Podcastration #3 - Tobi Lütke

Podcast: Invest Like the Best

Episode: Building Islands of Innovation
Guest: Tobi Lütke

Release Date: October 22, 2024

This one reminded me of the Palmer Luckey episode on The Joe Walker podcast. Lütke continuously delivers thought-provoking ideas and philosophies in quick succession. Here are some of excerpts:

On the differences between Founder-led and Managerial-led companies...

LÜTKE: If legitimacy comes from a founder, rather than legitimacy comes from a plan, because this is the core of a difference. If you're a managerial-run company, you're a custodian of a company; you inherited it. Very few leaders of companies—there are some—but very few of them could rebuild the company tomorrow if everything goes away. What you have to do is you have to create consensus that a certain plan is the right plan, and then that plan is actually the source of legitimacy. That plan is being implemented in an entire company. You can campaign for an explosion of a plan... It's much easier to just change numbers in a plan that already has legitimacy than it is to change the plan entirely. So it's much harder to react. And so everyone, I think, generally gets this. The plan is not sentient. The plan can't just say, "Hey, this company is spending too much time in meetings." The plan can't go and subtract all recurring meetings every once in a while because it's neutral to meetings. It doesn't reason. But the management and even the CEO might not have legitimacy to do so.

Founders as exothermic people...

LÜTKE: So what's this founder mode thing? I think it's a label on top of something that people feel, especially people who have been working in a bunch of different companies. The relentlessness. But here's the way I would put it. I think what happens in most companies is they converge on—let's go with temperature—I think companies run at room temperature because that's their entropic equilibrium of temperature. That's not a problem if everyone else does it too. So in room temperature, everything is just so. But then there's people who inject heat into businesses. Brilliant product managers, brilliant people in any job do this. They're dissatisfied with status quo. They pump energy. The best leaders are literally exothermic. They are just like this complete wellspring of heat into the system...By definition, the main act of starting a company is you're trying to inject heat into planet Earth. You're trying to do something like fighting against entropy; you're trying to make something better or something different. So I think founders are recruited out of a set of exothermic people to begin with.

On what separates the good from the bad companies...

LÜTKE: Look, the difference between the best companies in the world and the worst companies in the world is probably that humans are political creatures. In the best companies in the world, people spend up to 20% of their time on politics, and in the worst companies, it's up to 60%.

Broad sweeping changes > Piecemeal changes in a company...

LÜTKE: ... my joking label for this is that I believe in the 'saturated sponge school of change management,' which is not a school—I made it up. It just comes from the analogy that if you put a sponge into a bucket of water; afterwards, it's so full it cannot absorb more water, and therefore it doesn't matter how much you submerge it after that point. So I think change management is best done as just saturate the sponge—load up all change in one go—because people will mind, but they can't mind more than the saturation point. So all other change past this point is free, so might as well do it. I think these long, drawn-out approaches of 'go and just do a whole lot of stuff over a long period of time' are incredibly incompatible with the human psyche. It might seem more convenient in implementation, but I think it's bad for years.

Mainland vs Island thinking...

LÜTKE: There are not many islands in the world anymore. Mainland is really big. The Internet has connected us all. But innovation comes from islands. Difference comes from islands, literally. Visiting Japan is different than other places because it's an island. It has enlightened barriers such as water and language, and therefore they can maintain difference in a way that is very hard to do if you're part of a mainstream. Mainstream thinking is incredibly fashion-oriented. Sometimes it's fashion of this sort, sometimes fashion of that sort. And I think that this aesthetics even ended up impacting company building. And I think my takeaway is Shopify did not have language or water as enough to be able to make decisions that are significantly different from the ideas that are just floating around in the mainstream of this time. I think progress depends on more islands.

On how open-source programming actually works...

LÜTKE: Open source is totally misunderstood, by the way. People always think about this as the commons produces something that's better, but literally everyone can fork the project if they have better ideas and send gifts from there. And if those gifts end up being better than the previous version, then it's a marketplace that just doesn't run for money; it just runs purely for legitimacy and merit. And every good open-source project is led by a very small group of people surrounded by a clear and highly legitimate leader. So it teaches us a lot about human organizational structures at work.

On building something for yourself and your island, rather than for the "real world"...

LÜTKE: The amount of times I heard, "Hey, this Shopify thing, I like what you're doing—something like this—but this will never work in the real world." It's basically every day somewhere. "This will never work within the real world for real retailers. This will never work in a real world with real businesses. This will never work with customers or enterprises or any of these." I've heard it all, and here's my response every single time: "Yeah, that's fine. I'm not building for the real world. I'm building for my own island. And I'll invite you over; if you think what I have is better, use it."

On how to make good products...

LÜTKE: ...products are good when the people who make them give a shit, because what they do is they fill up the products with giving a shit, and everyone feels it on the other side.

On Implementation > Ideas

LÜTKE: I just think people overestimate the value of an idea. An idea is worth one good bottle of Scotch. Everything else is implementation, and here's the thing: the implementation matters. For instance, it would be trivial to do this, but there's an understudied, under-acknowledged thing that happens where your customers, by a company, stop being treated as a customer and are now treated as a crop to be harvested.

On how to market yourself as an Island rather than keep up with Mainstream babble...

LÜTKE: I think what we tell our customers, our merchants, is: why does your thing exist? What happened to make you think that this needed to be done? What's your source of energy? What are you doing? You are exothermic. But again, Newtonian laws say energy has to come from somewhere. What are you converting into this exothermic energy? Is it just some dogged desire to have a product exist? Is it anger at the status quo? Is it a counter? Have you been slighted by people and you want to prove them wrong? It doesn't actually matter. Human emotions are the only net adders of energy into these systems. Which ones have you tapped and contained and put a steam turbine on top to cause building to happen? Now, and then explain the journey and say this thing. That's a story for a founder, but that's speaking to your island, not to the mainstream.

On how leadership can overcome 'un-fun' challenges in a company...

LÜTKE: And I'm never worried about the stuff that's hard and fun. The stuff that's hard and not seen as significantly fun is much harder to do because that's where the exothermic energy needs to come in. You know what un-fun causes? Freezing. At some point, you're at zero, and then nothing ever happens anymore.

Questions

Exothermic-based questions:
What ways can you become exothermic in your own life?
Is it sustainable to be exothermic in an industry that you are not passionate for?
Have people discovered the 'thing' that they can be exothermic about in middle age?
Is there a process for finding the thing you can be exothermic about that isn't simply 'throwing spaghetti at the wall' or having a trajectory-altering event happen to you?
Do introverts or extroverts tend to become exothermic leaders?
[My assumption would be introverts because the activation energy required to become exothermic is larger for the introvert. It's easier to follow/believe in someone who has tapped into a raw, authentic place that doesn't have the unctuous, salesperson quality that extroverts often have.]

Island-building questions:
What are some of the pre-requisites to building your own island: Physically? Temperamentally? Socially? Financially?
At what point did Lütke receive some form of external validation for Shopify?
Would Lütke still be working on Shopify if it hadn't reach the scale it is at now? How do you hire people so as to not infect your island with 'Mainland-itis'?
How do you know when you’ve been infected with 'Mainland-itis'? What circumstances led to his own realization of his 'Mainland-itis' infection?