Eric Ries on Building Companies That Last

Eric Ries, the author of the seminal book "The Lean Startup," recently joined Lenny Rachitsky on "Lenny's Podcast" to discuss his new book, "Incorruptible: Why Good Companies Go Bad, and How Great Companies Stay Great." The conversation delved into the often-overlooked dangers that even successful companies face, and how founders can build resilience against these forces.

The Peril of Success

Ries began by highlighting a counterintuitive truth: a company's greatest threat often isn't external competition, but its own success. He explained that as companies grow and achieve significant market traction, their very success can become a liability, a concept he refers to as "financial gravity" or a force that drags organizations down into mediocrity and eventual loss of control. This can manifest in various ways, from founders being ousted to the company's core mission becoming corrupted.

Identifying the 'Force' of Corruption

He introduced the idea of an insidious "force" that operates within organizations, one that no one controls but everyone obeys. This force, he argued, leads to the gradual erosion of a company's founding principles and can ultimately result in its decline. He illustrated this with a stark analogy: a company's success can become like a polluted environment for its founders, leading to their eventual downfall.

Learning from History: The Insulin Story

Ries shared a compelling historical example from Denmark in 1885 concerning the discovery of insulin. He recounted the story of Marie Cro, whose husband, August Krogh, was a Nobel laureate. Marie Krogh, facing a diabetes diagnosis, worked with researchers to isolate insulin. The company they founded, Nordisk Insulinlaboratorium (now Novo Nordisk), was structured with a two-tiered system: a for-profit entity governed by a non-profit foundation focused on scientific integrity. This structure, Ries explained, has endured for over a century, protecting the company's mission and enabling its immense success, demonstrating that such protective measures are not merely theoretical but have real-world, long-term impact.

The Importance of Proactive Governance

Ries emphasized that building a company that withstands the test of time requires not just product-market fit but also proactive, intentional governance structures. He stressed that waiting until a crisis or an IPO to implement these protections is often too late. "It is never the right time to do this," Ries stated, highlighting that delaying these decisions erodes the leverage needed to implement them effectively.

Key Takeaways for Founders

For early-stage founders, Ries offered a crucial piece of advice: focus on both ethos and integrity. Ethos refers to the company's internal alignment and character, while integrity refers to the structures that resist external pressures and maintain that alignment. He suggested that founders should:

• Embed mission-protective provisions into their company's charter from the outset.
• Consider a two-tiered governance structure, similar to the industrial foundation model used by companies like Novo Nordisk, to ensure long-term mission alignment.
• Be wary of the common advice to defer such considerations until later, as success itself can become a catalyst for corruption if not properly safeguarded.

Ries concluded by urging founders to be proactive in building a resilient and principled organization, ensuring that their initial vision is not compromised by the pressures of growth and market dynamics.