Eric Ries

Supported by Greenhaven Road Capital, finding value off the beaten path.

Eric Ries joined Ted Seides to talk about his book (The Lean Startup) and his startup (Long-Term Stock Exchange).

At Ries’s first startup the business plan was a “beautiful artifact,” created with stealth operations. It was going to work, for sure. “If the customers had read the business plan we’d all be rich.” Only it didn’t work, at all. They failed.

Picture a rainbow, at some point one color ends and another begins. Similarly in businesses there must be a point when private work becomes public sharing. Tasty quickly became public. Ashley McCollum said, “The focus was not on food. The focus was on a format that you can watch in your social feeds, post literate, and audio independent.”

The only way to see if that format worked was by creating, sharing, and tracking.

Ries’s “beautiful artifact” made modern and for food TV would be another bubbly, kind, homely, southern, or intelligent chef showing off in a polished kitchen, using matching utensils, and baking in a magic oven.

There’s also private experiments. The Chocolate Wars were full of families fiddling with recipes, trying different milk sources, and ‘borrowing’ tips from their neighbors, friends, and enemies.

Public isn’t necessarily better than private and vice versa. What’s important is experimentation of some kind.

Ries did this with his book, much like a comedian. “During the process of writing the book, I didn’t know how it was going to turn out and I felt a real sense of obligation to make the book as rigorous as I possibly could.” Reis ran workshops, conferred at conferences and worked with all kinds of startups in all sorts of places.

For Steve Martin, this travel was on “the lonely road.” It was there that Martin went from writer/performer/musician/comedian to just stand-up comedian. Jennifer Armstrong wrote about Jerry Seinfeld, “He used his attendance at Manhattan comedy clubs as a kind of independent study. He analyzed comic’s approach to their material and even wrote a forty-page paper on the subject.” Andy Grove calls it “the winds of the real world.”

Now Ries is trying to build a new kind of stock market, the LTSE. One part of it is about nipping executive compensation. One client wondered to Ries why a competitor splurged on buybacks.

“I don’t even know the name of the company, the details of the industry, or anything really but I can tell you everything about their executive compensation system. Why are they doing buybacks? We all know it.” 

The reason? The incentives!

In one of our most popular posts, we looked at how Howard Marks organizes his life Matryoshka-like.

It’s great that Ries is doing what he’s doing, attempting something new, but as the Marks’ post notes, the odds are not in his favor.

The compensation quagmire spawned in 1993 when president Clinton wanted to stem the early 90’s recession (FRED). Clinton gave a speech and congress passed a law which capped CEO-pay-as-as-deduction at one-million dollars. In a world of cause -> single-effect that’s a brilliant move.

However, that’s not real-life, and CEO pay exploded.

How one incentive structure fits in another matters a lot. It’s why hiring is so important. If businesses can find people whose incentive structure already matches theirs then much of the on-boarding is already done. A good culture, wrote Rory Sutherland, is a place with “an atmosphere in which people can ask apparently fatuous questions without fear of shame.” A good culture, said John Hempton, is where people are challenged on accuracy.

Though the road is steep, Alex Ries and his team have a chance to make the climb. Their biggest advantage stems from this incentive weakness. Their competition can’t compete with them.

Ries said “We support dual listings,” & “The reason incumbent exchanges want listings so badly is not for the listing fees but for the extra trades it generates on their platform and we don’t make our money from trading so we don’t need to fight them for that subsidy.”

In another financial services post we noted the advice from Alex Rampell who pointed out that Max Levchin at Affirm is approaching a problem in much the same way. Levchin noted that people don’t need credit so much as they need the thing they want. So Affirm loans them the money. In an interview he’s asked why other banks can’t enter his market.

“Those guys cannot enter our business because they’re addicted to the income. If you make half your money on fees and the other half on these nasty deferred interest programs.”

Ries has learned some helpful lessons about iteration, experimentation, and compensation. Good luck to him for trying something new. Thanks for reading. Want more stories. They’re all here.

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