Ep. 1 Decoding Lean Principles with Eric Ries

Decoding Lean Principles: Eric Ries and The Long-Term Stock Exchange

A CONVERSATION WITH THE AUTHOR OF "THE LEAN STARTUP"

41 min

Ep. 1 Decoding Lean Principles with Eric Ries

41 min

What do you do after you’ve changed the way an entire generation of founders launch and build their companies? If you’re Eric Ries, you tackle one of your most ambitious projects yet—creating a new stock exchange to generate long-term, sustainable value. Hear Eric discuss “The Lean Startup,” the hard work of changing the status quo, and more.

"I couldn't understand why the technology that we were building was so great and yet the business outcomes were so poor. And so I thought, okay, I need to learn more about business."

Quick takes on...

Why "Startup" Doesn't Necessarily Mean "Small"


"I said, look, it seems to me like these ideas should be equally applicable in a two person company, you know, two founders in a garage or 200 or 2000 or 200,000. It doesn't seem like size or industry or sector should matter. What should matter is like the fundamentality of doing something new... anytime you have that extreme uncertainty, you're automatically in startup mode, no matter what."

Why Speed of Innovation Is Critical


"The question is, are you learning faster than whatever the normal cycle time is in the industry that you're attempting to disrupt? So if it normally takes a year to do something and you can do it in a month, then you're faster. ... So speed of learning really is the fundamental unit of competition."


Mastering the Process and Practice of Entrepreneurship


"This is a discipline that you can master and we can take many of your historic corporate strengths and apply them to doing entrepreneurship well or poorly. It's kind of up to you. … As more managers have really awoken to the true uncertainty of the century ahead, there's been more adoption of techniques that are designed to mitigate that uncertainty..."

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Meet your guest, Eric Ries

Author, “The Lean Startup”; Founder, LTSE

Eric Ries spotlight on Decoding Digital

Eric Ries is an entrepreneur and the author of the New York Times bestseller, "The Lean Startup," which has sold over one million copies and has been translated into more than 30 languages. He is the creator of the Lean Startup methodology, which has become a global movement in business, practiced by individuals and companies around the world. This methodology was the inspiration behind his founding of the Long-Term Stock Exchange (LTSE) and his books, "The Leader's Guide" and "The Startup Way." In addition to his work on LTSE, Eric is hosting his own podcast ‘Out of the Crisis’ where he talks to leaders from every industry who are providing and coordinating relief efforts during the COVID‑19 pandemic. Give it a listen by subscribing to it on Apple or Google podcasts.

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Ep. 2 Michelle Romanow talks about decoding venture capital on AppDirect's Decoding Digital podcast

Decoding Venture Capital: Michele Romanow Rethinks How to Invest

A CONVERSATION WITH THE FOUNDER OF CLEARBANC

28 min

Venture capital has a people problem. Typically, it requires personal introductions and face-to-face meetings. It also takes a long time, and bias inevitably creeps in. Hear from Michele Romanow on how she is changing that dynamic by using data, AI, and automation to accelerate funding decisions and make it much more diverse.

Episode transcript

Eric Ries: [0:00] The failure started to really get to me, and I couldn't understand why the technology that we were building was so great, and yet the business outcomes were so poor. I thought, "OK, I need to learn more about business." 


Daniel Saks: [0:13] This is "Decoding Digital," and I'm your host, Daniel Saks. Every episode, we hear from someone who is working to build something new in the digital economy. Each guest has a unique perspective to share, and together, we work to understand or decode a trend that is shaping our digital world. Today, I'll be decoding the Long‑Term Stock Exchange with Eric Ries. Let's dive in.

When a book called "The Lean Startup" was released in 2011, it quickly sold a million copies and was translated into 30 languages and completely changed the way a generation of founders built and launched their companies. Since then, the book has become a global movement with ongoing education meetups in 94 cities across 17 countries, and that continues to influence the way businesses are run.

Today, we're going to meet the person behind the Lean Startup phenomenon Eric Ries. Eric is an entrepreneur and investor with two decades of experience in Silicon Valley. He has advised startups, venture capital firms, large companies, such as GE on product strategy, and he has served as an entrepreneur in residence at Harvard Business School, and IDEO.

Eric's latest project, the long‑term Stock Exchange, is looking to transform the way that companies IPO. Putting an emphasis on sustainability and enduring success that delivers value to more people. Eric, thrilled to have you on the show today.


Eric: [1:44] Thanks for having me on.


Daniel: [1:43] Amazing to always connect. So we've known each other for a while, but I have to say it for the listeners, the Lean Startup methodology really transformed the way we started our company. Can you tell us a little bit more about how you got to writing the book and starting this movement?


Eric: [1:58] Thank you. I admire what you've taken the tools to build. It's been awesome to watch. My story begins as a lot of software engineers and programmers did, I was a programmer as a kid. Loved computers and technology, did a computer science degree. Then my life took this detour because I happened to be in school at the time of the .com bubble. When.com mania swept the world, I got swept up in that too. I wind up doing a number of startups.

The way people thought about building startups in the end of the 20th century, wasn't very sophisticated, [laughs] merely by not our standards now. I was the least educated of all the founders that have [laughs] attempted anything in that way. It didn't go very well.

I got bitten by the entrepreneurial bug and I wind up doing a series of startups that failed in ever more spectacular ways. What was interesting, and when I look back in retrospect, the Silicon Valley ethos that if you failed, that was a learning opportunity. That meant that you were more qualified to do the next start-up in the previous one. I didn't understand that, you know, coming in.

It took me a little while to appreciate how powerful that was. Nonetheless, the failures started to get to me. I couldn't understand why the technology that we were building was so great, and yet the business outcomes were so poor. I thought, "OK. I need to learn more about business." I was trying to learn and educate myself about how do you build a company in a different way that would get to better outcomes.

What I discovered is that a lot of conventional business thinking is optimized around the use case of large companies that are building in a stable world and a consistent product and have been for a long time. Not to say that, that knowledge is not useful. It just wasn't especially useful to me.

As a founder, first and foremost, and then as a leader of companies, and then eventually, as a writer, I went on this many year odyssey to try to understand what are the management principles that make sense in an entrepreneurial context. In a context where you don't know what's going to happen in the future, where you're trying to do something fundamentally new.

That ultimately led me to a bunch of related theories like customer development, and agile, and lean manufacturing, and that ultimately culminated in this idea called Lean Startup, which now I can't believe it's been 10 years since I started writing about it or more now.

Eric Ries: [0:00] The failure started to really get to me, and I couldn't understand why the technology that we were building was so great, and yet the business outcomes were so poor. I thought, "OK, I need to learn more about business." 


Daniel Saks: [0:13] This is "Decoding Digital," and I'm your host, Daniel Saks. Every episode, we hear from someone who is working to build something new in the digital economy. Each guest has a unique perspective to share, and together, we work to understand or decode a trend that is shaping our digital world. Today, I'll be decoding the Long‑Term Stock Exchange with Eric Ries. Let's dive in.

When a book called "The Lean Startup" was released in 2011, it quickly sold a million copies and was translated into 30 languages and completely changed the way a generation of founders built and launched their companies. Since then, the book has become a global movement with ongoing education meetups in 94 cities across 17 countries, and that continues to influence the way businesses are run.

Today, we're going to meet the person behind the Lean Startup phenomenon Eric Ries. Eric is an entrepreneur and investor with two decades of experience in Silicon Valley. He has advised startups, venture capital firms, large companies, such as GE on product strategy, and he has served as an entrepreneur in residence at Harvard Business School, and IDEO.

Eric's latest project, the long‑term Stock Exchange, is looking to transform the way that companies IPO. Putting an emphasis on sustainability and enduring success that delivers value to more people. Eric, thrilled to have you on the show today.


Eric: [1:44] Thanks for having me on.


Daniel: [1:43] Amazing to always connect. So we've known each other for a while, but I have to say it for the listeners, the Lean Startup methodology really transformed the way we started our company. Can you tell us a little bit more about how you got to writing the book and starting this movement?


Eric: [1:58] Thank you. I admire what you've taken the tools to build. It's been awesome to watch. My story begins as a lot of software engineers and programmers did, I was a programmer as a kid. Loved computers and technology, did a computer science degree. Then my life took this detour because I happened to be in school at the time of the .com bubble. When.com mania swept the world, I got swept up in that too. I wind up doing a number of startups.

The way people thought about building startups in the end of the 20th century, wasn't very sophisticated, [laughs] merely by not our standards now. I was the least educated of all the founders that have [laughs] attempted anything in that way. It didn't go very well.

I got bitten by the entrepreneurial bug and I wind up doing a series of startups that failed in ever more spectacular ways. What was interesting, and when I look back in retrospect, the Silicon Valley ethos that if you failed, that was a learning opportunity. That meant that you were more qualified to do the next start-up in the previous one. I didn't understand that, you know, coming in.

It took me a little while to appreciate how powerful that was. Nonetheless, the failures started to get to me. I couldn't understand why the technology that we were building was so great, and yet the business outcomes were so poor. I thought, "OK. I need to learn more about business." I was trying to learn and educate myself about how do you build a company in a different way that would get to better outcomes.

What I discovered is that a lot of conventional business thinking is optimized around the use case of large companies that are building in a stable world and a consistent product and have been for a long time. Not to say that, that knowledge is not useful. It just wasn't especially useful to me.

As a founder, first and foremost, and then as a leader of companies, and then eventually, as a writer, I went on this many year odyssey to try to understand what are the management principles that make sense in an entrepreneurial context. In a context where you don't know what's going to happen in the future, where you're trying to do something fundamentally new.

That ultimately led me to a bunch of related theories like customer development, and agile, and lean manufacturing, and that ultimately culminated in this idea called Lean Startup, which now I can't believe it's been 10 years since I started writing about it or more now.

It's been a wild ride where I feel like I got access to this almost secret knowledge about how entrepreneurship works. It's nothing like you see in the movies. It's nothing like you read in the business school case studies, it's totally different. I now have had the chance to share that with a lot of people. It's been a very moving decade.


Daniel: [4:50] People say there's no manual for starting a startup, but using a certain methodology and knowing. You can be wrong about this, but if you iterate and you have conviction in your vision, you can thrive and push past it. You must get overwhelming feedback with the methodology and how it's applied. What's one thing that people don't understand?


Eric: [5:09] The most difficult thing for people to grasp is that everything a startup does is an experiment, whether you admit it or not. Everyone knows every startup is different. There's no manual. There's no repeatable set of practices that you automatically confer success.

People say, therefore, there's nothing to say about how to build a startup. That's like saying that each discipline of science is different. Therefore, there's no such thing as an experiment. In a startup, we're doing an experiment. We can pretend we're doing something else. We can say like, "Oh, no. I'm just following a business plan." There's all these different theories about what it is that you do when you form a new business. My view is that you are running an experiment, no matter what philosophy you adhere to.

Therefore, all of the tools of the scientific method are at your disposal. We can say, "What would make a good experiment versus the bad experiment? What's a falsifiable hypothesis versus not?" There's always scientific concepts that we can bring in.

It's funny because, so many startups are started by scientists and engineers, and people who in the lab are extremely scientific and very dedicated to the epistemology of science. Yet when they apply business thinking to what they're doing, they often act more like astrologers than scientists.

That's still one of the most underappreciated things about Lean Startup is that a scientific mindset is valuable, even though the specific tactics that you're going to use to put those principles into action is, of course going to be different depending on stage and industry, and the character, and interests of the founders, etc.


Daniel: [6:47] Got it. How can Lean Startup methodology be applied in larger organizations as well?


Eric: [6:52] This was a big surprise to me. When I first was working through the theory of Lean Startup, I noticed something. I said, "Gosh, Lean Startup really to me seems like it's more about uncertainty than it is about company size." I always thought that the essential definition of a startup was a small company.

That's kind of how we use that as those terms of use small business and startup in the world interchangeably, but that doesn't make any sense. You meet most entrepreneurs they are not striving to build a small business. In fact, very few small businesses are intentionally designed to stay small. We want them to grow.

If your goal is growth, then there's something different about something that's striving for growth than a small business. Eventually, what I realized was that anytime you face extreme uncertainty about what's going to work in the future, you're doing a startup, again, whether you admit it or

I wrote in my book as a bit of speculation, I said, "Look, it seems to me these ideas should be equally applicable in a two-person company, two founders in a garage, or 200, or 2,000, or 200,000." Doesn't seem like size or industry or, sector should matter. What should matter is fundamentally of doing something new.

Anytime an existing large company tries to build a new product or enter a new market, or conditions on the ground change dramatically, like if there was a global pandemic or something. Anytime you have that extreme uncertainty, you're automatically in startup mode no matter what. Therefore, the techniques of Lean Startup ought to be applicable, if you think about it.

I didn't know if that was true. That was a bit of deductive reasoning from the principles of Lean Startup, but it's proven true over and over again. In the years since the book was published, as you mentioned, 2011, so many companies have so many different sizes, I think I have the complete order of magnitude set now.

From two founders in a garage up to big multinationals and governments, and military stuff. People have tried to apply the Lean Startup framework, and they've done it successfully. In a big company, the major, major difference is the portfolio of work is weighted differently than the startup. If you think about any given organization, certain amount of its work is high risk, high reward, high uncertainty, and other of its work is relatively stable and well known.

Even a tiny startup, as soon as you have two customers, you immediately have to figure out "Should I try to get two more customers, or should I try to serve these two customers? You always have this dilemma between the new and the existing.

In a big company, a lot of the portfolio is heavily weighted to the existing. There are some big companies that have more startups currently active within the company than all of Silicon Valley put together, they're that big. If they use 20th century general management principles to manage those startups, to do an extremely poor job of it.

A lot of the Lean Startup framework is simply taking these principles and kind of unlocking for corporate managers that just because you've learned discipline of management in a certain way, doesn't mean that that's the only discipline of management available.

Yes, you have mastered general management, but there's also this entrepreneurial management discipline that you can get good at. Then it takes entrepreneurship out of this mysterious force that all these crazy kids do. No, this is a process. This is a discipline that you can master and we can take many of your historic corporate strengths and apply them to doing entrepreneurship well or poorly. It's up to you.

For companies that exist in the 21st century, anyone who thinks like, "Oh, don't worry, my industry is safe. There's not going to be any disruption in my business." Come on. [laughs] Those days are over. As more and more, and more managers have awoken to the true uncertainty of the century ahead, there's been more and more adoption of techniques that are designed to mitigate that uncertainty in a corporate context.


Daniel: [10:46] The Lean Startup methodology has been an inspiration to me in growing AppDirect, and has been at the forefront of the way startups think about evolving. It was also clear on over the last decade how Lean Startup methodologies touched all types of businesses, whether it's fortune 500s, whether it's government, or whether it continued growth.

One of the things we did with our organization early days when we started was talk about the Lean Startup methodology and how important it was. The [laughs] irony was we were working on multi‑year sales. It took us two years to get to potentially even talk to our first customer than more years to launch.

Five years in, we had our core KPI, which is app transaction and people said, "How can you call yourself a Lean Startup, if you know it takes five years to launch?" I love that you're working on such an ambitious long‑term project. I bet you have a good answer on that question.


Eric: [11:40] [laughs] Long‑term Stock Exchange, we're about to launch finally, after almost 10 years of work. There's nothing about Lean Startup that like this. [laughs] Here's the funny part. People read these stories of Lean Startups who did a specific tactic. Like the founders of Instagram, used Lean Startup, and they made a very famous pivot.

Everything of Instagram happens so fast compared to if you're building a nuclear power plant or something long. People then say, gosh, if fast means you can ship every week or every day, I want to start. How about we ship 50 times a day, practicing what's called continuous deployment.

Therefore, how can somebody slow also be fast? Of course, it's the wrong comparison. The point is not like, "Can you pivot faster than Instagram?" The question is, are you learning faster than whatever the normal cycle time is in the industry that you're attempting to disrupt.

If it normally takes a year to do something, and you can do it in a month, then you're faster. If it normally takes five years to do something, and you can do it in one year, then you're faster. If something normally takes 100 years and you can do it in 10 years. That's actually pretty good.

The last time someone attempted to build a new stock exchange, the listing venue, with a new corporate governance model is the creation of NASDAQ in the late 60s. We're doing OK. [laughs] Even when we're 10 years in, I don't mind that at all. You see that a lot in businesses where in the 21st century those who learn fastest wins.

Speed of learning really is the fundamental unit of competition. Everything you do to accelerate that learning is key. That doesn't mean that it's fast in any objective sense. Fast and slow are only concepts that make sense, relatively.

An organization that can put out a new appliance every year when their competitors only put one out every five years has an incredible cycle time advantage, even though compared to an app, it's slow.


Daniel: [13:36] What's your vision for the Long‑Term Stock Exchange?


Eric: [13:40] I wrote about this in the Lean Startup. That's how long I've been thinking about it. I think that many of the problems that afflict our society today have as their root cause an infection of short‑term thinking that has seeped into the incentive structure of all of our major institutions. A lot of that has to do with how our public markets are currently constituted.

If you go interview middle managers around the country, around the world, and you say, "What are the top three problems that afflict your organization?" You can be talking to a government, an NGO, a for profit. It doesn't matter who you're talking to.

The fact that there is short‑term pressure and short‑term thinking at the top of the organization is practically number one, two, or three of everyone in the world. This is an incredibly pervasive belief that we've lost the ability to make long‑term investments as a society.

Our view with LTSC is that if we can fix that in a root cause way, to create a new public market, same regulatory, category, and stature as NYSE or NASDAQ. That has long term thinking. That has multi‑stakeholder governance. That has diversity and inclusion, and environmental sustainability baked into the listing standards, the requirements to list there.

Then you can reverse some of these macro trends that are driving our civilization into late stage decline. It's a big idea, but it's simple. This is a funny thing where the more educated people are, the policymakers and the politicians, the fancy people with the fancy degree.

They sometimes get confused about how bad is the problem or maybe this is just temporary, or maybe it's fine. There's a lot of defenders of the status quo, but when you walk the factory floor, any place where people work for a living, this problem is like well-known and is considered grievous.

In some ways, all we need to do is give the people that create the value for organizations and empower them to stand up and say, "No. This is not the right way to run a business." It's not even like, people often frame these things as like, "We for the environment or we for economic growth." As if acting in a non-sustainable way is a good way to get economic growth.

It's a misunderstanding of where our true economic value comes from, when we operate, when we make long‑term investments. When we plant our fields long before we try to sow them. When we're good stewards of the resources that we've been given, we actually outperform from a financial point of view.

If you look at the very best companies, they naturally espouse these values. That's especially true in this next generation of founders. What we've done is build an alliance of the founders and the investors who see things this way.

We're not saying, "Hey, the whole world has to change on our timeline." We're saying, we're going to create at least one venue in the world, where companies are the customer, not traders. Where the focus is long‑term value creation and not just who trades and divvies up the value that we create.


Daniel: [16:47] Really strong value proposition and I think as an entrepreneur, you want to focus on creating value. You want to focus on living by your values and doing good. This is definitely a way to enable that. Tell us about where you are on your journey and some of the good news with drivers and approvals.


Eric: [17:01] I'll tell you a funny story. When I first started this company, I don't know how many years ago now. Long, long, long, long time ago. When you want to say, "I want to start a new stock exchange," people look at you funny. It's almost like you said, "I want to create a new moon."

They're like, "Uh, first of all, we already have one, so do we really need another one?" That's first reaction. The second reaction is like, "Also, you're just a human being. Cosmic matters are not for you. This is not the kind of human scale endeavor that you can do."

It's like, "This is impossible. We've got two exchanges already. We don't need another one. Also, nobody can create a new one. What are you talking about?" It has this kind of incredulity about it. Many of the people who make their money from the financial system are not exactly so happy to help an upstart person come in and disrupt.

It took me a lot of years just to get a clear answer to my question, which is I had to create a new stock exchange anyway. I finally found this lawyer. He said to me, "You know, it's not that hard. You have to fill out a form one application."

I was like, "I don't understand what that means." He's like, "The form one." I'm like, "Not following you." He's like, "OK, let's take a step back. You know how government forms are all numbered? I'm like, "Yeah." He's like, "OK, well, this is SEC Form number 001, the application to establish a National Securities Exchange. It's just a form."

Now, the form is 200 pages long. It's very, [laughs] very complicated, but it's not inhuman. You don't have to be a certified demigod. It's a form. The United States Congress has laid out a legislative process by which this is done. It took us five years to fill out that form, but we did get what's called the Form‑1 Approval from the SEC last year.

Then that gave us the regulatory power to do everything that NYSE and NASDAQ can do, but that's not enough. On top of that, we wanted to say no. We want to have differentiated listing standards. The whole point is that if you want to list on LTSE, it has to be a meaningful commitment to these principles I was talking about a moment ago.

We got that approval last month. If not for COVID, we would be launched in trading stocks right now. As soon as the financial markets stabilize, we expect to be able to launch the trading platform. At that point, we'll be able to start soliciting companies to list on the platform and abide by the principles. It's going to be a pretty exciting year for us.


Daniel: [19:23] Congratulations. Let's decode that a little bit further. Let's say I'm a company that wants to go public on your stock exchange, what's different and what's required?


Eric: [19:32] We take all of the existing corporate governance standards as a base. Listing in LTSE is about being held to a higher standard than with a conventional IPO or direct listing, so much so that you can even do list. We allow companies. If you still want to go, ring the bell and have an NYSE IPO. Amen. You could just add LTSE as a secondary listing.


Daniel: [19:56] Are you going to have a bell?


Eric: [19:57] You can ring the bell in New York. It's fine.

I don't really believe in jinxing things, so we haven't even gotten there. We'll get the thing open, and then we'll figure that out. We should be so lucky to have the opportunity to list companies. We'll figure out what the right ceremony is.


Daniel: [20:15] Good. Well, I'm sending good vibes. It's going to happen. If any of the listeners have ideas to Eric on how to...


Eric: [20:23] Send them in. We love to hear it. Because the challenge with it is a lot of the IPO iconography and ceremony, it's about the moment of the debut itself, which is a little bit having an amazing wedding, which I think is great. Listen, I had a really beautiful wedding. I think having a great wedding is good. Hiring a good wedding planner, A‑plus.

A stock exchange is not a wedding venue. It's the place where your company is going to live for the rest of its corporate life. It's the equivalent of the marriage that you're going to have with capital markets for a long time.

Part of this, the symbolism of it, and of course the substance of it is, how do we help companies understand that they're making a really significant commitment and how we make that commitment meaningful to all of their stakeholders so that their employees, their investors, their managers.

But also the communities in which they operate, their vendors, their partners, the citizens of their digital republic if you will. How do we help those people believe that this is a company with purpose and whose purpose is sincere? A lot of a lofty language you see in your typical S‑1 filing where they say, "Oh, we're going to be good for the world."

If you analyze it, have they made a commitment to do anything specific, or is this just sounds good, vague corporate speak. Unfortunately, for a lot of companies, they failed that test. It's been revealed that those were empty promises and just words on a piece of paper. They weren't real.

When companies list with LTSE, they have to adopt corporate governance policies that are in accordance with our key principles. For example, companies have to have compensation of executives and board that are aligned for the long‑term. They have to reward their long-term shareholders and engage with them differently than for short‑term shareholders.

They have to report in a more holistic way. They have to take care of their employees, their environment that makes certain exit diversity and sustainability representations. Each company‑specific implementation plan of those principles will be different. We don't believe in a one‑size‑fits‑all corporate governance model.

The commitments that they're making are real. They're enforceable, and they're independently verifiable so the public can look at a company that's listing in LTSE and say, "This is not what's come before. This is a company with sincere intention to do things differently, to treat their employees and our stakeholders fairly." That brand benefit, it's also really important not to underestimate. So much of corporate America is dealing with this crisis of credibility and trust precisely because of all these scandals.


Daniel: [22:58] Sure many people get caught up in that celebration, the wedding analogy, right? Ultimately, as an organization, there's a fear that you go public, and then your team members feel like that was the exit. You lose motivation or things change. It's a good point that almost by not celebrating that moment, it shows that you're actually just recommitting for a longer point in your journey if you're a long‑term oriented.


Eric: [23:19] I'll tell you one of my least favorite words in the entire startup lexicon, is the word exit. Why do we celebrate the exit? Who's exiting exactly? If the only people who exit are the early investors, whose listing are being rewarded. The very, very best early stage investors, they don't exit at the exit.

If you look at some of the best VCs, their returns after companies go IPO are even more than their returns pre‑IPO. The people who believe should stay on the cap table. That's what's worthy of celebration.

In too many companies, the exit is the time when the key employees exit. For a lot of customers think about how you feel when one of your favorite products gets acquired by a public company. As an exit, you're like, "Oh, this product is probably exiting from my life. It's not going to be as special as it was."

The fact that we've allowed this really important moment of the public being allowed to enjoy the prosperity that these companies can create, that we've turned that into a negative because now we know that the companies are going to become soulless corporate barren wastelands. What have we done? It doesn't make sense.

The thing we should be celebrating is not the exiting of those who are leaving, but the fact that the founders are staying, that the employees are staying, that new investors believe in the growth potential of this enterprise. I think we have to totally reimagine, reconceived what we're doing with these kinds of transactions.

We have to reverse the trend that we're on, which is that companies are going public much later. The number of public companies in this country is in a significant decline over the past 20 years. The public is being systematically locked out of the opportunity to go on this growth journey. That's not right either. We got a lot to fix.


Daniel: [25:04] Take the experiment of the Lean Startup methodology. Where are you on your experimentation?


Eric: [25:08] I love that question. That's awesome. I'll tell you how it honestly feels to me. I'm not a believer in over‑promise and under‑deliver. I don't want to say like, "Oh, we have the answer, and LTSE will solve all our problems." It's a bigger problem than anyone of us.

It's going to take many kinds of reform to fix it, especially at this current moment when the economy is under such strain and the human toll of what our society is going through, especially in this country is both heartbreaking and very, very daunting. Here's how I feel honestly.

There's something magical about interfacing with the root cause of so many symptoms. I've worked on a lot kinds of things in my life. When you're tinkering at the edges, things are easier. When you're at the heart of the system, when you're in the high‑leverage moments, things are much more difficult.

Small changes have the potential to make huge consequences. Having access via the stock exchange to... I feel like I got to go into these dusty, old control panels. We live in this utopia that was designed mostly by our grandparents. We just are the inheritors of this incredible system. We've been tinkering with it around the edges for decades.

The true, true, true heart of the system is a relatively small number of very powerful controls. I feel like we step into these control rooms and some of them are dusty and old. No one's been here for decades. You're like, "What is a red button here that says, 'Launch new stock exchange.' What happens if I push this button?"

Most people are like, "I don't know. We haven't pushed it in a long time." You're like, "OK, well, what if I pull this lever and that lever?" There are these really fundamental controls that are part of the foundation of the world that our grandparents built for us. It's almost like we have to remaster using them for the public good.

Plenty of people like, "That button has been pushed. There have been new stock exchanges created." It's all been about stock trading, efficiency, and velocity of trading. We have built the world's most effective and efficient trading system. If you want to trade 50 share lots of public companies. We're really good at that.

What if your goal is not to just make a quick buck on arbitrage? What if you want to make a fundamental investment? You forget entrepreneurship. What if you like a pension fund and your job is to make sure that you can provide for your employees' retirement decades from now? You want to make a large investment in the future. You want to do that with a public company. Well our system is actually not that good at that.

Part of this is just about reorienting from this short‑term transactional, quick-wins financial system to something that's more enduring. I think when you make changes at a deep level from first principles, from what is right, what is in the public interest, I don't think we know how impactful that can be because we do it so rarely. I'd like to go find that.


Daniel: [28:13] Really inspiring. I want to shift. You've used a few themes that really resonate with me. One is talking about a set of principles and starting an organization. The other is this vision for the long term.

What advice would you give to entrepreneurs or other people that work in living in a first‑principles way and building a vision from the ground‑up but still maintaining this long‑term thought in mind.


Eric: [28:37] I appreciate that question. The ability to think from first principle, it's one of the greatest gifts that having an education can give you. I feel enormously grateful for that. I don't just approach business as a spreadsheet but have had this more philosophical approach that has to do with the way that I was raised and the educational opportunities that I had in my life.

For those who have not had similar opportunities, I strongly recommend that, to whatever extent you can, start to study from first principles, study philosophy, study the structures that underlie the world that we live in. It's extremely rewarding. Not as a personal matter, but as a business matter, it's so essential.

The one thing I would say is most businesses or business plans even rely on certain fundamental leap‑of‑faith assumptions that have to be true in order for this plan to be a good idea. Some of them are really obvious. If I build this product, people will buy it. It's almost too stupid to say it out loud to like, "Well, obviously, I believe that," or, "I wouldn't be doing the business."

If you say, "OK, but from first principles, which people do you think will want to buy and why?" You start it working out. You work out the math. You're like, "OK, so you're telling me that most entrepreneurs are like everyone. Every person in the world is going to want my product? I love that because they're like, 'Well, great.' That's a great falsifiable hypothesis."

If you believe that's true, then you're telling me that the first 10 people I randomly run into on the street today, if I said, "Would you like to be the first customer of this new product x, y, z?" All 10 of them are going to say yes.

I've met entrepreneurs who are so delusional that they're like, "That's right. Mm‑hmm. That's what I'm talking about. I've invented teleportation. Who wants to commute when you could teleport?" I love that example because every entrepreneur thinks their product is as good as teleportation. Rarely, "Are any of our products actually that good?" More importantly, run the thought experiment with me.

Imagine I walked up to you on the street said, "Hey, would you like to be the very first early adopter customer of this new experimental technology that will disassemble you atom by atom? But don't worry. It will totally reassemble you in exactly the same place." It's like, "You know what? I'll go second. Yeah, I'm interested. I definitely don't like my commute, but I'll..."

Even teleportation is not that easy to sell. Whatever you believe, the key to success is to write it down and think critically about, "Here's the deductive reasoning. Here's what would have to be true. I work it forward. If you can model it mathematically, so much the better. I feel like I'm the last person in the startup world who's pro‑business plan," but not the fiction writing contest of it.

You could throw all the Word documents away. You don't need your fancy prose. The business plan that I am interested in is the spreadsheet that says if people behave in this way, if 10 percent of customers who see the free‑trial buy and if 82 percent of them every month decide to renew.

You have an actual mathematical equation that describes why this is going to be worth a billion dollars one day, well, let's then great. Let's go test those assumptions to see if they're really true. That's how you reconcile these two contradictory impulses that are at the heart of Lean Startup, but really, of any business philosophy.

On the one hand, it's unequivocally clear that acting quickly matters. Speed of iteration cycle, time matters a great deal. Yet, if your focus is short‑term, none of that will work for you. It doesn't make sense. This is not a new insight of mine.

Toyota Production System, they had to work this out in manufacturing 100 years ago that having a philosophy of long‑term thinking is the foundation upon which rapid‑cycle time activities make sense and again by any analogy to a scientific lab.

Each trial you do in the Petri dish, how fast you can do it really does matter because they add up over a long period of time. If you don't have an overall hypothesis of what you're trying to learn in the laboratory, just throwing chemicals against the wall is off. It's very fast, but you're not doing science anymore. I found that combination of urgent action combined with a long‑term philosophy very, very powerful.


Daniel: [32:55] Got it. It seems like that aligns with your GPS analogy. The vision tells you where you need to go.


Eric: [33:00] That's exactly it. That's exactly it. People get so confused here because people like, "Well, gosh, Lean Startup sounds mechanical. I'm having a robot do my startup for me." No, a GPS is a robot. You get in your car. You don't ask the robot, "Where do I want to go today?" The robot does not know, but you have to tell it where I want to go.

Let's say I want to drive from San Francisco to New York City. The robot will be like, "OK, here's the best route, and here's how long it will take." Let's say you start driving. You start in San Francisco. First thing it tells you to do is go across the Bay Bridge as I go to East Bay. You're driving over there.

You're like, "Uh‑oh, bridge is closed." Down for maintenance today. You wouldn't be like, "Oh, no journey over. I'll never get to New York this way." You just go home. "I had a difficulty. Oh, boohoo. Bridge is closed." No. Duh, your GPS is going to come in real handy.

A GPS helped me find a new route to get to New York City and say, "Well, OK. Why don't we go south? Instead of going east, we'll go south first. We'll cross a different bridge," or, "Maybe we'll go all the way south, pass and..." You can imagine all the different things that might tell you that it will help you navigate.

Lean Startup and all the tools of science are navigational aids to find the best path to realize the vision. When we talk about the need to pivot, a pivot is just a change in strategy without a change in vision. I'm still trying to drive to New York, but I had to pivot. Sometimes, the pivots are really extreme.

Sometimes, you're like, "Oh my goodness. There's some kind of extreme weather event, and I'm going to drive all the way south to New Mexico before I can come over east," or like, "I'm in an electric car. I have to stick very closely to where there's a Tesla supercharger." Whatever the constraints of that situation might be, it's very difficult.

You still have that True North idea of where you're trying to go. Without that True North, we can't even say whether you're getting closer or not. Imagine if I said, "I don't really care where I'm going, I just want to take a drive. I've been driving for a couple hours."

You're getting closer to business success. You're like, "Well, I haven't driven around a lot. That's not really what I asked. In fact, I could be driving in a circle for all you know." I think for a lot of startups—a lot of business, frankly—there's so much make work, busy work, and driving around in circles.

We don't even know if we're getting any closer to our vision. It's really important to think rigorously about, what are we trying to achieve? What would success look like? Then what has to be true one of those leap‑of‑faith assumptions that make success possible?


Daniel: [35:25] I'm just going to ask you a series of quick questions to get your perspective on a few things. One, what is a book that a lot of people wouldn't think of to read, but that you'd recommend?


Eric: [35:35] You want something obscure or something people don't think of in business?


Daniel: [35:41] Both.


Eric: [35:42] One of my favorite books. This is not for everybody. This is extremely acquired taste, but if you're a product development person. You work in engineering, product management, actual engineering, any of those disciplines.

Maybe if you work in an adjacent discipline, like design or finance, you might find this book enjoyable. It's called "The Principles of Product Development Flow" by a guy named Don Reinertsen, who is an unheralded genius of the late 20th century, early 21st century. He's a really interesting thinker.

The problem with this book is it's structured as a series. I can't remember now of how many hundreds of deductive theses. They're numbered. It's like "Thesis 1: Master This Concept." The entire book is an extended argument about why the way we think about product development and flow of products through a product development factory if you will, the idea of factory is all totally wrong.

It's an incisive and difficult book. If you miss one of the links in the chain of the argument, the book is completely unforgiving. It's just like, "Well, sorry." [laughs] "Return home. Go back to the start. Do it over again." It's not user‑friendly in the way that a lot of business books are, but it's just absolutely packed full of really useful ideas.


Daniel: [36:56] Fascinating. What's a productivity tip that you have for people?


Eric: [36:58] [laughs] That is not my domain. I'm a writer. Even when I was a programmer, knowledge work is impossible to be productive at. Everyone has to find their own personal way of working that allows their inspiration and creativity to flow. Yeah, I'm not a productivity hacker, put it that way.


Daniel: [37:23] What do you do outside of work?


Eric: [37:24] I love music. I have a lot of musical instruments. Down here, I have all my digital modeling stuff and upstairs is all the acoustic stuff. I have young kids now, so I hardly have [laughs] any hobbies anymore.


Daniel: [37:41] Who's a hero that you look up to?


Eric: [37:44] What's that?


Daniel: [37:45] What's like a hero that you look up to? Mentor leader? Visionary?


Eric: [37:50] Boy, it's so hard to choose. My Myers‑Briggs Type can't decide what to eat for lunch. These questions are excruciatingly difficult.


Daniel: [38:00] You're doing great.


Eric: [38:02] People often study Toyota Production System. Of course, they know a lot of the original folks, like Dan Mangan and others who are part of that. There's a couple of thinkers who don't get the credit that they deserve. There's a guy named Taiichi Ohno but even more, a guy named Shigeo Shingo.

I won't get into it, but if you're at all interested in the history of management, a lot of MBAs don't get taught that the engineering side of the breakthrough. I've said that that's who popped into my head when you were talking.


Daniel: [38:39] Eric, this has been amazing. What a great journey learning more about startup methodology, Long‑Term Stock Exchange, fundamentally first principles, and long‑term thinking. This was a really fun for me, and I'm sure the listeners as well. So great catching up.


Eric: [38:55] Oh, it's my pleasure. Thank you so much for having me on. Once again, congratulations.


Daniel: [39:01] Thanks. Take care.

Thanks for tuning in to this episode of Decoding Digital, where Eric Ries decoded the Long‑Term Stock Exchange and touched on his Lean Startup methodology. A few key things that Eric touched on that really resonated were his conviction around a set of principles.

Really when thinking about a new idea, starting from the ground up by defining your conviction and your hypothesis but having the flexibility and agility to be able to move and listen to what's going on along the way.

I also really was inspired by Eric's focus on how you can both create the vision you want while also thinking about good business. The Long‑Term Stock Exchange concept is a great example of how a big, ambitious idea that theoretically could take decades to execute on, it's still something that is worth it to focus on, to be passionate to make the world a better place.

Another huge thanks to Eric for being on the show today. In addition to his work on the Long‑Term Stock Exchange, he's also hosting his own podcast out of the crisis where he talks to leaders from every industry who are providing and coordinating relief efforts during the COVID‑19 pandemic.

Give it a listen to your inspiring stories and to find out how you can help. Don't miss the next episode of Decoding Digital where we'll decode venture capital with one of the 100 most important women in Canada, serial entrepreneur and star of CBC's "Dragons' Den," Michele Romanow.


Michele Romanow: [40:30] I think my biggest piece of advice is just get started. [laughs] Here's the thing, is you're never going to feel like it's the right time. By getting going, by jumping in the pool, you have to swim.


Daniel: [40:42] Make sure you never miss an episode by subscribing to the show in your favorite podcast player. To learn more, visit decodingdigital.com. Until next time.