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Eric Ries has invested in over 100+ early-stage startups. He is best known as the author of The Lean Startup, a must-read for entrepreneurs worldwide. He also founded the Long-Term Stock Exchange (LTSE), a new stock exchange designed to support companies with long-term goals. He recently launched a new podcast discussing ways to re-think corporate governance to be mission-first.
In Part 1 of our interview, he shared insights from angel investing. In Part 2, Eric shares his new ethos for startups rooted in long-term thinking, putting a company’s mission at the center of everything and aligning all stakeholders. This mission-first approach challenges the traditional capitalist, and data shows it leads to better company performance.
Eric writes checks of $10K or less as an Angel at the earliest stages. He is interested in mission-driven founders, education, fintech, AI, and more.
Highlights:
- Eric Angel invests for reasons beyond financial outcomes. He focuses on giving back to people in his network, learning about startup approaches and various industries, and doubling down in areas he is passionate about. Any time he has strayed from his investing criteria, it hasn’t worked out.
- Advising then investing: Eric prefers to work with a startup as a friend or advisor before investing. He keeps his check size to $10K to support his goal of high-velocity learning. He can write more checks with smaller checks, which means more learning.
- Investing as a spiritual journey: Eric practices introspection to support continuous learning and to avoid overgeneralizing when things don’t work out. When he invests, he applies Lean Startup thinking by asking, “Is this outcome falsifiable”? Invest -> Measure -> Learn. We guess this makes him is a "Lean Investor"
- Eric’s second act after Lean Startup is supporting mission-first startups: He advocates for a new ethos that he believes will lead to better performance in the long term.
- Eric shares tools for mission-first founders, including the Public Benefit Corporation, the LTSPV, employee voting trust, and more.
- (00:00) - Introduction to First Funders
- (00:54) - Meeting Eric Ries: a journey down memory lane
- (02:45) - The Impact of Lean Startup
- (07:15) - Eric's Angel investing journey starts with being an advisor and a mindset of giving back
- (09:55) - What is Eric's investing criteria
- (14:04) - Eric prefers to advise startups first before investing
- (17:47) - Eric's second act: from Lean Startup to nurturing mission-driven founders who will also realize massive profits
- (25:14) - Writing small $10K checks into a high volume of early-stage startups enables high velocity learning
- (27:24) -
- (28:28) - Eric decouples investing from outcomes to stay focused on giving back and learning
- (30:44) - How to be a useful startup advisor: stand for something that creates competitive advantage for startups
- (34:31) - A challenging investment: lessons from high-stakes and high-stress moments and can the startup journey be a force for healing trauma?
- (43:04) - The Long-Term Stock Exchange vision: a new ethos and governance approach for the startup community
- (45:01) - How mission-driven founders and investors need to be brave to challenge the capitalist status quo
- (47:33) - How tech startup can leverage the Public Benefit Corp and how the B-Corp certification won't work for software companies
- (51:24) - LTSPV: An SPV Angels can leverage to align their check with long-term thinking
- (54:08) - The spiritual journey of investing: what did you really learn vs what do you think happened?
- (57:07) - Speed Round and Final Thoughts
- (59:24) - Takeaways
Connect with Us:
- Follow the First Funders Podcast
- Newsletter with behind-the-scenes access and key takeaways
- Twitter/X: @shaherose | @avirani
- Email us with feedback and suggestions on topics and guests
Disclaimer: This is for information purposes only. This is not investment advice.
Creators & Guests
Host
Host
What is First Funders?
Learn from angel and seed investors bold enough to write the first check.
How do they decide which startups to invest in?
How do they gain conviction in founders and ideas?
How do they add value to their companies?
Shaherose Charania and Aamir Virani are operators turned investors. They chat with their friends investing in early-stage technology startups and learn about their strategies to fund the best founders and startup companies.
If you are an angel investor or seed investor, you'll hear how others operate.
If you are a startup entrepreneur, you'll hear how investors filter and decide on writing that first check.
FIFU 07 - Eric Ries - Final
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Introduction to First Funders
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Shaherose Charania: [00:00:00] Welcome to First Funders. We are back with another episode. And this time we are interviewing an angel investor. A lot of you have asked for more interviews from other angels, and we heard you today. We're interviewing Eric Ries, who has been in the ecosystem for a long time, both as a founder operator and the creator of a concept.
We all know Lean Startup. He's invested in a lot of companies over the years and has a lot of insights to share. Ones that might be expected in ones that might surprise you.
I hope you find the conversation to be helpful and inspiring as you go on in your angel investing journey. Enjoy..
Meeting Eric Ries: a journey down memory lane
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Shaherose Charania: We are here today with longtime friend and collaborator, Eric Ries. So I thought I would start by [00:01:00] talking a bit about how Eric and I know each other.
So this is my memory of the first time we met. And I'd love for you to tell me if you remember differently, but I remember being at a conference somewhere in the South Bay and you were presenting the early concepts of Lean Startup before the book was out. I assume, I think it was like 2008, 2009. And I remember being in the audience and I was like, wow, okay, this makes sense.
This is how you go from zero to one when you might have an idea and at the same time, it was also in real time brainstorming. The loose idea of what was then called Founder Labs, which was an incubator that I wanted to launch, focusing on diverse teams to go from zero to one.
After you presented, Steve Blank presented on customer development, I thought, this also makes sense. And I remember my memories, I went up to each of you individually, and I sort of pitched the loose idea of Founder Labs. And before I knew it, Steve roped in Ann Miura-Ko, and we were, designing a five week program.
And then we did it and it was an [00:02:00] incredible experience, at least for me, to really like learn and eventually be able to guide teams on Lean Startup, thanks to you. And a bunch of teams came out of the different cohorts that we did. So we did a number of cohorts in San Francisco, , we did a cohort in Menlo Park and a cohort in New York.
There was a company called AppSpurce that got acquired by AdRoll, there was a company called Pickie that got acquired by RetailMeNot, , a company called Authy that got acquired by Twilio pre IPO. And that was just like such an incredible time because the people who came into those classes were getting the first version of the book.
So that's my memory of our first time meeting.
Eric Ries: We've got to bring that program back.
Really good. It was a great program.
Shaherose Charania: It was a great program. I think about it all the time. It's something that we might want to bring back one day.
Eric Ries: Yeah, those were good times.
The Impact of Lean Startup
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Eric Ries: I mean, yeah, Steve and Ann were wonderful collaborators and it was fun. People now, who weren't in the scene then, can't imagine that there was ever a time when this was not like considered totally obvious.
But we were like the freedom fighters, you know, it was like, controversial. I can't— people used to [00:03:00] yell at me about Lean Startup. Now people disagree privately, you know, and there's still a few people out there who don't like it, but, like, the new entrepreneurs the new entrepreneurs just think it's like, old stuff that was written in, you know, the eighties or whatever, they can't realize how recently Silicon Valley viewed this as heresy and how upset people used to get about it.
So yeah, it was fun. We were part of an emerging movement of people who were like, building out new infrastructure to change the way that entrepreneurship was done. You think about like Y Combinator, how big an effect that had on the startup funding landscape and the company building landscape. And there's just was a lot of that kind of stuff going on. I thought we were gonna be like preparing to do battle with the status quo and conventional ideas, and we would ride out to the field of battle and eventually these older ideas would ride out to meet us and we'd have like the.
The apocalyptic battle, like from a movie. And that's just not how that never You know, we were on the the field of battle with no one else there. It was like a vacuum when these ideas that seemed invincible just crumbled under the weight of this new onslaught of energy.
And [00:04:00] I think about that a lot. Things can change faster and more profoundly than you think in a shorter amount of time than you think. , so yeah, those were really fun times. It's always more fun than being successful later because, you know, having an enemy and feeling like you're on the crusade is actually very, very
Shaherose Charania: I mean, you really made a dent in the universe with this work.
Eric Ries: Thanks for saying that.
Shaherose Charania: You did. and when we talk about it being sort of like everywhere, I mean, it's being taught in college. Like I spoke at a university of Virginia a couple of years ago at the Lean Startup class.
Eric Ries: I mean, listen, we put ideas out into the world. You never know what's going to happen. and there's nothing more satisfying or enjoyable just for them to be taken seriously, , even the people who criticize them, but they criticize them by name, I always say, thank you.
I appreciate the respect . So that's, that's wonderful to hear. And listen, the other thing I remember about that time is people used to tell me all the time that diverse founders didn't exist.
And that, tech being a homogenous environment was just inevitable the way that it was. And I remember, pointing to the Founders Lab program all the time because people would say, these people don't exist. [00:05:00] And I said, well, if you go down to. I can't remember that.
What was that space called? It turned out to be illegal on the water there in San Francisco. I was like, physically walk 200 yards from where you're standing right now... and it was eyeopening for me. And I think for a lot of people to see that, like the things that we viewed as an inevitable consequence of the way things were, were a constructed reality that could be undone. Now, I wish we'd had as much success with that as with other things.
So we took a lot of work to do there, but, that was also a really important part for me just to see that that was true, even though I believed it intellectually, it's different to think it than to see it. Anyway, good times, good times.
Shaherose Charania: Good times. And I think you also just being very conscious of that, put out the energy into those cohorts, Those weekly gatherings where we would give feedback, for them to not feel different in any way and just feel like an entrepreneur. made a difference in all of their journeys. , and I think that's important too, even if you're unsure about whether these founders do exist, it's how you show up with them. That also equally matters when you do see them.
Eric Ries: You contruct your own reality. People tell me that they don't [00:06:00] exist. I'm like, , you're erasing them, from existence in your own mind. That's not reality's problem. That's your problem.
Shaherose Charania: Yeah. And by the way, it was Pier 23. It was the True Ventures office.
Eric Ries: The True Ventures office. Yes. Shut down by the city later That was a great space.
Shaherose Charania: It was a great space. It was such a great space. So, one thing I would just end on here before we go on is , one one thing that I would say about you is you've always opened up doors. So, as we went on our journeys, , there were times where, , there was an opportunity to advocate for immigrants and you came on board and we followed Brad Feld to advocate for the startup visa program.
And then I reached out to you in 2018, 2019. I said, I want to, it's time for me to get into investing. You looped me into a bunch of companies that you were advising, some of which have gone on to become unicorns like Bubble, the no code platform. and then as LTSC was raising around, you invited me to invest, and then I came back to you and said, let's do an SPV.
And I got to do my first SPV, which I was closing the night right before my wedding, which was hilarious,
Eric Ries: I remember that.
Shaherose Charania: But you've always opened doors for [00:07:00] me and for others, and I appreciate that. And you're always in the flow of early stage founders given all this work that you've done. And so that has allowed you to be an angel investor knowingly, unknowingly, consciously or unconsciously.
Eric's Angel investing journey starts with being an advisor and a mindset of giving back
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Shaherose Charania: And so with journey to angel investing. Would love to hear what got you to write some first checks.
Eric Ries: Yeah, I mean, first of all, thank you for saying all those nice things. It's very flattering to hear you say that. And I just think of it as paying it forward. So many people opened doors for me and that's kind of how I thought about investing too.
have tremendous respect for real investors, people who can develop independent conviction who have the confidence to manage their own and other people's money to write the big checks, to do portfolio construction, to really do the research. It's a very hard job.
It's a very important job and I don't claim to be especially good at it and just to be clear for your listeners, I don't have a venture fund. I don't have LPs. All I do is invest, my own money and, I viewed it as a form of giving back, honestly, just.
People invested in me. I should invest in other people. I think I was quote unquote [00:08:00] investing before I was even eligible to be an accredited investor, I was just on the common side of the ledger. I just, I, people asked me to be an advisor to their company.
Now those are the first deals, quote unquote, I can remember doing were, advisory deals. And still to this day, I like it better. I'd rather be on the common side of the ledger than the preferred. I don't really like owning preferred shares. I don't, like, the idea that there's a situation where you'd want to make money while the, founders didn't make any money, like, no thank you.
I'd rather have our interests aligned. If people would allow me to buy common shares at the 400 price, I would do that every time over by preferred shares, but that's not how it's done. So I do it the way people want. and so, yeah, the first companies that asked me to be an advisor, I was surprised that they would pay me for that.
I thought I was the one getting the favor. I was getting to learn all this incredible stuff and be involved in startup. I love being involved with startups from as long as I can remember. And then like, the idea that you also get to participate in the upside of the success of the company was like very addictive to me.
So yeah, in the early days, I was just an advisor. And then you know, as I started to make some money, I mean, I'm not wealthy by Silicon Valley [00:09:00] standards by any means, but I've had some success, , I felt like I need to put some of that money back into the ecosystem. That's just, kind of my obligation.
And people started asking me if I was already an advisor, would I also join the preferred side of the ledger? You know, would I be a named investor in their company, stuff like that? And, and so I was happy to do it. And I definitely went through phases of doing more and doing less, you know, it's waxed and waned over the years.
I was trying to think. knowing I was going to be coming on the show. I was like, how many investments have I done? Like, it must be hundreds by now, , I don't track it that rigorously. I'm not trying to get a certain IRR target. I think it's partly actually what allows me to be a good investor is that I'm not letting any exhaust get in my way.
If I like the company, if I think I'm going to learn something from it, if I think it's interesting. Then I'll do it. And that's been a really good guideline. Every time I've deviated from that to be like, "Oh, this is a hot deal". "Or I'm going to make a lot of money" Any time I talk myself into doing anything but my normal thing.
It's almost always been a disaster. So yeah, that's how I got
into it.
What is Eric's investing criteria
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Aamir Virani: You mentioned that these are companies where you think something is interesting. [00:10:00] What do you think is interesting? What does that initial filter for you?
Eric Ries: Well, I'm very lucky, and I'm super privileged in that the first, I don't know how many of these companies I got to invest in. I knew the founders personally from something else. So very unfair. I didn't have to filter.
It was just like, Oh, this is someone as an engineer, I personally worked with, I always knew was really smart and would start a company one day. Like when people like that in your life go on and do something, I get offended if they don't ask me to be part of it.
You know, I got, I'm like, wait, that's like, wait a minute. Hold on. You know, I thought we have a bond for life. Everything I do, everything you do, you know, we're in it together. They don't always remember that. And I feel that way now about people that work for me and have worked for me.
I've occasionally had them go off and do something and not even if they're trying to get a new job or something, and they don't call me to help. I'm like, what am I, chopped liver? like I thought you joined my family. Like we're in this together now forever. I went through a lot of effort to choose you out of a million trillion other people I could hire.
And so, yeah, I want to be part of those journeys. I viewed that as really fun. And sometimes it led to an investment and sometimes it didn't. But like, as I've gotten more opportunities, what I've learned is. To be [00:11:00] interesting, it has to be either a really unusual person where it's like, Oh, this is somebody that can teach me something: a smart person, a really interesting person, a very unusual background, they're charismatic or they have tremendous determination or just sometimes, you know, , the level of their conviction in their own thing is just so high that you want to be. part of it or it has to be an industry or area thesis that I happen to have an interest in.
Like I'm really interested in education— changing in education. I'm really interested in changing in the financial system. I'm really interested in all kind of AI stuff that, you know, now everyone's all excited about, but I have been for a long time. So like, over time I developed these certain theses of like, , for example, there's a awesome scientific paper I read many years ago that showed that not only can you harvest electricity, small amounts of electricity from the RF waves that saturate , Wi Fi signals and everything, you can harvest electricity from that. You can even do what's called backscatter communication.
Two nodes that are being powered by that can communicate with each other at a very low bit rate without having to have a battery or any power source of any kind. So extreme low power electronics [00:12:00] just powered by the ambient. , energy that we are pumping into the atmosphere all the time. So I read that paper, I don't know how many years ago, I was like, some day someone's gonna pitch me a super low end computer mesh network based on this.
So it's on my list. I keep a mental list of all these things. Like that is just super cool. If I didn't have 29 other startups that I was working on right this second, that's the kind of thing I would do.
And I have a bunch of things like that, that I wish somebody would do. So every once in a while you just get lucky and somebody pitches you the thing you were, excited about. And so that, those are interesting. I did that to extreme for a while. I actually used to pitch other people on starting a company and be like, look, I'll help you start this company.
Just, here's what you should do and do it. I've gotten burned enough times that I've become a little more gun shy about it, but I used to do that a lot. And then the third thing is, I'm going to learn something because the way that they're going about it is really interesting. So like, especially in the early days of Lean Startup, they're running very rigorous experiments.
It's data driven, it's scientific. It's just like, it has that rationality to it that a lot of teams just don't have the discipline and the skill for that. And [00:13:00] so even if you give them advice, it doesn't really help. Like, it's not so much that your advice is good or bad. It's that you don't know if your advice is good or bad and they don't know either.
Like you give them some advice, something happens. Did you cause it to happen? You don't learn that much from those kinds of teams. I do those investments sometimes, but like, whenever I find someone who's like, if I give them an idea, I'm going to get really high end follow up about like, what did they do as a result?
What happened? It's going to be a randomized controlled trial. We're going to learn a ton for like, you learn so much being around those people. I wish I could say I never get seduced by the size of the vision, the impact, the magnitude, the total available market, but like there are those companies sometimes you're like, wow, this just seems like an amazing, good business.
, I definitely want to be part of it. I think that's the easiest one to go astray with, I really admire the professionals who can do that. In a rigorous way, but I do do that sometimes too.
Aamir Virani: mentioned that companies will come to you and you feel like you'll learn through their rigor. , how are you able to suss that out before making investment? Is it because you're talking to them just over time? Is that your usual flow that you're just [00:14:00] working with them anyway?
And then you decide to put money in, or do you have
another way of getting
that
Eric prefers to advise startups first before investing
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Eric Ries: yeah, my, my preferred way of, investing in a company is to work with them first, either as an advisor or just as sometimes as an informal friend of the company. Like if I have my choice, we'll work on stuff for months, especially like, you know, it used to be people wanted advice on Lean Startup and metrics and analytics.
Now people want advice on governance and how the company should be structured and how to prevent investors from ruining it and stuff like that, but like, whatever the thing is, I much prefer to work on something and like do the work first and see what it's like to work together.
If that's possible, sometimes it is, sometimes it isn't. You know, one of the funds that I'm in LP and they have a model where they actually, work with founders for 90 days and then they write their first 250K check. And I remember that being like, that's just like such a smart model.
You learn so much, like being pitched is such a bad experience. I hate pitching. I hate being pitched pitches or not. It's like, if you could be in the meeting the night before where the team decided how to do the pitch, you know, the late night cram session to make the deck, if you could somehow observe that meeting, you would learn everything you want to know about what the company is like, the deck has [00:15:00] very little information there.
So yeah, if I get out of the pitch mode into the working mode, I always prefer that. If it's not possible, then I just trust my intuition , and go with my gut. Usually in half an hour you can tell the kind of person that you're talking to, the kind of team. And the crazy thing is the vast majority of people have just absolutely no follow up.
So I can't tell you how many times I've been like, okay, I'm interested, but like, I'd like to see you do this one thing and I'll try to make it something really easy, like, when you fix this one bug or when this thing happened or just anything at all, or even just like, after the round has evolved in this specific way, like call me back.
You almost never get any kind of callback. So. There's also just the natural filtering of people who just don't have the persistence, the determination to do it. I hate saying that in a public forum like this. I feel like you're giving license to people to be really annoying and like be really aggressive with their follow up, which is also really bad.
, I always tell people like, don't social proof me, bro. Don't do it. I was talking to a Y Combinator startup recently. I actually liked their product a lot and I, just met them [00:16:00] and, I happen to be the target customer for the products. I was like, Oh, I like this.
That sounds good. The Y Combinator has like a very specific protocol. You're supposed to run to like force investors to commit by the deadline. And I was like, look, I know what you're doing. I've been through the Y Combinator program. I know all those guys. I understand that they gave you this advice, but it's not working.
they were like trying to treat me like a regular investor. And I was just finally had to be like, look, just please stop contacting me.
I don't want to do that. And like, look, they might be an awesome company. I might've missed out on an investment, but. Since I'm not in it for the money, I don't have the kind of FOMO like, Oh no, the one that got away. It's just like, I'm going to invest the money anyway. Cause I'm giving back.
So, if I miss it, I miss it. It happens. I'll learn from that experience. Hopefully that will help me in the future. I
Shaherose Charania: That's amazing. Um, we were going to ask this question, but I think you've kind of answered it, which is like, What's your why for investing? I think I'll just put it out there in case something different comes up. And when you think about all the investments you do make, what is your purpose?
Eric Ries: I mean, I'm not altruistic. I make investments to make money. Like I do [00:17:00] like the return. I do like the impact. I feel like, , for profit companies are a really important mechanism to maximize human flourishing in the world. That's, to me, actually like what the purpose of a for profit company is.
So getting to be part of the journey of the people that are doing that, I feel is super meaningful. And I think we live in a world where like investors rule everything around me. Like, we live in a very investment driven, investor driven time. I love that it's the First Funders podcast. Nothing makes me happier than writing like the first $5,000 check To get a company started. Like I would much rather do that than write a bigger check later and make more money. I'd rather help something come into existence that wouldn't have otherwise happened. That I really enjoy. And so that, that makes me feel like I'm giving back.
And then, , if I also make a return from that, then that just means I get to do more of it. So it has a kind of a compounding effect that I really enjoy.
Eric's second act: from Lean Startup to nurturing mission-driven founders who will also realize massive profits
---
Aamir Virani: When you say you want to give back, it seems like there's a vision you have for the future or the world you want to see around you. Could you share a little bit more about [00:18:00] that? You and Shaherose were talking earlier about the different things you've done, like, socially, like maybe this all aligns.
What world are you trying to build?
Eric Ries: Thanks for that question. That's really, that's nice of you to ask. Yeah, , I do a lot of different things, there's a lot of different parts of my world and there's all kinds of people that work for me in all kinds of different ways. So like, I have a lot going on. And it can seem very chaotic from the outside, but to me, there's like, everything is tied to this one mission that I've been on for a long time, which is to change the way that our society is structured around organization building and what we call a for-profit capitalistic system.
Because I think there's like an error, or like a fundamental mistake that has been made in the way that we do things that is both suboptimal from a resource allocation and profitability perspective, and it's like deeply morally egregious and unethical. So, to me, the idea that we could both solve a lot of the world's social problems.
And also like make more money while doing it. Like it's like such a seductive idea, you know, and lots of people have failed to do that in the past. It's not like a new idea that people have tried that, [00:19:00] but I really believe we have the tools if we are smart about it and there's like a new, I had that same feeling.
It's funny. We were just talking about the good old days. I had that same feeling about Founders today that I do then, that like there's like a new ethos, a new feeling that Founders have around what we're trying to do that is going to be very transformational. So one of my core ideas is that you have to back your allies.
Humans are so prone to infighting and I was just talking to someone this morning, and they're a reformer, and I was like, Oh, we should get all the reform groups together who are working on related things and promote them all together. And he was like, we could do that, but most of them are bad.
And I'm like, Oh really? I was like, Oh no, not this again. And it's like, even though we agree on 95 percent of things, that guy's taking credit for stuff he didn't really do. And this guy, his model is not as good as this—and I was like, Oh, not this again, right? Humans are so prone to this, like the person who disagrees with you 5 percent drives you far more crazy than your actual enemies.
And like, that's true, whether we're talking about defending democracy against fascism or [00:20:00] leave things way more mundane than that. It's just how we are. So like, to fight back against that, we got you that you have to give back, you have to back your ally, you have to like people who, are aligned with you, even if you don't agree about everything, you have to do what you can to help them and hope that they'll reciprocate.
So like, that's one really important part of this. Like, nurturing this new movement. And the other thing is, it's funny, we were just talking about this in the context of Lean Startup, we're up against an economic orthodoxy that is as entrenched as it is irrational, like it's full of all these cargo cult and like just fake beliefs that are not true.
That I won't get into the academic research and the studies. I mean, I could, Take over your whole podcast with that. But like, when I talked to people, I was talking to a founder the other day spent a really long time with him, hour, two hours. Like really, this is a person who's very influential.
I was like, look, , you really need to see that you can be part of the solution here. And he was very much like, after I had really talked to him for long and he's like no, I really believe in my ethos. Like, I want my company to be trustworthy. I really believe in making long term investments. He had this framework he called being exploitative versus being additive.
I want to be [00:21:00] additive, not exploit. I want to make sure we're actually generating real value in the world. And He had already had the realization, which is hard for a lot of people, that that is his source of competitive advantage. That's not some altruistic thing on the side he has to apologize for.
The reason his business works is because he made that investment. If you take that away, the whole thing would collapse. And even despite our agreement on those points, even In the face of all that, I said, look, so we have to work together to change the system. He's like, man, that just seems too hard. So hard.
How are you going to do that? Seems too hard. I was like, look, honestly, it's not your job or mine to judge how hard it's going to be. We don't know. Is this thing formidable or is it a paper tiger? We'll see, but , we can't know that we have to do it anyway. And I feel like that is such the common entrepreneurial thing.
Like the thing that I really admire about people who, you know, have a different idea who are actually contrarian, not the people who all these cargo cult fake contrarians around in the investment community. They're all contrarian in the exact same way. You know, it's very funny, but [00:22:00] like the people who really have an individual, independent inside conviction around it and like, are willing to make the attempt like.
There's something really amazing about that and courageous about it that we spend so much time in analysis trying to judge how likely is it to occur. And that's actually not that important of a question. And so like, we should ask better questions, like if it were to occur, how valuable is that?
And like, is there a plausible path to get from here to there? Does this make sense from first principles thinking, right? Leaving aside convention and so called best practices, does it have the logic of reality on its side? Anyway, when you ask those kinds of questions, you know, there's people , whose ideas might seem crazy, but actually, it's not that long before they're seen as inevitable.
Aamir Virani: hen you talk about additive versus exploitative, , that really resonates personally. And I think that's one of the reasons why I had a hard time just doing venture capital on that side of the table. Do you think that's one of your filters? Like I'll give you an example. I really don't want to invest in advertising based companies, cause I [00:23:00] consider that exploitative, right? , and it's not really adding to the future. I want to see, do you consider that as part of the filter? Because some people would say, well, make the money and then use the money to make something additive happen
Eric Ries: Oh, yeah.
I don't buy into that framework at all. Yeah, that was obviously FTX made that super famous. But even before FTX and, that, I remember at Stanford business school, people used to talk about the deferred life plan. I don't remember who's coinage that is, but it's basically like, you make all this money and then in retirement you give back and do good stuff.
And it's like the implicit belief of those people is that how you make your money doesn't matter because the system is the way that it is. And so just, you get your money, then you give back. And of course the problem with that is you're lending your life force, your energy to systems that are bad. By which you make money, but then you don't sleep very well at night.
And if you want to know why we're having a crisis of all these billionaires who seem to be going crazy before our eyes, like, I think we know the answers. A lot of people are making a lot of money in ways that make them very uncomfortable and they're having trouble sleeping at night. And like, , don't be there.
It's like, don't be that person. don't Build those kinds of companies and don't invest in them. Absolutely. I [00:24:00] can't tell you how hard it was to avoid making money from crypto. I worked really hard at it. I probably some fund, I mean, I probably made some money from crypto somewhere. But I didn't invest in any initial coin offerings.
I did not participate in any of the like debt specialized venture funds that were like basically running a very sophisticated pump and dump where they got in early. Like there's all these people who made so much money in. Silicon Valley on products that ultimately, like the end investor didn't make any money from. They turned out basically to be useless and it's not, I'm not anti crypto actually.
For example, Chia is being used for good stuff. Like that—I think there's good stuff there. And listen, I read the blockchain paper when it first came out, as a computer scientist, I was like, this is amazing. If you told me when I was younger that this problem would ever be solved.
The Byzantine Generals problem would be solved. I would've been like, that's never going to be solved. Unsolvable problem. Somebody solved it. Amazing. Okay. All very impressive. So, I don't mean to be anti crypto, but just my filter was like, I don't think these projects are useful. I don't actually believe that they're accomplishing what they say they're going accomplish.
And that is true. I tend to stay away from stuff like that. Someone just [00:25:00] pitched me a sports gambling website yesterday, and I have no doubt that they're going to make a lot of money from it. But life's too short. no, thank you. Yeah, like I didn't make money from tech enabled tobacco.
That stuff just stuck me as super, super evil. So yeah, that's a "no thank you".
Writing small $10K checks into a high volume of early-stage startups enables high velocity learning
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Shaherose Charania: I love it. I think all three of us, , probably want to invest in the same types of companies and founders. I think we're on the same page here. So, let's do one thing. Let's rewind the clock to early days again. If we can go back there where there was a moment where a company said, Hey, I'd love for you to put money in.
And it doesn't have to be the exact first investment, but if you can rewind the clock to that moment where you actually like, made a wire and maybe the first, second or third time. And it was like really memorable for you, right? Like, what was that company? How did you find it?
What happened to it? Like, just what was that first moment where you said, okay, I'm going to put money in to a company.
Eric Ries: This is embarrassing, but I don't even remember. I made so many investments now, Although, you know, I do [00:26:00] remember like learning how to send a wire. It was actually like, it's very cumbersome. You know, you don't, that's the kind of thing you learn.
You have How do you like do it in such a way that you can't be easily defrauded? I remember one of my mentors was like, don't make it too easy. Don't pick your bank account by how easy it is. To send the wire. You want something where a human has to check with you about it.
, Gosh. And of course now, of course, my brain immediately goes to the company I didn't invest in. You know, I remember the Palantir founders were like, you want to put some money? And I was like, no, no, no, that's not my thing. No, no, thanks. Uh,
So that's the other thing is it's very different now. Like I remember that the early, early days of this was before angel, before there was any infrastructure for it. So it was very, very one off bespoke. You know, everything was, , kind of random.
And then I remember going through , when AngelList first was successful, another one where I turned down the chance to invest. Now that you mentioned it, I remember that if he offered me the chance, I said, uh, I was writing too small of a check for him. It wasn't worth it. He's like, well, I'll make you an advisor anyway.
And I never got around to it. So I can remember those things really [00:27:00] easily. Like, oh, I should've done that. Oh, I should've done that. Should've been in that fund or whatever, but, , I did go through a phase and a lot of investors do this, which is really bad. AngelList turned investing into like e-commerce for me for a while.
Cause you could just like go on there and see all the startups and just like, you put a thousand dollars here, a thousand dollars there and whatever. I didn't make a single dollar from any of it, and so yeah, gosh, I wish I could tell you an early investing story, but the truth is, I just, I
just can't remember.
---
Aamir Virani: Um, I have, I think you bring up two things that might be useful to our audience. One is, you talked about the initial check sizes and it being too small for something like AngelList. Could you share what your check sizes were back then at the very beginning and what they are today for those who are listening to you?
Eric Ries: Oh yeah, yeah. really like to write a 10, 000 check, or less. I don't like to write big checks. I have deviated from that, but I have tried, like, if I'm gonna invest $100,000, the professional investor portfolio construction correct answer is to make highly concentrated non correlated bets. And so they would say like, wait and find the right team and [00:28:00] put all the money into it.
But I've never been comfortable with that because my goal was to learn as much as possible. And if I could learn from 10 companies instead of learning from one, I much prefer that. It was a time when 10, 000 was like a really big check to me and I was really scary to write that kind of check.
And now I could write bigger checks, but I don't. Anyway, I've gone through various phases because of course my liquidity also is tied up in my own companies. So sometimes I have more and sometimes I have less, but yeah, having a check size that's small enough that you, don't need to get the money back was really important to me.
Eric decouples investing from outcomes to stay focused on giving back and learning
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Eric Ries: So like when I work with my financial planners and when I look at my net worth or whatever, , my investments are not part of my net worth. So they're just there. I at the time that I make them. And then anytime I make any money for any investment, it's a nice, pleasant surprise.
It's never money that I'm counting on. I never use it to fund my life, like, I don't rely on it in any way. And that helps me a lot with , not thinking too much about the mortality rate of these companies is so high. If you think about too much, you just won't do it.
And then, yeah, trying to be consistent, not write too many checks, not get caught up in the hype and the fad. [00:29:00] I mean, I don't do a great job of that. I'm sure I wrote a lot more checks in 2021 than I did in 2022. That's not logical. The reverse would have been much better, but you know, it's very hard to resist those trends.
But I do try to be kind of consistent and level headed about it. If I was really disciplined, I guess I would take a like percentage of My income and just set it aside for the purpose of startup investing and just pretend I make 10% less money a year or whatever the amount is, right?
Like, I would rather do it that way , than start to emotionally connect to the results of the return because this is the problem with investing. And as much as we'd like to criticize the structures of investment that we've developed in Silicon Valley, you know, two and 20, 10 year life fund, Even the equity structure of startups, like, we swim in this water so much, we don't appreciate what's great about those structures.
One of the things that's really amazing about those structures is it decouples people's like personal ability to feed their family from the returns that they're getting from their investments or from the work that they're doing. Like if you're a sole proprietor, every dollar you choose to invest in the company is a dollar you didn't [00:30:00] take home to feed your family with. So like, you're always in this tension between your personal financial thing. And so using equity to compensate people allows them to project their net worth into the future. It's literally, you're literally borrowing money from the future to finance the thing that you're doing today.
And you're getting a, you're getting away from that, like personalization of the thing. With its downsides and agency problems and all that acknowledged, It's a very powerful tool. Same with professional investing. Like , when you're investing in such a way that you're able to draw management fees from it, or that you're able to invest money that is not essential to you to return, you don't have the same skin in the game.
So you don't have the same emotional rollercoaster for better and for worse. And since for a lot of investors, the real problem is that they're greedy and fearful, just toning it down is actually really valuable.
How to be a useful startup advisor: stand for something that creates competitive advantage for startups
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Aamir Virani: So it sounds like, in your head, you're treating this as, money that's gone to zero. You're willing to write, you know, 10, 000 checks, The number per year, you're not really trying to hit a certain target number. And you like to interact with the companies and you want to provide some sort of value.
So the limiting factor for [00:31:00] you is time. And so I think a lot of people listening may think of themselves the same way. Maybe they don't have the money, but they have the time and they want to do the advisor thing that you said you were doing at the beginning. So can you think about the first few companies you advised and how those ended up coming to you?
, you obviously had a higher profile than the typical person out there, but...
Eric Ries: No, not for the first, you know, my profile got raised quickly, but the first people I advised were all people I knew personally. We had worked in startups together before, or like, you know, I had met them at industry events or things like that. Once I started writing about Lean Startup and started to stand for this idea, then of course that attracted a lot of people to me.
And definitely that would be my advice. If you want to be an advisor. You should be aware, just for the record, it's important to understand that like advisory shares are controversial in the industry. Like the Y Combinator official handbook says not to give anybody advisory shares and never do it.
Like , only take investment from people outside the company, not advisor. Which unfortunately like limits the pool of advisors to accredited investors. And I think that's a mistake personally, you miss out on diverse perspectives. But I also understand you're giving people equity for free.
You know, it's like [00:32:00] how people are very greedy for their equity. I don't want to give it away for free. And investors especially don't like when you do that. So understandable. Anyway, but I've gotten a tremendous amount of value out of my advisors over the years and I've made them plenty of money.
I felt really good about it, and I've enjoyed being an advisor. So if you want to be an advisor, you have to stand for something. That's really hardest part of this is like the startup has to know to go to you for a thing that they care about or need to know about.
But also, part of the value that you provide to them is that they chose you and it signals something about who they are and what they stand for to other people. So if you don't stand for anything, then why should should they have you as an advisor? Now, sometimes you work at a company that they want that logo on their chart or whatever, like, so there are times to do it.
But if you want to be, if you want to become an investor, it ultimately has to be about you as a person. What do you stand for? What are you good at? What are you useful in? How can you make yourself useful to companies? And the good news is startups are starved for help and honestly, just for a kind word. And it's someone who can be their ally. So whatever skill you have, you could probably find some way to turn it to [00:33:00] entrepreneur's advantage. But yeah, , you have to be in the scene, you have to know them, going to work for startups, work around startup, being in the industry, obviously is a huge, huge advantage.
And I would often tell people if you don't have the conditions for this, just go start a company yourself. That's the best way to get into the ecosystem. That's how I did it. If you have the ability to do that, that's awesome. If if you feel like you can't do that, then maybe you can go work for a startup or, you know, I know a lot of people who've just found a startup they admire, especially an early stage startup that they admire and just find a way to meet the founders and just be like, hi, can I work for you for free?
I'll be your intern for free. Just can I, is there anything I can do? That could be useful to you. Like if you're determined, you can get yourself into the ecosystem. And if you're an outsider, go in through operations, not through finance. It would be my advice. People who are like always hanging around VCs and trying to make themselves into VCs through there.
That's not good. I went through a phase of doing that too. I was actually, I was a, what's going to be called a venture advisor at Kleiner Perkins, the like high end venture firm. I actually had that as a job for a while. I carried a venture, a Kleiner Perkins business card for a while. And, you know, I learned a lot about VC from that, [00:34:00] but it was not, , I used to think that that was the best way to get to know founders and to get into the ecosystem,
but it's absolutely backwards. You want to get in through the networks of operators, not the networks of investors.
Shaherose Charania: So look, sounds like you've had a wonderful run, at least starting the process of investing by first advising companies, investing in people you know, and really doing the work of being useful to them, right?
With something very specific. And over time it became the Lean Startup practice and offering. And in that journey, I'm sure things went south.
A challenging investment: lessons from high-stakes and high-stress moments and can the startup journey be a force for healing trauma?
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Shaherose Charania: Is there a memorable or unmemorable sort of worst moment that you can think of where you invested in a company and it just became a really challenging situation that left you with some really important lessons?
Eric Ries: Oh, it's interesting because the worst situations are all emotional. The companies I've lost the most money in were all times when I talked myself into, , deviating from my normal pattern and convince myself I was thinking of a company that was awesome.
Just seemed so great on paper. I was like, this company can't [00:35:00] possibly not make money. This strategy is so good. I'm going to, I'm going to upsize my check. I'm on a bigger check cause I know this one is going to be a success. And it's like involves this B2B deal making thing that I didn't really know that much about, but the founder seemed like they really knew what they were talking about.
The business model analysis seems super rigorous. Anyway, they didn't make any money at all. I lost that investment like promptly. And so, yeah, definitely had some of those bigger losses where it's just like, if I had just stuck to my normal thing, at least I would have lost less money, but honestly, that doesn't bother me because remember, I psychologically write the thing down to zero at the time when I write the check.
So it's, the expected outcome when I lose money from it. The times when it's been a hard is like when somebody does something wrong. I had a company once that, oh God, this was maybe the worst, is I was the last item on their due diligence checklist to complete a like gigantic M& A transaction to be bought.
So they're being bought for cash by a big conglomerate every contract, everything has to be scrutinized and it turns out nobody can find [00:36:00] a copy of one of the contracts related to my investment. At the time, this would have been my biggest return ever, probably six figures return for me. So like, significant money. So I really cared and it was just awful because they couldn't find the contract.
So like, the founder calls me and he's like, look, we have to close this deal. We've been working on this thing for, months. He didn't say this, but like he and his co founders are about to make. ungodly amounts of money personally, and now I'm standing in the way.
And I said, look, I don't know. I don't remember. Let's just go find the documents and we'll find the email correspondence of whatever we were doing and like, whatever it says, that's what we'll do. So we look it up and he calls me back.
And quite a lot of people were like, you need to let this go. Just take an L for the sake of your relationship with him.
He's like, oh, we found it. We found the document. And I was right.
He sends it to me and I was like, this is a very obvious forgery.
Someone has forged my signature. I called him out. I'm no forensic expert [00:37:00] here. But like, you have glued the signature page from one PDF onto another PDF. , I'm looking at them right now. I know what you did. And he's like, I just don't have time to deal with this right now.
Hangs up. I called one of the investors in the deal. I was, distraught. And I'm like, what do I do? You know, and he was actually very good. He was going to help me understand what that guy was going through.
It's like, look all he wants is to close this deal. He's long past caring about what's right or wrong. Be That's all he wants and so I called him back. I was like, listen, I talked to your investor. He gave me this great advice. I'm just wanting to know that I'm here for you. And I was trying to be really nice, Like, he was just like, I don't have time for this. This is what it takes to get the deal done.
Fine. Slams the phone down on me. Never spoke to him again. We've never exchanged one word since that time.
Cost me a relationship with a person I was friends with. I was like, I couldn't believe it. I was just like, wow, was it really worth it for this? Amount of money? Probably not.
Like, I see why people gave me the advice to let it go, but I was just like, it's not right. I'm sorry. I can't forge my signature on a [00:38:00] thing. I just like, can't. That is the worst of being around startups. That's far worse than losing money.
And so I've learned to have a thick skin about it now and just understand that just like a cost of doing business that , you're dealing with high stakes, high uncertainty.
Shaherose Charania: Yeah, thank you for sharing that. I think, that's reality that I don't think any of us are trying to live in or perpetuate, but it does happen and it is the high stakes, it is sort of people coming forth with, different value systems that don't get revealed until difficult moments.
Eric Ries: Yeah. And money messes with people. People have trauma, about money. why do they become entrepreneurs in the first place? Sometimes it's because they're, not capable of being in an institutional setting. And that might be a reason for that.
So there are people who are damaged. And I used to be very apologetic about this and I don't want to sound too woo woo, being from the Bay Area or whatever, but I actually believe that business can be a force for healing trauma.
We can heal the world and actually do good stuff here because we bring out these wounds, and then we have a chance to do something different with them. Now, people, sometimes they [00:39:00] just repeat the old pattern and they cause more damage and whatever, but it doesn't have to be that way.
And part of what I hope we do as an industry is do a little introspection. We have so much control more than any other industry on the planet. We have control over how we do things because we're building things from scratch. So every time we get to start over, we're building a little bubble of utopia.
This is the world that we, the way we think relationships between humans ought to be. And so let's not just do whatever we can get away with, let's do what we actually think would be amazing. And, you know, sometimes you're going to have to work at this company for like 10 years or more. It might be the rest of your life.
So make something you're going to be happy to be a part of. Be, have something that when they engrave it on your tombstone, you know, you're proud of that. Don't have it turn into something that you later regret.
Aamir Virani: Not all angel investments go awry. Some go really, really well. Could you share with us one that you think is the best in your mind? Like not just one where you learned the most, but also hopefully one where you had an outcome that is positive and made you think that this $10,000 bet I make once in a while is worth pursuing and [00:40:00] doing more of.
Eric Ries: That never happened, because time you get the reward, the time lag, especially if you invest in the early stages, I like to be as early as I can, the time lag is ridiculous, the other thing you have to understand, people talk about like, investing's so risky, but, as if the worst thing that can happen to you is, , you lose your investment, you lose your money.
That is not the worst thing that can happen to you, okay? I've already talked about some of the things that go wrong, but like I've had investments now, when you go through enough economic cycles, I, and I'm basically a buy and hold investor. I don't sell the shares. I'm along for the ride. I mean, I rarely do anything with them.
I don't day trade. I don't try to time the thing. I'm not trying to maximize some metric for some LP or whatever. I just basically buy and hold. And so, I've now been through a few of these cycles where I've had investments where I have lost more money from that investment than I have made from it because you have this incredible run up.
I remember in the 2021-22 down cycle, like, I had one or two [00:41:00] investments where the loss of those was probably greater than my whole net worth. Like it was unbelievable how much money on pay, it wasn't real money. I hadn't really made the money. I didn't really lose it, but like psychologically, Oh my God, it was awful to feel like if I only had timed it right, I would have so much more money than I have no need now.
And I really had to like really work at it. Struggle with it a lot. So I was like, I don't need, if I needed the money, I would have sold the shares. I didn't need it. I just, I love the scoreboard feeling of like the number going up. And that's just like the, I mean, it's, a major drug. It's super addictive.
It's an amazing feeling. And I feel so, I mean, I'm so privileged to have been part of the journey of those companies and had them, go public and, not have been diluted down to zero, like actually have it mean a meaningful amount of money and then to just like be on the rollercoaster to hold it like that's also like in some ways that's even worse because now you have like choices to make and it's super stressful.
So yeah, it's having the longterm view there has been [00:42:00] really challenging. Again, I don't want to sound like, Oh, poor me. Obviously like I'm very, very, very lucky. to have been around these epic companies so such that they even now having collapsed in value comprise of very large percentage of my net worth that presumably now that there's upside for them to grow again. But it's like each cycle as the magnitude gets bigger the stress of it gets a lot bigger.
So again, like The compartmentalizing of it as that's the one thing I recommend as much as possible. It's like, , don't count on it. Don't spend it. Like let it do its thing. And one day you might have that money if you need it in a true emergency or something, but like, don't let your lifestyle depend on these illiquid gains or anything like that.
Like that's just such a trap. Easy to say, very hard to do.
Shaherose Charania: Thank you. okay. Let's talk about what you're up to today. So obviously you've been investing for a few years on the side, but you are also a founder. You have started multiple companies and you have one that you're running today and you're doing a couple other things to push forward this new movement of how to build companies into the future.
So all of that does work in with your [00:43:00] angel investing. Would love to hear about what you're focused and how you're working with founders
Eric Ries: Yeah.
The Long-Term Stock Exchange vision: a new ethos and governance approach for the startup community
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Eric Ries: I mean, I'm a founder of what's called the Long Term Stock Exchange or LTSE. First new, regulated stock exchange at the same regulatory category as NASDAQ or NYSE, really the first one with a listings product, a differentiated model for how to list companies since the creation of NASDAQ in the seventies.
So we kind of dusted off this creaky old infrastructure from 50 years ago. And it'd be like, Hey, does our society even still know how to boot up one of these things? It's been a very difficult project we're working on for, you know, more than 10 years and probably raised $200 million at this point.
But as a result of building that, I've learned an incredible amount about just how the system really works. Like , how does financialized capitalism like really operate behind the scenes, how the capital markets work. And I became a collector of avant garde ideas about corporate governance.
So I know a lot about companies and how they're structured. And so an AI company called me. And they have a company, like they've been, they're incorporating a company and building this thing super mission driven.
And, you know, I asked them, do you know what your own corporate [00:44:00] governance is? And they were like, what's that? I was like, you have an, you have an incorporated company. Do you know how it works? They're like, I don't know. Our lawyers just told us to do the best practice. I was like, okay, tell me if this sounds like a best practice to you.
Name for me the most evil company you can imagine. And they named a certain well known company that they had used to work for. They're like, We built this company to get away from the evil clutches of such and such person. Okay. What if such and such person were to call you right now and offer you to buy this company for 1 a share more than it's worth?
What would you do? And they're like, well, what's he going to use it for? And I was like, I don't know. He's going to use it to sell cigarettes to children. Whatever. Like something, the most evil thing you possibly imagine. What is it? He told me. They had actually a way worse thing in mind. I was like, okay, that's their plan.
And they were like, well, obviously we're not doing that. I was like, great, let's go read your corporate governance documents. Oh, look, did you know that according to most corporate governance experts, the paperwork you yourself just signed file in Delaware says, not only do you have to consider this offer, you have a fiduciary duty to do it.
And they were like, that's the most horrible thing I've ever [00:45:00] heard. It's like, yeah.
How mission-driven founders and investors need to be brave to challenge the capitalist status quo
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Eric Ries: And what's so interesting, I've had that conversation now hundreds of times with founders. I'm often the very first person to ever talk to them about corporate governance. And yet, when you're like, so let's do something different, we're so afraid to do anything different.
I don't know. The lawyer says, investors might not like it. And they call me back. Investors might not like it. I was like, did they give you any names? What investors might not like? Did they, do they say anything? I was like, Oh, investors in general. Can I call the guy who doesn't like it?
Like, is any, like, can we be specific? We got to build structures. I call it being a mission controlled company that allow us to really put long term, like our long term ambitions really at the center of the structure.
And then our companies can actually be trustworthy counterparties. The other problem with these companies is you don't know who's going to run them in the future. So they promise to be good, but like, you promise what? A founder the other day was like, I don't have any grandiose ambitions with this company.
I just, I'm not into it. So I'm not trying to save the environment or whatever woke thing, blah, blah, blah. I was like, okay, well, what is your ambition? He's like, I just want to build a company where engineers can do the best work of their life and we [00:46:00] just make amazing products. I was like, Oh, really? Is that your, been your experience that that just kind of naturally happens in most for profit companies?
He's like, no, that's why I'm building this company. I'm so pissed off about how that never happened this time. And I was like, that doesn't sound like maximizing returns for your shareholders. He's like, well, but if we do that, our shareholders are going to make a lot of money. I was like, I know, but that's not the same as saying whatever would make them money is what you plan to do.
So it sounds to me like your company has a long term purpose. Would you like to enshrine that in the constitution or do you think investors should run the company? And he was like, oh, once you put it that way, it's like, Oh, the right answer is totally obvious. I don't understand why the best practices are what they are.
It makes very little sense to me. So given that you have a lot of investors who are listening to this podcast, that is a very easy way in this nascent moment when this is starting out. that's a very easy way to differentiate yourself with founders is just to be like, look, I'm prepared to back you in such a way that like, I will help you [00:47:00] actually put the mission at the center of this thing.
And I'm not going to be one of those investors that's like so stingy and so selfish. So I'm constantly hassling you about what about me and my thing, and I need control and I need to veto rights and I need this and I need that. I understand some people, they have to do that. Some people have an LPA that require like, okay, I'm I understand some people have to do that, but like, especially if you're a new investor, especially if you're an angel investor, like, or you're an early stage fund, like, you have a chance to really differentiate yourself in the , minds of founders by just being like a little bit nicer about that stuff.
Like caring about it, like a little bit more is already like a very potent weapon in your arsenal if you want to use it.
How tech startup can leverage the Public Benefit Corp and how the B-Corp certification won't work for software companies
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Aamir Virani: 10 years ago, it seemed like becoming a B Corp was a thing that tried to go along this path. So could share a little bit more about, you know, why this is not the same as saying, I'll just go be a B Corp and give back.
Eric Ries: Yeah, yeah. yeah. B Corp is very misunderstood because, most people, when they hear B Corp or Benefit Corp, they're thinking about the little B with a circle in it. Everyone's seen that trademark. Like if you go to a farmer's market or something, you'll see a lot of retail companies that have the certification.
That certification is actually awesome. And it's for companies that that makes sense for. It's really [00:48:00] great. Consumers really care , but it was really designed for a certain kind of company. And, I know a lot of companies that just have a hard time figuring out how to do the compliance with the circle because they're a software company.
They don't have a supply chain. There's no retail things. So there's actually a separate thing that is similar but different. It's called being a public benefit corporation, which is a legal filing you make in Delaware that changes the official purpose of your corporation from being about short term maximization of profit for investors to the thing that you write and say it is.
I do think that is very important and worth doing, and I recommend that to a lot of companies, just to make sure everyone's on the same page, like, what are we trying to do here? And I, you know, I meet founders occasionally, and they're like, well, what I'm trying to do here is make a lot of money.
It's like, okay, well, best of luck to you. But most founders believe the way they're going to make a lot of money is by being a trusted counterparty. Because they're the kind of company that people want to do business with, that is ultimately what's going to allow them to accomplish the mission.
And that's why people are going to make money. So enshrining that in your company's constitution is kind of a no brainer for those kinds of companies. The [00:49:00] problem is, and I've been critical of investors, but let me just criticize founders for a second. Founders always are looking for the one weird trick to solve this problem.
If I just do the one, if I got founder control, dual class shares, board control, this thing, that thing. I know so many founders that have done one and exactly one thing different. And they're like, check the box, I'm set. Those companies have not done well. The first round of B Corps that went public got crushed.
I mean, anyone follow the Etsy story? It was just brutal what happened to them because ultimately these conversations, this is a political conversation about who has the power to decide and do investors deserve to have that power? It's like a moral question. Do they deserve to have the power by virtue of the fact that they provided the financing the company needed in the past?
Or is the company exist for some other reason? Is there a different moral logic? I actually think it's very clear that that is wrong. So, different people have different views, but like, if you happen to be a founder who believes that you, your company is going to stand for something, you have [00:50:00] to make it a continuous practice to strengthen the governance, to bring all stakeholders into alignment with that vision, not just on day one, but every day after that.
And a lot of founders just are too impatient to do that. They're busy doing something else. And then I have been there, man. I have counseled so many founders through this who did not listen to this, who did not, do any of the things that I recommended and then they get ousted by the VCs or like the company turns evil.
And like, I've just seen it so often. It's heartbreaking how idealistic these companies are at the beginning and then what they become. And so, yeah, I do think we have to take much more seriously, like. What are the mechanics by which each individual company, I need to think about for our vision, for our purpose, for our industry, for our situation, how are we going to protect the mission?
And like, does anyone care about our good intentions? No, your good intentions are not worth the paper they're printed on. Like what else you got?
Shaherose Charania: so what I'm hearing you say is you believe that there is a new way to think about corporate governance in that the mission becomes the means by which [00:51:00] maybe control or power is, , defined
Eric Ries: Mm hmm.
Shaherose Charania: That like the definition of what's important comes through a mission and that mission needs to be written into corporate governance documents so that companies can allow that to lead the company forward as opposed to just the first traditional goal of maximizing shareholder value. Is that correct?
LTSPV: An SPV Angels can leverage to align their check with long-term thinking
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Eric Ries: I'll give an example, like, there's a lot of techniques that come out of this idea, but one that might be interesting to your audiences, we have this concept we call the LTSPV, where from a mechanics point of view, it's just like a regular SPV investors put money into it, it appears as one line on the cap table of the company.
But the shares that are owned by the SPV are governed by a trustee or trustees selected jointly between the investors and the company, someone who's very trustworthy. And there is a constitution that binds the trustee and it just says, here's how we're going to vote these shares in the future.
Here's what our purpose is in making this investment. And it's like very simple, we [00:52:00] always tell founders like you want somebody who in the, who would help defend you if you're in the right and people are trying to oust you and they're in the wrong, like we would defend you, but it's not the same as defending management, no matter what, if you've been ousted and you're trying to recover the company, like they would still back you, right?
Like they, cause they're here for the mission, not for any particular faction, or specific outcome. So like, that's, an investment product. so much. That's like very similar to what we do today. It's like a very slight difference, but I think it's very meaningful to start to re imagine what could the relationship between investors and companies look like.
We do similar things for employees. We can do what's called an employee voting trust, which is very cool. People may know Anthropic, the AI company. I helped design what they call the Long Term Benefit Trust, the LTBT, which is another example of how this can be done. There's a whole literature on companies that have a foundation, a nonprofit foundation that's involved in their governance and has the ability to appoint board seats or something called the board mission pledge.
It's like, there's so much you can do that deviates from the cookie cutter standard advice we tend to give startups. And there's a vast academic literature on those [00:53:00] techniques that like, if the dominant theory of financialized capitalism was correct, these techniques would lead to underperformance.
Because ruthlessly efficient companies, would perform better and make more money, but the data shows the opposite. So like, if you just follow the data, something's wrong with the dominant paradigm, it doesn't actually make sense. And so those who are early to this realization and can do something with it are going to have the advantage going forward.
I actually think it's going to be very exciting to see what this next generation of companies does.
Shaherose Charania: Yeah. Like we were saying earlier, it feels like early days of a new movement, ground floor of what Lean Startup was. And here we are, there's a new movement and crusade to be fought going forward. So let's wrap on with the few minutes we do have, in all sort of new movement that you're focused on.
You are going to continue angel investings or advising, actually looking to continue advising and guiding them through these journeys. So as you continue in this, angel journey, is there anything you'd like to share with the listeners who are investors [00:54:00] on what you do, , to get better?
At this game of investing, even if you're making the choice to advise a company, what are you doing to get better at this?
The spiritual journey of investing: what did you really learn vs what do you think happened?
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Eric Ries: know, is it too much for your listeners to say that this is a spiritual journey? Journey of self discovery? I think it is. At the end of the day, reality is the thing we're studying. Like, what is real? What's really going on here? And we make up stories in our mind about what happened. That are often untethered from reality.
And the more pressure we're under, the more we use our socially constructed persona to make those decisions, the less likely it is to be accurate. So like, there's something actually really magical about investing and working with startups in all these different ways is that you're just, you're forced to really confront, like, what do you really know?
About how the world works and the answer is often not that much. So you have to be willing to be, get good at it. I think you have to be willing to introspect and really like , what happened and why, what did I learn from this experience? [00:55:00] And the key is, you need to learn from the experience without overfitting.
I've made this mistake where it's like, I lost some money on investment and I'm like, I'm never doing that again. But it begs the question, what is that? Am I never investing in an e-commerce company again? Because I lost money on e-commerce. I'm never investing in a founder that looks like that because those demographic characteristics bother me.
That's a very natural human intuition. We do that, whether we admit it or not, that's a terrible inference to make—not just it's immoral, but also stupid. Unlikely that that was the factor, but then what was the factor? And then of course, there's the people like, well, it was just market timing. Well, if it's just market timing, you should do it again and again and again and again.
And that's the definition of insanity. So that can't be right either. So like actually to learn anything, you have to have had a falsifiable hypothesis and then you have to actually falsify it and then be like, okay. What did I get wrong here? What did I learn? And I don't know, I don't spend tons of time doing that.
Like, obsess with my losses and whatever, but I try to pay attention. Just like, how did it feel? What was I thinking at the time? What was my [00:56:00] real honest motivation for doing the thing? I found quite often, I just wanted to make some money. That's so common to delude yourself about that.
And those are terrible. Those are my worst investments for sure— when I trick myself into doing that. So yeah, I think. You want to get better at it, , you got to cultivate equanimity. You got to cultivate the ability to see what is really happening. And there are so many tools for that from the scientific methods to meditation.
Like it sounds a lot like "how do you live a good life". It's the same as anything else is. We just, happen to do that in this intentionally high risk environment. And since the world is highly uncertain anyway, I would say we're just being honest about how risky doing anything is.
So like, how many people do you know who've gone to work at a safe job at a big company and then got laid off? I had those same people tell me that even after being laid off, they're like, doing a startup is too risky. I was like... is it? You're, you're the one who had the really bad experience of like life being totally out of your control.
You know, I was able to make a career out of this. So yeah, I feel like part of [00:57:00] this is just embracing what is, seeing what comes.
Shaherose Charania: I love that answer. Thank you. Yeah, really resonated with me.
Okay.
Speed Round and Final Thoughts
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Shaherose Charania: With two minutes, Aamir,
shall we do a speed round?
Aamir Virani: yeah, let's do the speed round. So these are one word answers. Um, so we'll just hammer through them real fast.
Eric Ries: short form
is not really my specialty.
Aamir Virani: Okay. All right. who is another first funder you admire?
Eric Ries: I have so many, the people with the most independent conviction. I mean, my old friend, Brian Singerman at Founders Fund, He's done it many times. I admire the courage that that requires.
Aamir Virani: What is a book or piece of media that has had a major impact on how you invest? Besides your own.
Eric Ries: Huh. If I listened to my own advice, I probably would do it less. Uh, is it too cliche to say Dune these days? I feel like Dune is back in the popular culture, which is awesome. That book was so meaningful to me.
Aamir Virani: Oh, why, why Dune?
Eric Ries: I mean, if you have to ask, what can I say? I don't know. I think that it's part of a genre of books that, , really take [00:58:00] seriously the question of like,
what are institutions and how do they interact and just like what are the ways that the hero's journey can be both awesome and go terribly wrong that just to me has always felt all too relevant for this kind of work. So
yeah,
Aamir Virani: Zoom, phone, or in person meetings.
Eric Ries: I actually like talking to people on the phone I'm so old fashioned. I still use a dial in conference line when I can get away with it Because I'm very introverted and I spend so much of my days in meetings now. I was much happier when I could write code all day because like that was more my natural rhythm and so now like yeah the number of in person and Zoom meetings I have to do per day burns me out and I burn out a little less if I can just be on the phone.
Aamir Virani: Social media platform of choice.
Eric Ries: Hate social media. Get me off social media. Yeah, I do not. My choice would be somehow it wasn't invented and we don't use it. The problem is I want the information that I can only get from social media. So of course I want the good parts without the bad parts.
So if someone can invent a version of it that is not addictive, it doesn't make me feel like crap when I use it. That would be my platform of [00:59:00] choice.
Aamir Virani: Eric thank you for joining us.
Shaherose Charania: Yes, totally. Where can people find you
online,
Eric Ries: All the usual places, yeah, you can just go to TheLeanStartup.com or I'm at E R I C R I E S on all the relevant platforms.
Shaherose Charania: But you're not on it because you hate it.
Eric Ries: I wish, I wish I was not on it, yet there I am.
Yeah, join my mailing list. If you want to follow me without having to go on social media and damage your mental health, I do have a mailing list, you can go to
Takeaways
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Eric Ries: TheLeanStartup.com.
That was a really great interview. I'd love to share some takeaways. I'll share the takeaways in two parts. The first we'll focus on insights and takeaways for angel investors. And the second will be focused on company building with long-term principles in mind, which is a new ethos that Eric is pushing forward right now. So in terms of takeaways for angel investors, Eric has invested in over a hundred companies over the years, very often one of the first early checks.
Shaherose Charania: and he shared a takeaway that we've heard often, which is have your [01:00:00] own personal, why for investing,
For Eric, you know, his, why was three key things first giving back, giving back to the people he's worked with. He's started companies with. And, , people who've supported him over the years. The second is learning whether he's learning from the founder or the space that they're operating in or how they're going about running their lean startup experiments.
, and lastly, investing in spaces that he is excited about. He talked about. investing in the future of education and the financial system and AI. And so having your own personal, why again was reiterated as a very important learning for investors.
The second takeaway was how Eric talked a lot about angel investing as a way to learn. as I was reflecting on his approach, which is to make an investment and then introspect and reflect on what did he really learn? it dawned on me that what he's doing is he's applying the lean startup framework [01:01:00] to investing. At the lean startup framework, as we all know is build, measure, learn. And Eric is applying his own framework, which all of us are doing as investors, which is invest, measure, learn.
And so, when you stay very principled on learning. Where you invest and then you , you can reveal sort of micro and macro learning to improve. Decision-making. And separate really What might seem true and proven with data and what you think is true. Eric talked about, , asking the question is this falsifiable with data, and then also talking about how introspecting and then meditating on that learning is equally important that you can gather the data to help learn. What might've been truth from an investment or what is still yet to be learned because it's not falsifiable with data.
And we won't always be able to do that. We won't be able to make an investment. And have the data to learn. And that's where we can get into traps of. [01:02:00] Making assumptions or generalizations or having unconscious bias.
And he said this really quickly. Um, Just almost glossed over it that, you also want to be introspective and meditative. And I realized that is a very important tool as an investor that I'm starting to use so that I can separate, what is true. And again, falsifiable data with. What I'm assuming or what I think. so that I can make better decisions.
That really stuck with me as something to remind myself to do is that data is what will give you truth. And the rest of it, we actually still don't know. And to be open-minded about what really is true.
Another takeaway that he shared was that he has criteria that he looks for when investing and that anytime he's deviated from it, 'cause he got swept up by some hype or a promise for some quick money.
It didn't work out.
pay attention to that because [01:03:00] he's looked back at his track record and realized those ones didn't always work out.
And boy did that one land for me. I too have made. Quick, decisions or ones where I've strayed from my criteria. And sometimes I was like really quickly. Get revealed is, oh, oops. I shouldn't have made that investment. And so, I can relate to that story.
And for me, this was a reminder, have criteria. stick to it, right? cause you also hear stories of investors who went off script and did really well. And so I struggle with, you know, when do you go off script and when you don't.
but I think.
if the first principles of an investment. are sound and this doesn't sound too good to be true. then, then yeah, you can go off script, but I think it's, it's those moments where there's that promise. And you know, we're human and we all want shortcuts. that was just a good, a good reflection and a reminder to like stick to your criteria.
you [01:04:00] know, first principles thinking Over opportunistic thinking.
another quick learning was on check size, which I think is a great one for angel investors. Eric keeps his check size small. 10 K or less. And I've done that. when I angel invest, I keep it. One to 10 K usually in around the 5k range. 'cause like, Eric, my goal is also learning. And if you focus on smaller check sizes, you can do more checks, which supports high velocity learning.
So great takeaway for angel investors that the check sizes don't have to be big. And if your goals are learning, that's what that supports.
Another takeaway was around being an advisor.
Look, this isn't for everyone. It's something Eric has done. It's something I have done. It is controversial in the early stage community for people to be given equity. For their time, but for him it has worked out. He His advice for people who might [01:05:00] want to take the approach of advising what startups is that get, really get clear on what you stand for. So that founders know that they can come to you. And they can get that value and use that value as a competitive advantage.
You know, I love the as Eric mentioned, You want to get people out of pitch mode? Like how are they really working? How do they really think? And. The best way is to work with someone, work on a challenge together, Brainstorm ideas together.
And I know when I've done that, I tend to have more conviction in the founder because I know what they're really like versus what they're like when they perform. It's often two different people. I wish there was an easy way for, for investors to do that. I don't think people who are in funds have that structure as easily built in to the model. But I think as an angel. If you have the flexibility or you have the time. I really feel like it's, it's worth considering.
and what that does is it'll create a flywheel because founders talk. founders will refer other founders to you and. it's a great way [01:06:00] to add value to the ecosystem beyond the check.
Another takeaway was that startups be a vehicle for seeing the worst side of someone. Or it can be a canvas of growth. You know, he shared a deeply challenging journey with a founder who revealed their worst.
side in a high stress. High stakes environment. And this happens right. ,
hearing Eric's story was kind of healing to me that I, I'm not the only one who's gone through. And experience where a founder behaves in a way that was very unexpected.
and what Eric suggested is sometimes these high stakes and high stress moments. Can be an opportunity for personal growth. I founder can choose a different way instead of being triggered by the stress or the trauma in these moments. And we can all sort of use. company building as a canvas for growth. I loved that I've done that personally. I think it's really important to think about.
Okay.
Part two of takeaways. Eric talked about on building companies from day zero with a [01:07:00] mission centered. Mindset right. he believes there's a new way where the sole goal of maximizing shareholder value, isn't going to. sustain and create the most high-performing companies.
He alluded to data showing that mission first companies are outperforming traditional capitalist first companies. And so some tools
he quickly talked on was
the public benefit corporation structure and we'll link to it in our newsletter. Which balances stockholder value with one or more specific public benefits.
And I thought. It's really interesting to think about, , the future of companies, where they weave in both mission and profits.
And so. Is there a new way forward to build companies that have the long-term in mind, then have a mission at the center and still drive massive profits and impact.
I want the answer to to be YES. I'm not exactly sure how it works yet for venture backed startups.
[01:08:00] I know we've tried. We've tried. Impact investing. We've tried the B Corp as we talked about in the episode. Um, and I don't think we're there yet, and I hope that there is a way forward. Because what I've noticed is that companies that do operate from a mission and a purpose. Attract talent are able to retain talent, Attract customers in a different way.
Like things are changing, right? People want to align to something bigger than themselves. And with, you know, the massive amounts of choice we have. You know, on the products and services side. It can be a differentiating factor. , and same goes for employees who are looking for great places to work. and so look, this is all forming,
And I'm curious to see how this all evolves over the next few years. if a subset of existing tech startups embrace this.
Does it lead to a new wave of companies that do [01:09:00] outperform. the types of companies we have today. , because we do all know something needs to change.
And so look, Eric's approach to angel investing is clearly unique in that he has the advisory approach.
He has a focus on longterm mission alignment with founders and their. stakeholders. You know, he's really focused on continuous learning. Introspection he's a unique angel investor in our ecosystem, and we are lucky to have him doing the work that he's doing. So thank you again, Eric for this time.
That's all for this week.
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