Learn To Become Incorruptible with Eric Ries

Welcome and Introducing Eric Ries

SPEAKER_01 0:00

Good day, everybody. Welcome to the Investor Relations Podcast. Man, this is so such an honor, such a joy to spend time having conversations around relationships with investors. That's what investor relations is, in my mind. I might be wrong. But uh on today's show, we're gonna have a special release conversation around a book that's coming up that I want you guys to check out. I think it's gonna be super helpful in the way you think about investor relations, raising capital, and maybe the kind of capital that you may not want to bring into the gravity of your business. And with that, we're gonna bring on the mind and the author behind the lean startup, the founder of the long-term stock exchange, the author of the soon-to-be released, which I read it, uh Incorruptible. Eric, welcome to the show.

SPEAKER_00 0:48

Oh, thanks for having me, and thanks for the kind words. Yeah, you got it, man.

SPEAKER_01 0:52

All right. So, Eric, aside from author of some world, you know, best-selling author, right? Besides that, besides all the things that you've built, you know, like what are some things that you do in this world that brings you joy?

SPEAKER_00 1:08

Gosh, I have three young kids, so you know that's that's easy. That that that I have I have endless, endless joy from them. Uh so yeah, to me, like I've I really feel like it's it's changed my perspective on almost all the things that I do. Now it's not the things that bring me joy, but they give me the freedom to be able to spend time with them. Uh, and that's that's definitely a very joyous part of my life in my day.

SPEAKER_01 1:29

Yeah, super cool. All right. So, Eric, talk to us

The Lean Startup, Pain as the Source of Every Book

SPEAKER_01 1:32

about, you know, what is it that you do?

SPEAKER_00 1:35

Yeah, so I'm an author and an entrepreneur, and I kind of alternate between those two states of of being. You know, I I as you mentioned, I've built a bunch of companies, I've helped a lot of other people build companies and and I've written these um written these books like um like The Lean Startup and now Incorruptible. And I think the the privilege of being the guy who wrote the lean startup, which you know, I sold two million copies or more now, I don't know how many, and and traveled all over the world to become like a movement of chip for change in how entrepreneurship is done. The privilege of that is that basically every day of my life, somebody asks me for advice on building a company. And it's sometimes a person absolutely just in a grudge. I literally just got an email from a good friend of mine who's like, I'm quitting my big company job, starting a new company. Can you help me figure out what kind of company it should be? You know, that's I get those emails all the time. I get companies who are raising money that are in the in the thick of it, you know, already, you know, dealing with venture funds and private equity and who knows what else. Um, companies that are going public, companies that are already public. Like I really have had the chance to work with so many different kinds of companies in every kind of sector, business, culture you can imagine. So I kind of feel like that's really my day job. My day job is helping people build organizations that matter. And as a result, and whenever I have an idea or someone tells me a cool idea, I get to put it into practice right away. I don't have to wait, you know, for my next company. I can I can be like, okay, let's try it with this person who called and see if it helped them. And so I get a lot of like very practical, like hand, hand-to-hand combat kind of learning about what works and what doesn't work when people are building organizations.

SPEAKER_01 3:05

Yeah, for sure. And it it seems as though, and we're gonna talk about the the new book, but the the lean startup is is kind of around startups, it's in the title, but it's kind of a methodology that you kind of helped create and develop around you know, minimal viable product and you know, talking to customers early on and and building fast, you know, uh pivoting quickly, redeploying this knowledge and into getting them back in. Why did you write that book?

SPEAKER_00 3:33

So all of my books come from my own personal pain. Okay. They always say, write what you know. I know I never tell anybody to do anything I haven't suffered and tried to do myself. So Lean Startup came out of my experience building companies that fundamentally failed because the product wasn't actually what customers wanted. And that sounds so dumb and obvious. Like now, of course. It's like, well, of course, the first step of entrepreneurship is to find out what customers want. But actually, that's really not how it worked in practice those days. And even still to this day, like how many startups fail because they're fundamentally building the wrong thing, but they're doing it on time and on budget. It's a perennial problem. And I've, you know, having studied this problem for a long time, I understand the psychology behind it. I'm I'm compassionate for my younger self, who really like fell in love with his own ideas, as so many of us do. Um, but at the end of the day, it doesn't have to be that way. Like that to me is always the trigger to write a book or to evangelize for an idea, is when we realize that some piece of our received wisdom, the best practices we've been taught about how things, just the way things are, turns out to be not true. That there's there's a better way to do things. And I just feel like whenever I encounter that feeling of like, okay, we're suffering so much. Think about all the money and time and talent we waste on these companies that are doomed. What if we could unlock and do something better? Like, wouldn't that be incredible? So that's that's what that's where lean startup came from.

SPEAKER_01 4:52

Yeah. Selling over two million copies, or at least you you stopped counting at that at that point. What are some of the at a certain point?

SPEAKER_00 4:58

What are you gonna do? Yeah, exactly.

The Strange Reality of Public Notoriety

SPEAKER_01 5:00

Yeah. What are some of the downsides of of writing, you know, selling that many copies and and and achieving that level of um traction in the bookselling world?

SPEAKER_00 5:12

Okay, uh, I'm kind of a believer. I think this joke originally comes from Bill Murray. Someone comes up to him and says, Hey, I uh I I want your advice, I want to become rich and famous. He says, Well, why don't you try becoming rich first and see if that does it for you? Because like having public notoriety is wonderful in certain ways, and it's really uh it's strange in other ways. So, yes, uh yes, I have had people pitch me their startup in the bathroom. I have had people like interrupt me, you know, on a phone call, walking through an airport, being like, hey, are you the lean startup guy? Like, I recognize your voice from the audiobook. Like I in my in my little segment of the world, I've achieved a certain level of celebrity status, which I have decidedly mixed feelings about. It's a very strange way to live. But the the plus side of it is people are willing to talk to me. So that's true whether they are coming to me for advice, or if I see a company and say, wow, that's an incredible company, I want to meet the founders. Often it's very easy to do so because they'll have read the lean startup, they'll they'll want to tell me all about how it helped them build the customer. So like that part of it is really, is really awesome. But the other downside is when you put an idea out into the world, it's going to be misunderstood, obviously. So a lot of people out there who talk about lean startup or minimum viable product or any of our ideas have never read the book, have never even taken the five minutes to read the Wikipedia page. Okay. They just like they've heard from somebody who heard from somebody, and then they're like, this is stupid. And the thing I really didn't understand, this is important really for anybody who makes anything in the world. This is true for you know, product people, technologists, finance people. If you make a thing and you put it out in the world, you're gonna deal with this problem. And uh somebody, I just saw it recently. Every once in a while, someone will write a blog post or a social media post or something that will be like subject. Nobody should ever listen to Eric Reese. And the first time this happened to me, it's happened to me many times. First time it happened to me, I felt really attacked. Like, oh, what? And the first line of this art, the first time it happened, the first line of the essay was, I've never met the guy, but and I was like, Well, if you've never met me, why are you talking shit about me? Like, whoa, whoa, whoa. Like, what are you talking about? And I realized then, and of course I've realized many, many times since, that I'm not a person to him. I'm a character in his mental drama. There's like a little person who speaks in his mind who has my same name, but that's not me. So he's attacking someone, but he's not attacking me. And that's a really important distinction to learn to make is that when people are giving you feedback, it doesn't matter what about what, about your product, about your business, about whatever, it's not feedback about you, it's feedback about them. They're revealing something about their own preferences and beliefs. They're not actually attacking you. And uh yeah, I wish I'd learned that a little sooner.

SPEAKER_01 7:53

Yeah. I think, Nana, as we let's let's let's keep on that that fame for a moment because I think there's a lot going on with uh name image likeness and these, you know, young athletes that are that are gaining that level of notoriety and and speed pretty quick and and lots of money. And I think with that, I think I'm seeing a lot of brands getting built without the lean methodology. They're getting built backed by their own piggy banks, which is a lot, right? They're they're throwing some big money at these things. And I, you know, I've I've seen a lot of them go bankrupt or you know, had a switch. How do you how do you have the discipline for groups out there? And we're not gonna spend the whole time talking about the lean startup. You've done that for years, but how do you have the discipline to, if you have the big pig piggy bank or you're you have that level of funding, like how do you how do you keep that methodology? Where do you keep the discipline of that?

SPEAKER_00 8:47

Yeah, it's it's super important and very difficult to do. The joke

Why More Money Often Means Less Discipline

SPEAKER_00 8:53

in Silicon Valley is that no matter how much money you raise, you have 18 months of runway left. Which is so it's funny because it's true, because the more money you have in your bank account, the easier it is to spend that money. It's just, it's really difficult. And I remember I've I've been in some companies where we've raised way more money than we actually knew what to do with, sometimes for good reasons, and sometimes honestly not for very good reasons. And what happens is you get into this situation where someone's like, I want to spend money on X. And you're like, that doesn't seem like a good idea to me. In a normal startup, you could just you can just use your natural excuse to be like, we can't afford that. We're gonna have money. But once you have money in the bank, you can never say we can't afford it because you could afford it. Someone's like, I want to raise, I want money for this, I want my pay spend money on a vanity project or whatever. It just takes away the excuse that we can't afford it and requires you to be a lot more honest and say, I don't think your idea is good. Who wants to do that? So because so much of us are conflict avoidant, I know founders that instead of just saying, I don't think this is good and getting into a fight, they'll just spend the money. It's actually easier psychologically to waste the money than it is uh to do it. And you know, and like when you have where you've raised tens of millions of dollars or hundreds of millions of dollars, and someone wants to spend $100 on something, it's like, well, what does it really matter, $100? But the second you say what does it matter, $100, someone will come back to you and want to spend $1,000. And then they want to spend $10,000. And like there's really a lot of money you can waste, tiny, tiny little bits and drabs and paper cuts at a time. So I think one of the most important disciplines is simply to be clear what the mission is of an organization, like what's its purpose, what's the strategy, and like from that grand chain of being, like from the mission, the purpose, strategy, the business model, what are we doing? What are the experiments we're running? Then like to be exceptionally rigorous about saying every dollar we spend and every ounce of energy we invest, is it actually aligned with what we're trying to do? And use that and be really honest and have the conflict that's just like, no, I think we can do that for less. Let's do the minimum viable product, not this, like this is a waste of money. And it's just that's not for everybody. It requires a level of discipline and and willingness to have conflict, willingness to defend your own ideas is not everyone is wanting to build that kind of culture. So it's not it's not an easy thing to do. Easy to say, hard to do.

SPEAKER_01 11:11

You came back for Second Bite, right? And you uh

Introducing Incorruptible: The Wake That Wasn't a Party

SPEAKER_01 11:14

wrote another book, which is being released today as this is is released, this podcast interview. Tell us about that book.

SPEAKER_00 11:22

Yeah, it's called Incorruptible. And like I said, all my books come from pain, man. I have watched this problem occur. So many companies that begin with such idealism that have a spark that makes them really special, not just morally, ethically values-oriented, they do have that, but like a spark that makes them economically valuable. You know, think about the Steve Jobs approach to quality. You know, this is a guy who would get in a fight with people over the the configuration of the wires inside the case of a Mac that he didn't want his customers to be allowed to open. No one's ever gonna see it, but he said, Look, design and the inside is like it's just it's just an idea that quality is what is paramount. Um, you see the same ethos in Yvonne Chenard at Patagonia and so many other entrepreneurs. And yet, and when they get successful, they don't do a good job protecting that precious insight, that spark. And they and they basically lose it over and over and over again. And I'm sick of it. Okay. I'm just frankly sick of it. I'm sick of companies that that become these like walking zombies. I'm sick of companies that throw out all the mission-driven leadership and bring in mercenaries. I'm sick of companies that are getting taken over for and and where the new owners using the company's trustworthiness to squeeze and betray its suppliers and customers and employees. Like to me, this is just a massive, unprecedented waste of value creating energy. And people blame it on capitalism, but I say no. I think this is a corruption of capitalism. And we can do better. Now, the thing I think nobody tells founders, leaders, board members, we tell people don't worry, get to product market fit, have success, get big, and then you'll have power. And then because you have power, you'll have freedom. And this is true, but the problem that we don't tell people is that the more success you have, the more valuable you become as a target. So although you may be powerful, the financial system is even more powerful. And if it comes for you, it doesn't come for everybody. Some people sail through this and they never have this problem. But the vast majority of companies eventually encounter this gravitational pressure to conform, to abandon the spark, to lose what made them special. And I in the book I quote um there's a Harvard Law School study that shows that among venture-backed companies who have standard governance, like this, who follow all the best practices, only 20% of founders will still be CEO three years after an IPO. Everyone thinks they're part of the 20% exception, but statistically speaking, you're much more likely to be part of the 80% that is gone. Enough. Enough of this. It's absurd.

SPEAKER_01 14:04

Yeah. Man, we we see this in the world of mergers, acquisitions, and banking is this uh identity pull of I built this, I'm um, you know, some people, you know, they're they're just on their way out health-wise, or they want to transition to kids, or they they want to take on a new mission, but being ripped from your thing that you've built, being voted out, being, you know, leveraged by it, but whatever the case may be, being yanked out of something prematurely, not by choice, uh man, it's it's brutal. And you you said you've suffered enough pain where you came back and wrote another book. What was the pain? And you might not be able to give details because you're talking about public companies, but what is some of the pain that you experienced firsthand or saw that made you write this book?

SPEAKER_00 14:51

Yeah, I tell the story in the book of um of an incredible founder who I really admire. He made unbelievable amounts of money for his investors. Okay, people will talk about how this is also all about investors, but this is someone who made just gargantuan amounts of money for his investors. And yet, um, you know, because of bubble dynamics, the stock price like went way, way up and then it crashed. And because people measure Piquetrov, there was all these activist investors who were screaming for his head and they they ousted him from the company. And I was going to an event to like celebrate him, you know, and it was it was a cool event. You know, we got like employees, former employees, current employees. There must have been a thousand people there. People flew in from all over the country to be there for this event. Anyway, as I was going to this event, I was talking to a new founder. It happened to be, I told you, people call me all the time for advice. So I get this call as I'm on my way to this event from a founder who's like, I want to build this new company. I've got this cool technology. He's going on and on and on to me about it. And I'm explaining to him the kinds of problems we're talking about this problem with the ethos, the spark, losing the thing. And he's like, Yeah, yeah, yeah, I hear you. But anyway, can you talk? I talk, can we talk about my technology, you know, whatever. Anyway, so I'm we're talking about it. I'm he's like saying it, but as I'm talking, he's trying to be like, you know, it's funny you say that. You know, employees are asking me tough questions I don't know the answer to. They're asking me, like, how do I know this technology won't be used for evil? I can really see how this could be used to like extort people and gain leverage over them. And I don't want it to be used. I want it to be used to cure people and to help people. That's how we're going to make the most money. My employees ask me, how can I ensure them that this bad stuff won't happen? Well, I'm not going to become the next Mark Zuckerberg. And I tell them, don't worry, I have such good intentions. And that's not really getting it done. So I'm trying to give them these assurances. But when I talk to investors, in if I mention, if I even mention to investors that I'm even the tiniest bit worried about this stuff, they pat me on the head and say, Oh, I guess you're not very serious about business then. So he felt like really stuck. Like I'm trying to create this mission-driven company. I don't know how to promise the anyway. I'm like, look, I gotta go. I gotta go to this event. Explain to him what it was. And he's like, What's the event? What's happening? I'm like, this is founder, blah, blah, blah. And he's like, oh, go have a good time, enjoy the party. I'm like, no, man, you're not hearing me. I've been trying to tell you this whole time. This isn't a party, it's awake. We're here to mourn. And he's like, Well, did somebody die?

unknown 17:13

No.

SPEAKER_00 17:13

I'm like, nobody died. He's like, oh, did the company die?

unknown 17:16

I'm like, no, no.

SPEAKER_00 17:17

The company's fine. I'm trying to tell you what happened. Even though the company's fine, and it has new leadership. I even know the new leadership. They're perfectly fine. The problem is nobody can ever trust this company again. Because the CEO, the new CEO makes you a promise. Why should you believe him? He could be gone in a second. There's nothing he can do. If you can't, if the amount of money this founder made for investors is not enough to make you safe, there's nothing this new CEO can do to be safe. If investors demand it, this company can be decapitated at will. And we're mourning the loss of that trustworthiness. And the founder who was on the phone is like, oh my God, is that going to be me someday? And I'm like, that's what I'm trying to tell you. Yes, if you don't, if you follow the best practices that everyone tells you are the best way, you were going to wind up just like my friend. I couldn't protect him, but now I know how to protect you. And he was like, Really? Is it possible to build an incorruptible company? I was like, well, good news, bad news. The good news is, yes, it is possible. I know it sounds impossible, but it is possible. I can teach you how. The bad news is you've already taken wrong steps. You're already headed in the direction, not where you want to go, but where other people want you to go. And he was like, okay, now I'm ready to listen to you. I was like, okay, well, I got to go to the thing. After the wake, I will call you back. We will make this happen. And I've had that conversation now with dozens, hundreds of founders. And I've like figured out, I think, how to build organizations that can resist this pressure that are structurally strong. And so it's time. I think it's time for us as builders who care about this kind of stuff to embrace a new set of best practices.

SPEAKER_01 18:56

Yeah, there's this, okay, mission

You're More Mission-Driven Than You Admit

SPEAKER_01 18:58

driven. Does this does this incorruptible apply to non-mission driven? Like, look, we don't our mission is to make money. We we we pump out pens. You know, we we sell pens. We don't care about the mission. Do we, you know, we make margin, we're all good. We don't have 50 companies in our firm, whatever.

SPEAKER_00 19:14

No, it so it doesn't. It absolutely doesn't. Um, such companies can never be protected because uh fundamentally they are too weak, they don't stand for anything. So they can be tempted into betraying their mission. However, people say that about themselves because that's what you're supposed to say to sound savvy now in our finance-driven economy. Many people who claim to not be mission-driven actually are. And I can easily prove it to them. So I'll just give you one example. Of software, or a software entrepreneur called me for advice about this. And he was like, listen, before we start, I've heard, you know, you're like the governance guy and you could, but you care about I don't have a mission, no purpose. I don't care about stakeholders. I'm not woke. I don't want to hear about ESG. I was like, give me this long list of things. I was like, oh, you don't want to hear about stakeholders, no problem. But how do you feel about your employees? He was like, I would do anything for my employees. I was like, really? Sounds like maybe you feel like you have a fiduciary duty to your employees. He's like, of course I do. And I was like, okay, but you just told me a second ago you're pure mercenary, you just want to make money by whatever means necessary. What if that meant betraying your employees? He's like, I would never. I was like, okay, well, what do you what you I heard you told me what you don't want to talk about? What do you want to talk about? He's like, well, I just want to build a company that engineers say, this is the greatest company I've ever worked at because we believe in quality above all else. We're gonna build our products are gonna be efficient, high quality, the best, the best products that can be built. I was like, interesting. Is it your experience that that kind of naturally happens to companies as they get bigger? He's like, no, the last three companies I started, they started out that way and then they became like totally lame places to work. That's not gonna happen this time. I was like, oh, really? And what's your plan? He's like, well, I'm just gonna be really tough, strong about it. You know, it's like I was like, okay. You don't really believe what you think you believe, and I can easily prove it to you. Imagine that one day this company is a success. You're making tons of money from your high quality products. And one day one of your engineers comes to you and says, Hey, boss, I just realized something. If we make this particular product a little worse, lower the quality of it, customers won't even notice, but we'll make more money. Are you gonna do it? Was like, absolutely not, over my dead body. I said, But I thought you told me a second ago that you're gonna make money by whatever means necessary. He's like, Well, not like that. Oh, I see. So there are some limits. Oh, interesting. Well, did you know if you have any limits at all, then you are a business revolutionary, whether you admit it or not. You actually are a mission driven founder, even if you don't feel comfortable with that language, because we live in the era of shareholder primacy. Actually, I think we've gone beyond shareholder primacy. We're now in the era of extraction primacy. Meaning, if anybody can come up with a way where you can use the assets under your disposal to make a little bit more money in the short term, you must comply. So if you say there are limits, you don't want that to happen. You don't think that's how your company should be. You think it should exist to do any specific thing. You better get serious about this or you're in big trouble.

SPEAKER_01 22:11

Yeah. So the money, uh the money, uh

Shareholder Primacy Is Dead. Welcome to Extraction Primacy.

SPEAKER_01 22:16

raising capital, friends and family, bootstraps, series, you know, all the way up, right? You in your book, you describe this kind of gravitational force that occurs when you're when the money gets bigger, the fame gets bigger. That kind of explain what you mean by that. And then how do you how do you prevent that when you need money, right? And you can't just say follow the, you know, follow book A, lean startup. Be more lean, you don't need all that money.

SPEAKER_00 22:45

No, this is there, there are companies that need money. It happens. Like, and and look, I do think there are companies that raise money that don't need it, but there's companies that can't raise money that do need it, and that's both are problems. So, to answer your question, let me let me tell you a story first. Answer with a story, because I honestly think this story

Sol Price, FedMart, and the Locks That Got Changed

SPEAKER_00 23:00

is a bit of the encapsulation of the whole thing, and it's kind of a fun one. People don't really know the story of Saul Price anymore, but he is really the father of modern retail. He's so much the father of modern retail that if you've ever wondered why Sam Walton called his store Walmart, it's because he was paying tribute to Saul Price's company, Fedmart. Okay, so this is like truly the origins of the big box warehouse model of retail dates to Saul Price. So Saul Price was trained as a lawyer. He's a really interesting character. So he wasn't an entrepreneur from a young age. He was a lawyer, had a whole career as a lawyer. And when he was a lawyer, he learned a very important rule. The rule is if you have a client, you have a fiduciary duty to the client, meaning you have to put the client's interest before your own. Simple. When he became a retailer, he asked himself, well, who's my client? And he'll say, Oh, the customer is my client. So he built Fedmart, a discount retailer with a membership model, capped margins, higher than average wages, all the formula that has been proven again and again and again to work. He followed that formula in the 1950s. And he said, I'm a fiduciary to the customer. So it worked really well. Customers love shopping at Fedmart. They would drive miles out of their way to go there. You want to know why they trusted him so much? If competitors would do product dumping and sell loss leaders to try to get customers out of their store and into their, you know, out of his store and into theirs, Saul would put up signs inside his own store saying, Don't buy this product for me. It's cheaper down the street. He would post their ads to let people know where to get the lowest price. He's like, I'm your fiduciary. If the lower price is not in my store, I will tell you where to get it. But he also would not play those games with them. He believed in capped margins, meaning he marked every every item up 14% exactly. Not more, not less. He wouldn't, he wouldn't lower the price just to win sales because he felt like that was dishonest. He wanted to have only high quality products. He had limited SKUs. He believed in what he called the intelligent loss of sales. Everything designed for making a very clear promise to customers. If you come into my store, you are going to get high quality goods at a price you can avoid. He wouldn't spend any money on marketing or salesmanship. He said the best marketing is the unsolicited testimonial of the satisfied customer. That was Saul Price. So Fedmart was a huge success. He took it public, had a lot of success as a public company. But that's when the problem started. He started to feel this gravitational pressure. He felt like the public market investors didn't understand what made Fedmart great. He wanted low prices and high wages, but they wanted high prices and low wages. So he was very much an entrepreneur. He didn't just like to complain about things. He said, I'm going to solve that problem. I'm going to take the company private. So he did. He arranged with new investors to take the company private. They owned 51%. He owned 49%. Took the company private, and this solved zero of his problems. Because the new board, the second after the deal closed, what do they want? They want higher prices and lower wages. They want best practices. They want everything to be done the way other retailers do it. But Saul was a 100% uncompromising, impossible person who was just like, no, this is what makes Fedmart great. I will not change. So one day in 1975, after Saul had been building Fedmart for more than 20 years, he came into work and he could not get into his office because the locks on the door had been changed. Saul doesn't work there anymore. What the bleep are we doing here? It's absurd. This is considered a governance best practice because they're the shareholders and they get to decide. So let's see what happened. Let's do a little A-B split test experiment. In corner, in the in the way in the first corner, where in the blue trunks, we have Fedmart and its new investors who now control it completely. They managed, through the pursuit of higher profits, to bankrupt the company within seven years by destroying the trust that they had built with customers. Fedmart was in liquidation by 1982. In the B corner, we have Saul Price. We're in the red trunks. What did Saul do? He took two weeks off to lick his wounds. And after two weeks, he was back at work. He started a new company. He leased the office upstairs from Fedmart headquarters where he had first started the company. And he was back to work. He created a new company he called the Price Club. Because here's the critical thing you gotta understand about the situation. There was something I think investors understood that Saul never did. They understood that precisely because Fedmart was trusted by its customers, it could betray them and get away with it. So many private equity firms run on this principle. You take over a beloved brand and just squeeze, squeeze, squeeze. It takes a long time. Seven years is actually a long time for the thing to collapse. You can extract a lot of money. Think about the guys who took over Sears and extracted billions while they drove the company into bankruptcy. But Saul understood something that the investors never understood, which was they looked at Fedmart and they said, ooh, this is a juicy target. Look how valuable Fedmart is. They see its stores, its inventory, its employees, its contracts, its customers. They see the surface level stuff, but they could not see the engine that made all that possible. Saul understood the engine of interlocking parts that made it work, which meant that he knew it was repeatable. He knew he could do it again. So Price Club today is not that well known, although when I was a child growing up, it was a fixture of our local economy at a time when Fedmart was already a distant memory. The reason you haven't heard of Price Club, for those who are encountering it for the first time, is because of another guy who left Fedmart to go with Saul to Price Club. He quit in protest when Saul was betrayed. His name was Jim Sinegal. And if you're a student of business history, you certainly know this name. He worked his way up from stockboy to executive. Saul was a big believer in promoting from within. And so he went to uh work at Price Club. He did for a few years. And after that, he decided he wanted to strike on his own. He understood the engine too. He's like, if this is repeatable, I could do it too. So he decided to start his own company. And a few years after that, his company and Saul's company merged to form the company we all know today as Costco. Now, today, Costco has a $400 billion valuation, and yet, even to this day, is constantly under pressure from Wall Street. What does Wall Street want from Costco? They literally say things like this: Costco is taking money that rightfully belongs to investors and instead spending it on improving the customer experience. That's a criticism, really? They have always wanted higher prices and lower wages. That's the thing they've always wanted. So why is it that Fedmart was destroyed while Costco endures? It's not because Jim Senegal was like a better person or had better intentions than Saul. When he was once asked, they said, Gosh, it seems like you learned a lot from Saul Price. He said, No, you're mistaken. I learned everything from Saul Price.

Costco's Governance Fortress

SPEAKER_00 29:54

Okay, he was a big believer in the Saul Price ethos. This is the magic combination. Costco not only has the ethos of Saul Price, it has something else, something I call integrity. It has a structure that makes it impossible to bully from the outside. I call it a governance fortress. So when investors show up, when activists show up, that Gostco has been attacked by every kind of ludicrous thing you can imagine. It bounces right off because the management there doesn't care. They don't need to take in that kind of feedback. And the board of Costco understands its job not as an agent of shareholders, but as a bulwark in defense of the mission. So this is the combination, really, that if we want to prevent this from happening to companies, we need the ethos, the character, the business philosophy of Assault Price, but we need the integrity, the governance fortress of Jim Cynical.

SPEAKER_01 30:50

Yeah, I love that story.

The Spiritual Holding Company Explained

SPEAKER_01 30:54

I think when when that kind of stuff happens, uh two things happen. I mean, he only took two weeks to kind of figure this out. So it's you're gonna come back with a vengeance, right? Oh yeah. Or or you're just gonna run away. I love the the comeback stories where they go, okay, I'll show you. And then they come back and do something remarkable. And uh Costco is pretty awesome to this day. Uh Eric, as as you are writing this, uh, one of the things, the subjects that came up in the in the book is a a spiritual holding. Uh what the heck is that? All right, when we're talking, all right, we're gonna sit in front of this, you know, investor board and we're gonna talk about raising capital, this VC groups or or a family office, and we're gonna bring up the topic of spiritual holding company. What in the world is that?

SPEAKER_00 31:44

Okay, I know this is gonna sound exotic to a lot of your listeners who are gonna encounter who are encountering it for the first time. And you don't have to use the term if you don't want to in a business context, if it makes you uncomfortable. There are lots of other lots of other terms. You can call it a mission guardian entity, you can call it a perpetual or infinite holding company, a perpetual purpose trust, an industrial foundation. It goes by a lot of names. To illustrate what this is, can I tell you one more story with time? Yeah, I love it, man. Okay. Let's go back to the 1920s. Uh, this is a little further back than than Saul Price. There's a woman named Marie Crow who uh grew up in Denmark. She was actually one of the early uh credentialed doctors in Denmark and a big boo, a big advocate for women's medical education uh in Denmark. Anyway, she happened to be married to August, who won the Nobel Prize in Medicine. But bad news, at the same time he won the Nobel Prize in Medicine, she was also diagnosed with an incurable disease, which at the time the incurable disease was diabetes, no known cure. So despite her fatal illness, August convinces her that she should nonetheless come with him on a lecture tour of North America. So they come from Denmark to North America, they go, he's going around lecturing. She's accompanying him. She's at dinner with some scientists at one of these events, and the scientists at the table are discussing a new breakthrough that's happened in Canada. Scientists there have, for the first time, isolated artificial insulin, a possible cure for diabetes. She's pretty excited. August is pretty excited. She convinces him that they should extend their trip and go see this breakthrough for themselves. So the two scientists travel to Canada, they meet with the team, they go to the lab, they see how the thing worked, they're blown away. And they ask, can we please commercialize this? Can we bring this back? Can we license this from you and bring it back to Denmark? Not just to save Marie's life, but thousands of others. The Canadians agree, but everyone involved in the moment has this concern, a concern that sounds awfully modern. They said, Look, Trash, let's imagine that you had a life-saving cure that I buy from you. Okay. I need your medicine to live. So I want to pay you a fair price for it. I want you to stay in business. I want you to make money. I want you to have every incentive to keep making that medicine. Otherwise, I'm in big trouble, right? But they worried, but hold on. In that situation, you could do more than charge me a fair price. You could charge me anything you want. It's a life-saving medicine. I must pay you. They thought that was wrong. They thought a for-profit company would never be able to resist the temptation to do this evil deed. Decades before Martin Skrelly, okay, these guys understood where this was headed. So they made an agreement. They would create a new company. They called it the Nordisk Insulin Laboratorium. But it would be a for-profit company governed by a nonprofit foundation. I call that the Stat Structure, the Spiritual Holding Company, a separate entity whose job is to look after the spirit, the main thing that makes a company worth building. Like I said, you can call it a mission guardian entity or a mission lock vehicle. It goes by a lot of names. And in fact, it goes by too many names because the nonprofit foundation is one of like 10 or 15 different ways you can do this structure. You could do it with a co-op or an employee ownership trust or a perpetual birth. There's so many advocates for so many different ways that we don't actually have an omnibus term for all of them. Hence, in the book, I call it the spiritual holding company. So let's talk about what happened to the Nordisk Insulin Laboratorium. If that name sounds a little bit familiar to your listeners, it's of course, this is the predecessor of today's Nova Nordisk, one of the largest companies in the world. And this structure has endured in a way that very few other structures have. Even though, again, for most people listening, this will be the first time you're hearing about it. This is not a new structure. They didn't invent this. The German optics company Zeiss, who makes my glasses, lenses, and lots of people listening, they had this structure in 1885. So I always tell people, just because it's new to you doesn't make it new. And in fact, there are a lot of companies that have this structure. If you've ever eaten a Hershey chocolate bar, shopped at IKEA, bought a Patagonia vest, you have encountered this remarkable structure. In fact, there are so many of these companies that there's a data set. How do they perform financially compared to conventional companies? Well, it turns out really well. Companies with this structure are six times more likely to live to year 50 than conventional counterparts. They have superior return on invested capital. They have superior Tobin's Q, if you know what that is. Um, they're more likely to invest countercyclically. They treat their employees better. I could go on and on and on. There's all this data. You can look it up, obviously, in the end notes of the book. It's extensively documented. But to me, what's really interesting about this is it's it's value creating in a way that is very intuitive once you understand how it works. And yet we constantly tell leaders and board members and founders that it's