Lenny's Podcast: Product | Career | Growth
00:11:45 · Eric Ries, Lenny Rachitsky
[00:11:45] S0: Oh, sure. Sure. [00:11:46] S1: ... oh, other people, they're weak, maybe they're of loose values. The other is just like, do I really need to do this? There's so many companies that are killing it. I don't think they've done any of this. Why do I even need to pay attention to this? So maybe let's start with that first one or this idea of, and this is a core thesis of your book. This is not like an ethical values thing. This is a structural element of building businesses in the US.
00:12:09 · Eric Ries
[00:12:09] S0: I'm going to make a claim that's going to sound radical, but I'll back it up. If you don't get this right, no other decision you make about your company will matter for the long term because you're not going to be the one making it. According to Harvard Law School, among venture-backed companies that have the standard best practices set up that you got from your lawyer, only 20% of founders are still the CEO three years after going public. Just statistically speaking, everyone's being told by their lawyers, their bankers, their VCs, everybody that you're the exception. It's not going to happen to you, but statistically speaking, you're much more likely to be in the 80% than the 20%. I'll tell you one story in particular. A very hot company came to see me a year or two before their IPO. They were planning IPO and I built the long-term stock exchange. I've done a bunch of stuff that people come to me for advice about these things. They wanted advice. How can we structure the IPO? We want to think long-term, we're really a mission-driven company, et cetera, et cetera. And I was going through their governance documents. I said, "Oh, good. You have all the best practices. So you're totally like..." I was like, "The good news is you're so screwed you're going to have to do something. This is your [inaudible 00:13:15] guarantee to get this mess." And I had all the data and just like I do in the book, like, here are the examples, here are the case studies, here's the data, you need to know about this. And the founder was really concerned. He's like, "Okay, we're going to definitely do something about this. We're going to fix it up." But then he called me back a few months later. He's like... I said, "Well, what are you going to do?" He's like, "You know what? I talked to my bankers, talked to my lawyers, talked to my CFO, talked to my GC, talked to my VCs, talked my growth VCs. You know what they all said? They all said, 'Man, Eric is such a downer. If he really believed in your vision, if he really saw how special you were, he wouldn't talk like that. You're the exception.'" I said, "Okay, man, good luck." This company went public, had a very successful IPO. A lot of people made a lot of money. And then five months into their IPO, a competitor gets acquired and the whole category, everyone freaks out.
00:14:07 · Eric Ries, Lenny Rachitsky
Stock price collapses and the founder is ousted after five months as a public company. Now, if you read stories about the company, people were like, "Oh, he made all these mistakes. Their business model sucked. The company..." Blah, blah, blah. Did he make mistakes? I'm sure he did. Were there problems? I'm sure. But had he really earned so little grace that he only got five months, the same people saying that the business model is horribly flawed, they invested in the company five months ago. Had it really changed so much in five months? This is what's going on. These collapses are all around us and we're being told it's normal. This is just the way it has to be, but it's not. These are choices about the specific structures, cultural practices, the management practices we do on the inside and the structural, the governance practices we do on the outside. On both of them, were being told to do things that are incredibly weak. And again, if you think you're going to be the exception, think again. [00:14:59] S1: I'm excited to talk about what to do, these governance elements, but let's talk about this other critique that I imagine people have in their head of just like, is this like... Okay, I need to figure out product market fit first. [00:15:10] S0: Yeah, yeah. Worry about it later. [00:15:13] S1: Exactly. There's so much more I need to do. The chances of this working are so low. Why am ... I have no time for anything else.
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?