik. I wish Eric all the best in championing this new cause. I think it's a needed book. It's needed thought leadership, and I'm really excited to hear what our audience thinks about the topic as well.
[00:56:18] Henrik Werdelin: Yeah, me too. So with that, I think it's time to call it a day. And so the only thing that's left to say is bye-bye.
[00:56:25] Jeremy Utley: Bye-bye.