The anatomy of a startup death | Eric Ries (Author of The Lean Startup)
In a Nutshell
Financial gravity—the pressure to cut costs, raise prices, and sell to the highest bidder—destroys companies even when it destroys long-term value; Saul Price’s FedMart was liquidated seven years after he was fired for refusing to do so, while Costco, built with strong “mission guardian” structures, still thrives. Companies that resist this force use constitutional governance—public-benefit charters, two-entity trusts, and independent mission guardians—to lock purpose into legal architecture and outperform “shareholder-primacy” peers. Founders can start by running quarterly ethos check-ins, surveying whether employees still know what the company stands for, and fixing micro-fractures before they become fatal.
These notes were generated by AI and may contain inaccuracies.
Eric Ries has been an entrepreneur for approximately 20 years. He is the author of The Lean Startup and has built companies including Answer AI, an AI company, and the Long-Term Stock Exchange (LTSE). He has worked with hundreds of companies and thousands of entrepreneurs worldwide.
Ries has witnessed many companies fail to live up to their potential. Some were destroyed or driven away from their original mission. He notes that quite a few companies have been "murdered in the name of profit." This creates a paradox: in economic systems where companies are supposed to compete to create the most value, why would value-destroying actions be taken in the name of profit?
Saul Price, considered the father of modern retail and discount big-box retailing in America, founded FedMart in the 1950s. Before becoming an entrepreneur, he was a lawyer who viewed himself as a fiduciary to his clients, meaning he put client interests before his own.
FedMart would sometimes post competitor advertisements to inform customers they could get products cheaper elsewhere. Investors questioned why Price paid higher wages than necessary and charged lower prices. Price explained that he paid high wages not because he had to, but because he wanted to, and that this approach earned employee trust. He believed in low prices not because required, but because he wanted to serve customers and communities.
In 1975, after running FedMart for more than 20 years, Price was fired by his board when investors changed the locks on his office door. The board wanted more profit. By 1982, just seven years later, the company had been liquidated and completely destroyed.
After being fired from FedMart, Saul Price started the Price Club. One of his proteges also left FedMart in protest and started another company. When the two companies merged, they formed Price Costco, now known as Costco, a $400 billion public company. Costco maintains Price's ethos about how customers and employees should be treated.
Ries identifies a force he calls "financial gravity" - a psychological explanation for why companies are destroyed in the name of profit. The economic system rewards short-term thinking and cost-cutting without accountability for consequences to brand, quality, product, or environment. This system latches onto people's desire to succeed and manipulates them toward these outcomes.
Ries emphasizes two points: first, this is not the only way to build a financial system - different values could be transmitted. Second, when people see this force in action and witness favorite brands being destroyed, they often assume it's inevitable due to human nature, greed, or capitalism. However, if this force were truly inevitable, there would be no exceptions, yet exceptional companies exist everywhere.
Companies that defy financial gravity share something unexpected: they violate the so-called "best practices" of how entrepreneurs are taught to build and govern companies today. They do not share common cultures, strategies, values, countries, or decades. The fact that these companies violate modern governance standards proves that contemporary financialized business theory is wrong and that better approaches are possible.
FedMart was destroyed while Costco endured because of differences in governance. Most companies are built with weak governing structures. Costco was built with what Ries calls a "governance fortress" - provisions that prevent outside meddling and prevent investors from bullying the company. This is common among exceptional companies that have ways to thwart forces undermining their mission. Ries calls these structures "mission guardians."
These companies are often considered to have "bad governance" and receive poor ratings from ratings agencies. Since 2008, companies with bad governance have outperformed those with good governance.
Most founders have never read their governing documents. According to modern governance theory called "shareholder primacy," companies must always be sold to the highest bidder - this is considered law. This is a relatively new idea. Founders often don't believe this applies to them, but if someone offers just a dollar per share more than a company is worth, the company must be sold.
Vectura was a University of Bath spinout creating inhaler therapeutics for diseases like asthma and COPD. The publicly listed company on the London Stock Exchange received acquisition bids from Philip Morris International (cigarette maker) at 165 pence per share and a private equity firm at 155 pence per share.
Despite the business not needing to be sold and the obvious problems with a cigarette company owning a lung health company, the board determined it was their fiduciary duty to accept the higher bid from Philip Morris. Within three years, the company was completely destroyed. Some investors made money from the premium, but overall value was destroyed.
Ries presents a two-dimensional blueprint. Ethos refers to a company's character - how often it does the right thing, consistency of behaviors, what it stands for, and whether it aligns with human flourishing or financial extraction. To build ethos, companies must create business models where they only make money when achieving their purpose, develop a "virtuous cycle of performance" where mission success generates more money to invest in the mission, and build cultures where employees pursue the mission even without managers present.
Integrity refers to structural integrity - the ability to make and keep promises. Since companies are collections of people and CEOs can be replaced, promises must be rooted deeper than individual intentions. This involves structures like public benefit corporations that reject shareholder primacy in corporate charters, proper investor-company relationships, and mission guardians who hold boards accountable.
During a Texas ice storm causing power outages, an HEB store manager got on a counter and told customers to take their shopping carts and go home without paying. This was not a lone rebel act but something the company instills and trains for - seeing customers as people being served. This ethos requires extremely consistent action at every level, with boards, CEOs, and managers insisting on and rewarding this behavior.
Ries presents the concept "harder is easier" - doing the right thing consistently makes every future business problem easier. Steve Jobs fought with engineers about cable layout inside computers, insisting on quality even though customers would never see it. His position was "we will know." Like Saul Price's fiduciary approach, design was an absolute, not something done when convenient.
For hundreds of years, joint stock corporations were understood to exist for specific, society-beneficial purposes. In 19th century America, incorporation required state legislature approval with companies stating their specific public interest purpose in their charter. The critical transition date in the US was 1899. Shareholder primacy didn't take root until the 1980s.
Ries advocates for "constitutional governance" drawing from political philosophy concepts like checks and balances. The goal is creating "mission controlled companies" with architecture for institutional longevity - the ability to stay true to specific purposes over long periods.
Anthropic consulted with Ries shortly after founders left OpenAI. The structures established have been tested and stood the test of time. Anthropic is a public benefit corporation with AI safety mission infused throughout, protected by a mission guardian entity called the Long-Term Benefit Trust (LTBT). This two-entity structure has outside trustees appointing directors to the for-profit company's board.
Patagonia has a similar structure. The German optics company Zeiss has had this structure since 1887. Studies show companies with mission guardian entities live on average five times longer than conventional companies.
This affects everyone, not just CEOs and investors. Everyone will eventually hold positions of power and be tested on maintaining integrity. More importantly, everyone interacts with institutions as citizens, consumers, employees, investors, and community members. The public generates the gravitational force pulling companies toward certain values, and people must learn to wield this power for good.
Fifteen years after writing The Lean Startup, founders ask how build-measure-learn changes with new technology. While building and measuring can be accelerated through AI, learning remains constrained by human wetware. Learning is difficult to outsource.
Ries used AI tools extensively in research and editing his book, though not for writing itself. Deep research tools initially seemed promising but produced inaccuracies and didn't guarantee understanding even with perfect information. He switched to using "solve it" at Answer AI, loading research into context with writing pieces to brainstorm improvements together while maintaining final control over content flow.
Instead of sending agents out to do the work en masse, the approach is taking a large project like a book and decomposing it down into human-scale subtasks that can be done with an assistant. A really outstanding editorial and research assistant does not make a website but teaches how to make a website. They do not make a product but teach how to make a product. They do not measure what customers think but help figure out what customers think.
Once the shift is learned, AI tools can be seen that are really designed to accelerate the rate at which validated learning is achieved. In the meantime, people need to be careful and maybe would be better served by using the old methods that they understand better.
For founders in particular, the recommendation is to pick one thing to get started. Building an incorruptible company is not something done overnight like "ha tada." The advice is to focus on making a checklist and working on that checklist over time.
You can't just say, "Well, I ate a healthy meal today. Now I'll never get sick. Now I'm fit." No, that's not how it works.
You can't say, "I went to the gym one time. Now I can be an Olympic athlete." No.
If greatness is the goal, training and working at it is required.
One thing founders are asked to do is have a quarterly meeting or every couple of months—does not have to be every day—where they sit down with co-founders, board, executive team, or whoever the right people are, and ask whether the ethos is intact. Employees should be surveyed with questions like: do you know what we stand for? What do you think the mission of this company is? What do you think its values are? Are our governance protections adequate to what we're facing now? Or can we start to see cracks in the structure forming?
Most importantly, look ahead. Are there new threats on the horizon? Are there tiny inconsistencies? Think of it like micro fractures in a bridge or in a submarine's hull before it collapses. There sometimes will be the indication of stress fractures that can be observed. This should be done as a regular practice.
Get outside support if needed. Companies have been helped to start that are trying to help and support startups in this brave new world. Whether support comes from the speaker or anybody else, find somebody who can be a partner in helping think through these issues because the goal is to prevent the company from being on the new edition of this book on the list of the graveyard of good intentions.
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