Lenny's Podcast: Product | Career | Growth
00:15:19 · Eric Ries
[00:15:19] S0: Oh, totally. You said something interesting in the lead in which you said like, "Well, a lot of other companies seem to be killing it and they don't have these protections, so they're fine." I would actually check your math. So many times when people give me this argument, they were like, "Well, such and such company..." Someone was like, "Cloudflare, they are just a normal company. They don't do this stuff." I'm like, "Check your math, buddy. Cloudflare does many of the things that we're talking about. They're one of the examples in the book, so I picked that on purpose." A lot of companies that you don't necessarily instantly think of as do-gooder, mission-driven companies are actually very mission-driven in terms of how they're structured, and they are almost always protected by at least one of the governance structures from this book. So check your math. People used to tell me Costco was an example that wasn't protected, so much so that I was surprised to learn that it was embodied in a governance fortress. You'll be surprised. If you do the math, if you look into it, you'll be surprised. But let's talk about the product market fit thing because this one is really interesting to me. Generally speaking, this is one of the most important ideas in the whole book. The most important question about how to protect a product is not what protections it needs, but when those protections need to be enacted. And it's basically like that old proverb about the best time to plant a tree was 40 years ago, but the next best time is now. It is always too early until it's too late. And I'll give you the example. I've seen this hundreds of times myself personally. So I've literally been in the room where this kind of stuff gets discussed and it starts like this. You're incorporating your company, you talk to your lawyer, "Hey, I want to have..." These are called mission protective provisions in the law. "I heard this guy on Lenny's podcast," and your lawyer's like, "Oh, not again. Another guy, right? How many good ideas from Lenny's podcast are you going to tell me about? Okay, fine. What's this one?" "He told me I need to have mission protective provisions." He'll pat you on the head and be like, "Oh, that's sweet, honey. That's great. Yeah, get product market fit, get some success. Success is ultimately your source of leverage. Success will protect you.
00:17:13 · Eric Ries
Don't worry about it." You say, "Okay, great. But just thanks for letting me know." Now you raise some money. You got these VCs on your board, say the same thing. They're like, "Yeah, I totally am with you. We're on the same page. We want the same thing you want. We invested because we believe in you as the founder. There's no need to do this now. Let's just do it later. Do it when it's the more appropriate time." Okay. You got a growth round. Now you got these bold contrarian growth VCs on your board. And they're like, "I don't know. You might not want to be too different from everybody else. Might make it hard to raise money." You're like, "I thought you were a bold contrarian. What?" "Okay, don't worry about it now. We can always do it later." Now you're doing IPO prep. Now you got bankers and lawyers and you've got a GC and you got... And they're all like, "Yep, yep. This is a great thing to bundle with the IPO itself. You don't need to worry about it now. First, we got to land the plane, let's get our house in order." Blah, blah, blah. Anyway, I've actually been in the room where the founder sits with the CFO and now it's like IPO planning, roadshow. Here we go. It's go time. We're about to file the papers. And the founder's like, "Hey, whatever happened to those mission protective provisions?" You're like, "I wanted to really make sure we had our customers could participate in our IPO and I want a broadly shared prosperity and I want this thing for our employees. I have all this good stuff I want to do. Did we do any of that stuff? I don't see it in the S1." The CFO's like, "Oh, you were serious about that? Oh, sorry, man. You should have said something. Now it's too late." You're like, "Wait a minute, but when I talked to you about it last year, you said it was too early." "Yeah, it was. But now it's too late." Was it ever the right time? No, it is never the right time to do this. If you put this off, you will eventually find yourself in a situation where you can no longer do it. You will have lost the leverage. Success will not protect you because success is what makes you a target. That story I told you about the five months CEO got fired. That company, everyone who worked on that IPO, every banker, every lawyer, the CFO, everybody, they profited from all the transaction volume that that company generated on the way up and on the way down.
00:19:08 · Eric Ries, Lenny Rachitsky
They're all fine. They're all onto the next IPO. They're like carnivores. They're onto the next thing to feed on. Meanwhile, the customers, the employees, the people that cared about their company were not so lucky. [00:19:19] S1: Damn. That hit me. That hit me right in the heart. And it's so obvious just how personal and important this is to you. It's clear you've just seen this happen again and again and you're just like- [00:19:29] S0: Oh yeah. I've been in the room where it happens. Yeah. The proverbial room. [00:19:33] S1: Okay. So let's talk about what people should do and we'll poke around in different directions. What's the broad stroke solution to this? And then what are some, say, three things, say an early stage founder should do this week, next week?
00:19:45 · Eric Ries
[00:19:45] S0: Yeah. Yeah. Yeah. Okay. So broadly speaking, there is a blueprint. I promise when we talk about the horrors of living in late stage capitalism, it's easy to get depressed and just be like... I mean, literally part one of this book is called The Shape of the Abyss. So I'm not trying to sugarcoat it. This is quite grim. And if you haven't studied these case studies, if you don't know the story of Whole Foods and what happened to it, if you don't know the story of Vectura, you don't know these stories, they're really grim and it's important to grapple with what happened so that it doesn't happen to you, so that you're prepared. But it can feel like we're so helpless. But as I said, this is a double mystery, not just why does this happen, but how can there be exceptions to a rule that's inevitable? ... want to sell it out. And I won't get into the whole story. They did the right thing in this case because they had the legal power to do so. Their intervention ultimately created more than $500 billion of shareholder value. I didn't add an extra zero for emphasis, $500 billion. So when people hear about these things for the first time, it's natural to feel like we're talking just about business ethics or mission. It's like some extra nice to have thing that after you do the real serious business, now you worry about this stuff. No. This is one of the most powerful engines of value creation in the world. And for a lot of people listening, this will be the first time you're hearing about it. But just because it's new to you, does make it new? The German optics company, ZEISS, who makes the lenses in my glasses and yours too, they had this structure in 1885. So I think it's really interesting that we have enough of these examples to know that there's nothing inevitable about this financial gravity. We actually have a dataset that can be studied. There's a whole branch of academic research that has shown, for example, companies with that structure like Novo and ZEISS. They are six times more likely to live to year 50 compared to their conventional counterparts. They have superior return on invested capital. They make more money for investors. They're better in so many ways. So it's a bit of an open secret that these techniques exist.
00:25:31 · Eric Ries, Lenny Rachitsky
I want us to have these stories in our mind because, as we get into the techniques, some of them are going to sound radical. We want to say, "Wait a second. Is this really doable for me? Yeah, I'm just a little startup. I'm just trying to get into product market fit. Why are we talking about this long off stuff?" Hundred-year-old companies know. August and Marie, they were a tiny startup too once. Now that company's worth hundreds of billions of dollars. [00:26:42] S1: So before we get into that, let's remind people again why this is worth doing. Because it's going to sound like, "Oh, my God, this is so annoying. I have to do all these weird things that no one else is doing. I have to convince all these people this is not going to limit us and not hurt us down the road." But just let's remind people again just why this is important, why this is so painful if they don't do it right. [00:27:02] S0: Gosh, there's so many things to choose from. [00:27:05] S1: So much pain.
00:27:06 · Eric Ries
[00:27:06] S0: So much pain. I'll tell another story. We've been telling happy stories. Let me tell you one not very happy story. I've been doing this exercise for many years where I would ask founders or leaders really of any seniority. I'm just like, "Listen, before we get into the details, first tell me who you think is the most evil company in the world." And sometimes they instantly know who to say. They're like, "Oh, I know." But some people are like, "Well, what do you mean evil?" I'm like, "The company where there's no amount of money they could offer you that you would go work there. You know they're up to no good." Everybody has a company like that in their mind. I don't know if you want to say who is for you. I understand if you don't want to, it's okay. But I'll just, for the sake of us having a hypothetical that we can do, I would always tell ... We go around the room, Some of them are on Zoom, everyone puts in the chat and someone will be like, Halliburton. And someone else will be like ... Increasingly, tech companies are showing up on these lists now, which when I was younger, that would never have been the case. But now you somehow see tech companies there. Some will see Monsanto or you see ... Or some private equity fund. People are mad about something, they can name a company usually. So it's not hard to find examples. Now, my father was a pulmonologist growing up. So I was raised that Philip Morris is the most evil company in the world. So we'll just use that as our hypothetical just for the sake of argument today. If you think Philip Morris is great and you have different values, whoever's listening, fine. You pick the company you really would never, ever, ever want to have to work for no matter what. Now, I ask people to imagine the company they currently work at. If you're a founder, you're a company. If you're an employee, you're a company. But the company you hold dear, just imagine. Philip Morris shows up one day and says, "I'd like to buy this company from you for $1 more per share than it's currently worth." You selling? Most people are like, "Hell no. Hell no, I'm not selling." One person once asked me, "Well, what are they going to use it for?" Oh, sorry, to be clear, they're going to use it to sell cigarettes to children. Now you selling? Yeah. No. No deal.