Zero to One, Peter Thiel (10/10)

A powerful book, that changed how I thought about entrepreneurship. I’ve written about the importance of the Power Law before, and what it means for what you choose to do.

What do you know that others don’t?

  • What valuable company is no one building?
  • Creating value is not hard; capturing enough of that value is harder
    • In 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google, which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits—more than 100 times the airline industry’s profit margin that year.
  • Progress can take one of two forms
    • Horizontal or extensive progress means copying things that work—going from 1 to n. Horizontal progress is easy to imagine because we already know what it looks like
    • Vertical or intensive progress means doing new things—going from 0 to 1. Vertical progress is harder to imagine because it requires doing something nobody else has ever done. If you take one typewriter and build 100, you have made horizontal progress. If you have a typewriter and build a word processor, you have made vertical progress.
  • If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now?
    • In March 2001, PayPal had yet to make a profit but our revenues were growing 100% year-over-year. When I projected our future cash flows, I found that 75% of the company’s present value would come from profits generated in 2011 and beyond—hard to believe for a company that had been in business for only 27 months. But even that turned out to be an underestimation. Today, PayPal continues to grow at about 15% annually, and the discount rate is lower than a decade ago. It now appears that most of the company’s value will come from 2020 and beyond.
    • LinkedIn is another good example of a company whose value exists in the far future. As of early 2014, its market capitalization was $24.5 billion—very high for a company with less than $1 billion in revenue and only $21.6 million in net income for 2012. You might look at these numbers and conclude that investors have gone insane. But this valuation makes sense when you consider LinkedIn’s projected future cash flows.
    • The overwhelming importance of future profits is counterintuitive even in Silicon Valley. For a company to be valuable it must grow and endure, but many entrepreneurs focus only on short-term growth.

Thoughts on Monopolies

Monopolies vs. Perfect Competition

  • Monopoly is the condition of every successful business
  • Under perfect competition, in the long run no company makes an economic profit. Capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away.
  • If you want to capture value, don’t build an undifferentiated commodity business.
  • Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets; monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets
  • In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can’t.
  • If the tendency of monopoly businesses were to hold back progress, they would be dangerous and we’d be right to oppose them. But the history of progress is a history of better monopoly businesses replacing incumbents.
    • A monopoly like Google is different. Since it doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products, and its impact on the wider world. Google’s motto—“Don’t be evil”—is in part a branding ploy, but it’s also characteristic of a kind of business that’s successful enough to take ethics seriously without jeopardizing its own existence.
  • Winning is better than losing, but everybody loses when the war isn’t one worth fighting.
    • Just as war cost the Montagues and Capulets their children, it cost Microsoft and Google their dominance: Apple came along and overtook them all. In January 2013, Apple’s market capitalization was $500 billion, while Google and Microsoft combined were worth $467 billion. Just three years before, Microsoft and Google were each more valuable than Apple. War is costly business
    • When Pets.com folded after the dot-com crash, $300 million of investment capital disappeared with it.
    • Sometimes you do have to fight. Where that’s true, you should fight and win. There is no middle ground: either don’t throw any punches, or strike hard and end it quickly.

Monopolies and Moats

  • Every Monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.
    • Proprietary Tech – As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage. The clearest way to make a 10x improvement is to invent something completely new.
    • Network effects: Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small.
      • Network effects businesses must start with especially small markets. Facebook started with just Harvard students — Mark Zuckerberg’s first product was designed to get all his classmates signed up, not to attract all people of Earth.
      • This is why successful network businesses rarely get started by MBA types: the initial markets are so small that they often don’t even appear to be business opportunities at all.
    • Economies of scale: A good startup should have the potential for great scale built into its first design.
    • Strong brand: other monopolistic advantages are less obvious than Apple’s sparkling brand, but they are the fundamentals that let the branding effectively reinforce Apple’s monopoly.
      • Beginning with brand rather than substance is dangerous.

Building a Monopoly as a Startup

  • Every startup is small at the start. Every Monopoly dominates a large share of its market. Therefore, every startup should start with a very small market. Always err on the side of starting too small. The reason is simple: it’s easier to dominate a small market than a large one.
  • The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. Any big market is a bad choice, and a big market already served by competing companies is even worse.
  • It’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion market. In practice, a large market will either lack a good starting point or it will be open to competition, so it’s hard to ever reach that 1%. And even if you do succeed in gaining a small foothold, you’ll have to be satisfied with keeping the lights on: cutthroat competition means your profits will be zero.
  • Sequencing markets correctly is underrated, and it takes discipline to expand gradually.
    • The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative (related to Crossing the Chasm – I’ll add book notes soon)
    • As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.

Control over distribution

  • Superior sales and distribution by itself can create a Monopoly, even with no product differentiation. The converse is not true. No matter how strong your product—even if it easily fits into already established habits and anybody who tries it likes it immediately—you must still support it with a strong distribution plan.
  • In between personal sales (salespeople obviously required) and traditional advertising (no salespeople required) there is a dead zone – the distribution doldrums.
    • Suppose you create a software service that helps convenience store owners track their inventory and manage ordering. For a product priced around $1,000, there might be no good distribution channel to reach the small businesses that might buy it.
      • Even if you have a clear value proposition, how do you get people to hear it? Advertising would either be too broad (there’s no TV channel that only convenience store owners watch) or too inefficient (on its own, an ad in Convenience Store News probably won’t convince any owner to part with $1,000 a year).
      • The product needs a personal sales effort, but at that price point, you simply don’t have the resources to send an actual person to talk to every prospective customer.
    • This is why so many small and medium-sized businesses don’t use tools that bigger firms take for granted. It’s not that small business proprietors are unusually backward or that good tools don’t exist: distribution is the hidden bottleneck.
  • Advertising can work for startups, too, but only when your customer acquisition costs and customer lifetime value make every other distribution channel uneconomical.
  • Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.
  • If you can get just one distribution channel to work, you have a great business. If you try for several but don’t nail one, you’re finished.

Power Laws (the most interesting part of the book)

Never underestimate Exponential Growth, Compounding, and the Power Law distribution. The Power Law distribution—so named because exponential equations describe severely unequal distributions—is the law of the universe. It defines our surroundings so completely that we usually don’t even see it.

Venture Investing returns are Power Law distributions

  • The error lies in expecting that venture returns will be normally distributed: that is, bad companies will fail, mediocre ones will stay flat, and good ones will return 2x or even 4x. Assuming this bland pattern, investors assemble a diversified portfolio and hope that winners counterbalance losers. But this “spray and pray” approach usually produces an entire portfolio of flops, with no hits at all. This is because venture returns don’t follow a normal distribution overall.
    • Our results at Founders Fund illustrate this skewed pattern: Facebook, the best investment in our 2005 fund, returned more than all the others combined.
    • Palantir, the second-best investment, is set to return more than the sum of every other investment aside from Facebook.
    • This highly uneven pattern is not unusual: we see it in all our other funds as well.
  • The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.
  • This suggests two very strange rules for VCs
    • First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments.
    • Second: because rule number one is so restrictive, there can’t be any other rules.
  • Consider what happens when you break the first rule. a16z invested $250,000 in Instagram in 2010. When Facebook bought Instagram just two years later for $1 billion, a16z netted $78 million—a 312x return in less than two years. That’s a phenomenal return, befitting the firm’s reputation as one of the Valley’s best. But in a weird way it’s not nearly enough, because it has a $1.5 billion fund: if they only wrote $250,000 checks, they would need to find 19 Instagrams just to break even.
  • This is why investors typically put a lot more money into any company worth funding; investors who understand power laws invest in as few companies as possible
  • The power law means that differences between companies will dwarf the differences in roles inside companies. You could have 100% of the equity if you fully fund your own venture, but if it fails you’ll have 100% of nothing. Owning just 0.01% of Google, by contrast, is incredibly valuable (more than $35 million as of this writing).

What you work on matters far more than doing it well

  • Every university believes in “excellence,” and hundred-page course catalogs arranged alphabetically according to arbitrary departments of knowledge seem designed to reassure you that “it doesn’t matter what you do, as long as you do it well.” That is completely false. It does matter what you do. You should focus relentlessly on something you’re good at doing, but before that you must think hard about whether it will be valuable in the future.
  • If you do start your own company, you must remember the power law to operate it well
    • The most important things are singular: One market will probably be better than all others
    • One distribution strategy usually dominates all others, too
    • Time and decision-making themselves follow a power law, and some moments matter far more than others
  • in a power law world, you can’t afford not to think hard about where your actions will fall on the curve.

Seven questions every business must answer

  1. The Engineering Question: Can you create breakthrough technology instead of incremental improvements?
  2. The Timing Question: Is now the right time to start your particular business?
  3. The Monopoly Question: Are you starting with a big share of a small market?
  4. The People Question: Do you have the right team?
  5. The Distribution Question: Do you have a way to not just create but deliver your product?
  6. The Durability Question: Will your market position be defensible 10 and 20 years into the future?
  7. The “secret” Question: Have you identified a unique opportunity that others don’t see?

The book also illustrates how very few cleantech businesses have survived, using these seven questions.

Read Next

Book Reviews

Related Articles / Blog Posts

Margin of Safety, or why you should always save for a rainy day

[Note: I shared this mental model with my email subscribers on Feb 12, 2017. If you want to receive a new mental model every week, join the club.]

Margin of Safety: You build a bridge that 30,000-pound trucks can go across, and then you drive 10,000-pound trucks across it.

What it is:

Margin of safety is a critical principle in engineering.

Let’s say we’re building a bridge, and the maximum weight of vehicles we expect on the bridge is 5,000 tons. So do we build it to withstand 5,000 tons? 6,000 tons?

No. We build it to withstand 20,000 tons. That’s the margin of safety.

When you save “for a rainy day”, that’s what you’re doing. Building a contingency fund. A margin of safety for your lifestyle, should you lose your job.

As Seth Godin explains in Breakpoints: when laying a sidewalk, workmen don’t put long slabs of concrete in place. Instead, they keep small gaps every few feet. That’s a margin of safety too – in case the concrete breaks or expands in unpredictable ways.

[Tweet “”You build a bridge that 30,000-pound trucks can go across and then drive 10,000-pound trucks on it.”]

Examples from business:

  • Investing: Margin of safety is a core tenet of value investing, popularized by Benjamin Graham and David Dodd. As Warren Buffett, a long-time protege of Ben Graham, says: “If we calculate the value of a stock to be only slightly higher than the price, we’re not interested.”
  • Startup fundraising: You don’t raise just enough capital to get to your next round of funding. If you want to raise your next round at $1Mn in revenue, raise enough now to get to $2Mn. Better still, raise enough to become profitable. Similarly, don’t start looking for investors when you have one month of cash in the bank. Start when you have six.
  • Capacity planning: Most services organizations keep a bench (idle employees) of up to 20% of their total headcount. So that they can service any sudden requirements. Same goes for manufacturing – as they say, if you have 20% spare capacity, you have no spare capacity.
  • Project planning: When drawing out a project plan, always put in a few buffer days / weeks.

[Aside: we almost never do this. There’s even a name for it. The planning fallacy – how we believe that this time, unlike all previous times, we’ll finish the project on time.]

[Tweet “”If you have 20% spare capacity, you have no spare capacity.” #marginofsafety #mentalmodel”]

Rules to follow:

  1. Always build a margin of safety. Whatever you’re doing, estimate how long, how much money, etc. it’ll take. Then add a buffer.
  2. Expect your plans to go awry. Do a premortem. And then build redundancy / backups.

As Seth Godin says in the article above, there’s no doubt the ground will shift. The question is: when it does, will you be ready?

Further Reading:

 

Linked to: Redundancy, Premortem

Filed Under: Engineering

Cognitive Dissonance, or why it’s so hard to persuade people with facts

[Note: I shared this mental model with my email subscribers on Feb 5, 2017. If you want to receive a new mental model every week, join the club.]

Charlie Munger Quote on Cognitive Dissonance

Why is it so hard to persuade people with facts?

You feel like their argument stands on three key pillars, and you’ve destroyed all of them with hard data. Still, it remains standing. In fact, they’ve dug their heels in even more!

Why does being corrected trigger feelings of anger and dismay?
Short answer: Cognitive dissonance.

 

What it is:

Why does cognitive dissonance happen? As this article says, there are two main reasons:

  • Our brains don’t store facts as standalone pieces of information. We remember data points as a network of interrelated “facts”. So, when one of them is called into question, it feels like the entire network of beliefs is threatened. Loss aversion kicks in.
  • When an argument threatens your world view, self concept, or your very identity, facts can even backfire. You become more convinced of your erroneous stand, when you hear you’re wrong.

Strange things happen when you think your identity is attacked.

See the GMO study in the article above, or this interesting example of cognitive dissonance from the ever-provocative Scott Adams.

And cognitive dissonance isn’t triggered only in an argument. In any setback, you choose the interpretation most favorable to your self esteem. Just ask Aesop:

The Fox & the Grapes - Cognitive Dissonance

[Tweet “”We have a habit of distorting the facts until they become bearable for our own views.””]

Rules to follow:

So, what do you do? Or, as the title of this section says, how do you convince someone when facts fail?

  1. First, articulate the opposite position accurately. Acknowledge that you understand why someone could hold that opinion.
  2. Stick to the facts, and layer them up gradually. First, the raw information. Then, a second order inference. Agree on both. Only then, bring up your controversial conclusion.
  3. Keep emotions out. Discuss, don’t attack. No absurd absolutes. No ad hominem. And definitely no ad Hitlerum.
  4. Don’t activate identity when arguing a point. Show how changing facts doesn’t necessarily mean changing world-views.

If you and your stubborn interlocutor are a little geeky, try the Double Crux method. [I’m still trying to find a fellow geek I disagree with, to try this.]

Further Reading:

 

Linked to: Confirmation Bias

Filed Under: Psychology & Human Behavior

The Premortem, or how foresight can also be 20:20

[Note: I shared this mental model with my email subscribers on Feb 5, 2017. If you want to receive a new mental model every week, join the club.]

Premortem

Or as more ancient stoics said, “Premeditatio malorum”. Or “premeditation of evils”.

 

What it is:

We’ve all heard of the postmortem in business. When something goes wrong, all the decision-makers get together to diagnose what happened. And learn how to prevent it from happening again.

In theory, at least.

What really happens though, is an advertisement for hindsight bias. Everyone suddenly remembers how they “always knew it wouldn’t work”.

As Amos Tversky said, “The writing may have been on the wall all along. The question is: was the ink invisible?”

[Tweet “”The writing may have been on the wall all along. But was the ink invisible?” #hindsightbias”]

A premortem asks the same question as a postmortem, but before you embark on your endeavor. “It’s two years from today, and our plan has been implemented. But it’s been a disaster. What went wrong?”

Explicitly going through such a thought experiment can help avoid the overconfidence and groupthink that team decisions can suffer from. We all love “playing the devil’s advocate” – here’s an executive license (and order) to do so!

[Tweet “We all love “playing the devil’s advocate” – a #premortem is a clear license to do so! #mentalmodel”]

Examples of premortems / thought experiments:

Here are a few examples of thought experiments to try.

1 Year from Now:

  • We haven’t hit product-market fit yet. We took too long to launch our initial product. What features could we have left out?
  • Half our customers didn’t renew their contracts. Why? What went wrong?

 

3 Years from Now:

  • Our startup has just shut down. We just couldn’t hit a growth trajectory. What are the reasons for this failure?

 

Rules to follow:

  1. When you’re making a big decision, make sure you think about what could go wrong. And protect against it. Don’t only think about what happens when the plan works – you’ll fall prey to the focusing illusion.
  2. Every few months, revisit and repeat the premortem. Have you covered for the main risks? Have any new risks opened up?

Further Reading:

 

Linked to: Focusing Illusion, Hindsight Bias

Filed Under: Decision-making

The focusing illusion, or why “it’s not really as important as you think it is”

[Note: I shared this mental model with my email subscribers on Jan 29, 2017. If you want to receive a new mental model every week, join the club.]

Focusing Illusion Quote

What it is:

Have you been subjected to this nifty party trick? A person at the party claims to be able to read your psychology from manipulating your hand.

He presses your thumb backward, and says, “Hmm, you look like you’re often stubborn.” You’re surprised – it is true!

Later, you cross paths again. This time, he presses the thumb back and says, “You’re a surprisingly flexible person.” And that seems true too. You can think of several instances when you demonstrated surprising flexibility.

 

So which is it? Probably neither. You, my friend, have been subjected to the focusing illusion.

Just like the respondents to a question, “Are you adventurous?” in a research study. 97% said “yes”.

When you think of or focus on something, your subconscious assumes it’s important. After all, why would you think about it otherwise?

It’s recursive logic, with a healthy dollop of confirmation bias.

You focus on it, therefore it’s worth focusing on.

 

Examples in business (and elsewhere):

What you focus on seems important.

  • When you’re fundraising, it seems like make-or-break for your startup. But it isn’t. Money from customers, not investors, will drive success for you. If you’re building something useful, you’ll find a way.
  • You commit a silly mistake at work on Friday evening, and then you’re in torment all weekend. But your boss – he barely notices it on Monday morning. It wasn’t that important after all.
  • “There’s no such thing as bad publicity.” Fading movie stars crave it – at least it gives them presumed importance in the public’s eyes.

[Tweet “”There’s no such thing as bad publicity.” #focusillusion #mentalmodel”]

What you focus on seems true.

  • The positive test: In deciding whether a possibility is correct, we look for hits rather than misses. Just like the adventurous respondents in the survey above, we can be flexible or stubborn. It depends on the question. This kind of one-sided question (e.g., asking only whether you’re dissatisfied about a situation), is called a positive test. Beware when you hear such a question – maybe your counterpart wants to send you down a specific line of thought.
  • Medical students and their diseases: It’s common for medical students to feel they’ve contracted the latest disease they’ve heard about. They read that pneumonia produces pain in a particular place, concentrate attention on it, and get alarmed at the slightest sensation. This is so common, there’s an aphorism for it in medicine:

“When you hear hoofbeats, think of horses, not zebras.”

  • If 2016’s Brexit and US presidential campaigns have taught us anything, it’s this: Say anything often enough, and people will think it’s true.

[Tweet “”When you hear hoofbeats, think of horses, not zebras.” #focusillusion #mentalmodel”]

What you focus on seems causal.

  • Offer people a lot of money to do something, and they’ll do it for free. The listener automatically assumes the task is very important to you. (That’s why you’re willing to pay so much!). Try this the next time you’re trying to jump ahead in line.
  • The most visible action is assumed to be causal: When a company misses its projections, newspapers attribute it to a recent government announcement. Or a tepid product launch to a bad ad campaign.

 

Rules to follow:

How do we save ourselves from the focusing illusion?

  1. Don’t make big decisions in the heat of the moment. It’s quite likely you’re overestimating the importance of a couple of factors. Calm down, sleep on it, and make the decision later.
  2. Beware of one-sided questions. It’s quite likely that your counterpart is priming you towards an answer they prefer.
  3. Whenever you’re making a big decision, do a premortemMake sure to think about what could go wrong, and protect against it.
  4. In summary, remember Kahneman’s adage: Nothing is as important as you think it is when you’re thinking about it.

[Tweet “Nothing is as important as you think it is when you’re thinking about it. #mentalmodel”]

Further Reading:

 

Linked to: Confirmation Bias, Availability Heuristic

Filed Under: Psychology & Human Behavior

Occam’s Broom OR “You don’t know what you don’t know”

[Note: I shared this mental model with my email subscribers on Jan 22, 2017. If you want to receive a new mental model every week, join the club.]

Occam's Broom: "You don't know what you don't know"

My wife berated me the other day for forming a strong opinion about something (I forget what) without knowing all the facts. To which I responded with a question: Is it even possible to know all the facts?

Pride at being a smart alec notwithstanding, the conversation reminded me of this mental model. So, thanks hon!

What it is:

Philosopher Daniel Dennett talks about Occam’s Broom, a play on Occam’s Razor (a mental model for another day).

He uses the term to describe how, when we’re making an argument, we have a tendency to whisk inconvenient facts under the carpet.

And this tendency, already questionable, becomes downright insidious when experts present their arguments to the layperson. And completely leave out pertinent (but contrary) evidence.

Or when journalists present only half the story in the garb of “news”. Move over fake news – at least those guys aren’t pretending to themselves that they’re telling the truth!

And the worst thing is – you cannot do anything about Occam’s Broom. You’re helpless. After all, you don’t know what you don’t know!

[Tweet “People have a tendency to whisk inconvenient facts under the carpet. #occamsbroom #mentalmodel”]

Examples in business:

  • Evaluating partnerships / acquisitions: When you’re assessing a company to acquire / partner with it, you can only ask so many “right questions”. You never know where a black swan may be lurking. That’s probably why half of M&A deals fail.
  • Deciding on potential product features / business choices: If your team presents a new business opportunity / product feature, you can expect to mainly hear the pros of the choice. Sure there’ll be cons, but most of them will be strawmen.
  • Listening to a sales pitch: Let’s say a salesman presents you the latest software to revolutionize your business, or a “sure” stock pick. You have no way to know what he’s not telling you.
  • To assess whether a hypothesis is true, you need to test it. You can talk to all the experts you want. But you won’t get decisive answers unless you ask the right questions. And you don’t know the right questions!

 

Rules to follow:

OK, we get it. You don’t know what you don’t know. What do you do then?

  1. Whenever you’re making up your mind about something, recognize that you may not know all the relevant factors.
  2. Avoid forming opinions in areas where you’re not an expert. Keep your identity small.
  3. Sometimes, you do have to form opinions based on incomplete facts. In such cases, remember the adage “strong opinions, weakly held”. Form decisive opinions, but change them when the known facts change.
  4. Whenever someone offers you a strong / extreme opinion, get your guard up. Reality is not as stark as Occam’s Razor would argue.
  5. Tread carefully in a new area. Do a “pilot”.  No matter how much you’ve analyzed it. It’s a hypothesis till it proves itself in action.

Further Reading:

  • Occam’s Broom
  • Intuition Pumps: Daniel Dennett’s book, which introduces this model. [Warning: it’s not an easy read]. Also check out this article for a collection of his critical thinking tools – mental models in their own right.

 

Linked to: Occam’s Razor

Filed Under: Psychology & Human Behavior

The Power of Exponential Growth OR Why you are not late

[Note: I shared this mental model with my email subscribers on Jan 15, 2017. If you want to receive a new mental model every week, join the club.]

Exponential Growth

I complain about this often. And I’ve heard others grumble in a similar vein. Whether entrepreneurs, technologists, scientists, economists, you name it – “I wish I was born when all the action was happening.”

But here’s the thing – as Kevin Kelly says in You are not late, you can bet that in 2045, someone will say the same thing about 2015.

The last 30 years have created a platform, from which ever new exciting things can result. Whether it’s AI, virtual reality, nanobots, etc. – it’s likely that the key technologies of 2045 will be very different from the ones today.

So, next time you complain about being too late to create Microsoft or Google or Facebook or string theory, read this. You are not late.

But the article also illustrates a larger point – the power of exponential growth.

What it is:

Exponential Growth - Bill Gates Quote

That’s the best summary of exponential growth I’ve seen. Our brains can think only incrementally. But technology improves exponentially. Advancements pile on each other.

For a long time, nothing seems to be happening. Then all of a sudden, hypergrowth.

Credit: Mother Jones [http://www.motherjones.com/media/2013/05/robots-artificial-intelligence-jobs-automation]

I bet you’ll see the above graphic again and again. The last bit of shooting growth always astounds us. Despite it often being a mathematical certainty.

It’s not for nothing that Einstein (is rumored to have) said, “Compound interest is the 8th wonder of the world.”

 

Examples:

  • Moore’s Law: Gordon Moore’s prediction in 1975 that computing power would double every 18-24 months [I paraphrase] has held remarkably true. This regular doubling has given us PCs, mobiles, smartphones, and now AI.
  • Adoption rates of consumer technologies: As this graph shows, adoption rates of consumer technologies are ever-accelerating.
  • Look at any of the major growth stories of the last few years – Uber, Airbnb, etc. In each new market, they started small. No one noticed them, or worse, they dismissed them as irrelevant, non-scalable, or playthings of the rich. Till, suddenly, their dad started using them.

 

Rules to follow:

  1. When planning your career, try to work in sectors that are growing exponentially. Growth creates options.
  2. Don’t skate to where the puck is. Skate to where it will be. To requisition Wayne Gretzky’s memorable words, go where the future will be. Build skills that will be useful tomorrow.

Bottomline: The future will always be more different from today than today is from the past. The future adds a zero.

Ergo, the best time to start something new is NOW.

Further Reading:

 

Linked to: Power Law

Filed Under: Mathematics & the Sciences

Same Side Selling, or Sales as a Jigsaw Puzzle

[Note: I shared this mental model with my email subscribers on Jan 15, 2017. If you want to receive a new mental model every week, join the club.]

What it is:

For a long time, we’ve had this notion of great salesmen as master persuaders. Skilled negotiators who can seal the deal. Who use anchoring, pricing hacks, false urgency, etc. to close the sale. And if that doesn’t work, they use bull-headed tenacity to wear down the customer into a tired “YES”.

But as Same Side Selling (an excellent, short book) says, nothing could be further from the truth. 

Our mental model of selling is wrong. Sales is not an adversarial game, where you “close a sale” or “hit up your targets”.

Instead, look at sales as a jigsaw puzzle.

Sales is not:

Chess

How can I bamboozle you?

Sales is:

Jigsaw puzzle

Let’s solve this together.

[Tweet “Sales is not chess. Sales is a jigsaw puzzle #samesideselling”]

The moment you change the metaphor, your frame of reference changes. Completely.

 

Examples in business:

  • You are not on opposite sides of the table. This is not like chess or checkers. Like when you’re solving a jigsaw puzzle with your friends, you and your customer are on the same side!
  • Do you have the right piece for the puzzle? Are you solving the customer’s problem? Or are you selling the solution you have, with scant regard for whatever the customer’s problem may be? Focus on benefits, not features. Focus on the “job to be done”.
  • Sometimes, the pieces don’t fit together. Maybe the client needs something else. Can you help him find it, even if it’s from another vendor?

If your job / business / life involves selling (and trust me, it does), this subtle change in the game metaphor will change your approach forever.

 

Rules to follow:

  1. Start with what the customer wants. How you can help?
  2. When selling, focus on benefits, not on features. Remember – you’re not selling saddles. Your customer is buying a better way to ride.
  3. Always think from your customer’s point of view. You’re not selling to her. You’re working with her. Helping her solve a problem. You’re on the same team.

Further Reading:

 

Linked to: Job to be done

Filed Under: Sales & Marketing

The Procrastination Equation OR How to never be late again

[Note: I shared this mental model with my email subscribers on Jan 15, 2017. If you want to receive a new mental model every week, join the club.]

Procrastination

Should I procrastinate now? Or can I do it later?

What it is:

Piers Steel, in his book, outlines the Procrastination Equation:

Motivation = [Expectancy * Value] / [Impulsiveness * Delay]

That is the sum total of why we procrastinate. As Steel says:

Decrease the certainty or the size of a task’s reward – its expectancy or its value – and you are unlikely to pursue its completion with any vigor. Increase the delay for the task’s reward and our susceptibility to delay – impulsiveness – and motivation also dips.

[Tweet “Motivation = [Expectancy * Value] / [Impulsiveness * Delay] #procrastination #mentalmodel”]

 

Examples / how to use it:

How can we use this equation to beat procrastination?

  • Increase expectancy of success: In essence, we need to increase our optimism regarding success in the task in question. How do we do that? By creating a spiral of success – break the task into sub-tasks, and start completing and ticking them off.
  • Increase the task’s value: The more valuable something is to us, the more likely we are to do it. So, how can we increase the reward for completing something? Maybe we reward ourselves (with chocolate?) for doing something we’ve been putting off (filing taxes?). Or, we can “mix bitter medicine with sweet honey” – try to make the task more enjoyable (e.g., by having premium coffee while doing it.).
  • Decrease impulsiveness: According to the book, this is often the biggest factor. How do we fix this? The only solution – set clear, measurable goals in advance. Commit now, to do later.
  • Decrease delay: Usually, this is not in our hands. But if you can, artificially constrain the deadline for a task. Use Parkinson’s Law to get things done.

 

Rules to follow:

  1. Notice when you’re procrastinating.
  2. Guess which part of the equation is causing the problem. Fix it.
  3. If that doesn’t help, look at the other factors again. Repeat. 

Further Reading:

 

Linked to: Parkinson’s Law

Filed Under: Productivity

Goals vs. Systems OR The right way to make New Year’s resolutions

[Note: I shared this mental model with my email subscribers on Dec 18, 2016. If you want to receive a new mental model every week, join the club.]

Goals vs. Systems

What it is:

It’s that time of the year. We’re all thinking about past resolutions we couldn’t keep, and resolving to be more faithful to our resolutions for the coming year.

Most of our resolutions are of the form: “Next year, I will do X”. Where X could be: “lose 10 pounds”, “run a marathon”, “get up at 5 am everyday”, “hit a million dollars in revenue”.

But point goals such as these have a number of disadvantages:

  • The focusing illusion: When you focus on your goal, it becomes more important in your head than your primary objective (e.g., “to be happy”). Till you realize one day – it’s not making you happy at all.
  • Dependence on outcomes extrinsic to you: Extrinsic goals tie your self-worth to factors that you don’t have complete control on. This (a) reduces intrinsic motivation, and (b) increases irrational risk-taking, as a Harvard study shows.
    Think running a marathon despite a niggle, only because you’d resolved to 9 months ago.
  • Goals can seem overwhelming and amorphous: Sure, you want to get to a million dollars in revenue, but where do you start?

And, as Scott Adams says:

[Tweet “Goal-oriented people exist in a state of nearly continuous failure that they hope will be temporary”]

OK, so what should we do instead?

Focus on process. On systems.

 

What does that mean? Break down your goal into its constituent parts – the specific actions you’d take to achieve that goal. Focus on those instead.

Such an approach gives more opportunities for daily victories (“I exercised today”), and sustains motivation.

But more importantly, it also prevents tunnel vision. If something else comes along that’s better than your previous goal, your mind is free to notice it.

Thus, a systems approach takes you from low odds of success to much higher odds.

From “I need to achieve this specific goal, else I fail” to “I’m building skills and creating options, and I’ll take advantage of whatever comes”.

 

Examples in business:

  • Career Planning: Don’t “plan” your career, as Marc Andreessen says in his career guide. Instead, make choices that maximize your future options / upside. Go where the action is.
  • Starting a company: Don’t over-invest in the solution you’re building. Instead, start with the customer. Identify the problem, and experiment with different solutions till one “catches fire”.
    Hypothesize > Test > Rinse and Repeat till you succeed. This is not novel – it’s the Lean Startup approach.
  • Marketing: Don’t try every single new marketing channel to get to 1 Mn users. Instead, use the Bullseye approach – prioritize 3 marketing channels, and experiment with them. Once you saturate them, unlock the next ones.
  • Any risky endeavour: Preserve and generate optionality. Understand how you can maximize potential upside and minimize downside risk.

Stack the cards so that you come out ahead even if you fail (e.g. learn unique / hard-to-replicate skills, build a strong network of influencers, etc.). Plus if Lady Luck smiles, you rake in a windfall.

 

Rules to follow:

  1. Focus on inputs (which you can control), not on outcomes (which you can’t). Create a process for success. Follow the process.
  2. Ask the question: How can you take key extrinsic risks out of the equation? How can you increase the odds of your actions having the desired result?
  3. In any decision, choose the path that creates the most options.

TL:DR: Success is a system (take several high reward / low risk bets), rather than a goal (I want to get rich).

[Tweet “Success is a system (take several high reward/low risk bets), rather than a goal (get rich)”]

Further Reading:

 

Linked to: Focusing illusion, Antifragility

Filed Under: Decision-making