The Power Law, or why working hard is not enough

Throughout your academic life, you’re told, variously, “There’s no substitute for hard work”, “Work hard and don’t think about the results. They’ll take care of themselves”, “It doesn’t matter what you do, as long as you do it well”, and so on. Mildly put, that’s completely false.

I read Peter Thiel’s Zero to One a couple of months ago. In this book, Thiel, who founded Paypal and has backed many successful startups (including Facebook), talks about startups and how to create value in the world. The book itself has many highs and lows, but I found his discussion of power laws very thought provoking.

So, what is a power law? A power law describes an exponential distribution – where a few individual points account for a majority of the value in the population. Simply put, it’s the Pareto principle (80:20) on steroids:

Normal distributions assume that the entire population will be distributed across, with a huge majority of people around the average. For example, if you were to plot a distribution of the weights of a country’s entire adult population, it would probably resemble a normal distribution – a large proportion of people near the average, and the no. of people going down as you moved away from the average on either side.

On the other hand, populations that obey a power law are completely skewed to one side. Think about wealth distribution – you know how they bandy around the statistic that 1% of people account for 50% of the world’s wealth? That’s a power law. I read somewhere that whenever a book from Chetan Bhagat is released, it almost outsells the next 500 best-selling books combined. I was quite surprised, but I shouldn’t have been – book sales also follow a power law.

Why is this important? Power laws have always played a huge part in nature. For example, a vast majority of earthquakes are relatively minor, but a tiny proportion cause almost all the damage – that’s a power law. They also explain a lot of our societal context – language (a few words dominate usage), city populations (the largest cities account for an inordinate proportion of urban population), and so on. And more and more, entire industries are beginning to resemble power laws – especially in the Internet era. Think Search (Google accounts for 88% of the market), Social Media (Facebook has 33x the no. of visits as Twitter, its nearest competitor) and so on. This phenomenon, where the winner takes (almost) all, is becoming more and more pervasive. You dominate or you die (separate post on this later).

But coming back to the main focus of this post, what does this mean for you as an individual? A few things, actually:

1. What you work on matters, and matters far, far more than how hard you work. Till the early 1900s, there were people called ‘knocker-uppers’ who would help people wake up every morning, by walking down the street with a long stick and tapping windows till people woke up. Many of them worked very hard; but lost their living in a jiffy once alarm clocks started being mass-produced around 1920. As Thiel says, by all means work very hard on what you’re good at, but first think hard about whether it will be valuable in the future. In a world where the returns on your efforts follow a power law, you must think hard about where you stand on the curve.
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2. If you want to start up, seriously consider working for another one (with stake / options). One of the corollaries of the power law is that very few startups will succeed, but they will succeed hugely, enormously. So, being at the right startup is far more important than your role in the startup and how much stock you own. A little simplistically, 0.01% of Google is probably worth a lot, lot more (35 million dollars) than 100% of a startup that you’ll start. And most startups fail, in which case you’ll own 100% of nothing. So if there’s another startup / early stage company that you think is promising, it may actually be a better bet to join it with stock / options than starting your own.
3. If you have a startup already, don’t hoard stake. Many startup founders are very miserly with stake. I’ve heard many say “Your company’s stock is the most valuable thing at your company.” While technically true, many take this to mean that you should give away as little stake as possible. Rather, I’d read this as meaning that you should do whatever you can to raise its value. And if a particular investor can actually help you succeed and raise the value of your company significantly, then giving them slightly higher stake (within limits, of course) is worth it. This is especially the case early on, when the growth in the pie will affect your personal shareholding’s value far more than the proportion of the pie that you own.
4. Realize that the power law will permeate all your decisions. Whether the markets you choose to play in, your distribution channels, your product features or your decisions themselves, few or one will dominate in terms of creating value for you.

Now, you can’t predict the future, and so you don’t know which of your choices will matter. The only way to set yourself up for breakout success in an uncertain world is to go for the big prize – where even if chances of success may be low, the value created (for you and others) in the event of success is immense.

These are the different ways in which power laws affect us as individuals. I would love your feedback – how else do you think power laws affect our daily lives and work?

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