Last Friday, the lockdown in Singapore was lifted. It was a glorious, sunny day. As I looked out of my window and saw a few people swimming in the pool (it was closed through the lockdown), my first thought was, “I’ll go for a swim this evening. It will be amazing.”
My second thought was, “Wait, that doesn’t make sense!”
I hate swimming.
I’m not a good swimmer.
In the two years I’ve lived in this condo, I’ve never used the pool. Not once.
So what the hell happened there?
What happened was, I got some freedom back, and I loved it. Even if I’ve never actually used that freedom, and therefore, its value to me is precisely zero.
This was a benign example. But this yearning for freedom, even when we don’t actually need it, is an intense force driving our behavior.
The term for this is Psychological reactance. Here’s Wikipedia on the subject:
Reactance is an unpleasant motivational arousal (reaction) to offers, persons, rules, or regulations that threaten or eliminate specific behavioral freedoms. Reactance occurs when a person feels that someone or something is taking away their choices or limiting the range of alternatives.
As opportunities become less available, we lose freedoms. And we hate to lose freedoms we already have.
This desire to preserve our established prerogatives is the centerpiece of psychological reactance theory.
According to the theory, whenever free choice is limited or threatened, the need to retain our freedoms makes us desire them (as well as the goods and services associated with them) significantly more than previously. So when increasing scarcity—or anything else—interferes with our prior access to some item, we will react against the interference by wanting and trying to possess the item more than before.
That’s why we have these videos of people rejecting masks in different parts of the US.
In this one, a protester thunders, “I will not be muzzled like a mad dog!”.
Around the age of two, children come to a full recognition of themselves as individuals. This newfound sense of autonomy also brings along the concept of freedom. And the child wants to explore and test (again and again) the boundaries of this freedom.
Much to the chagrin and frustration of the parents.
There’s this hilarious example in Cialdini’s book, about banned detergents in Florida.
Dade County (containing Miami), Florida, imposed an antiphosphate ordinance prohibiting the use—and possession!—of laundry or cleaning products containing phosphates.
A study done to determine the social impact of the law discovered two parallel reactions on the part of Miami residents.
First, in what seems a Florida tradition, many Miamians turned to smuggling. Sometimes with neighbors and friends in large “soap caravans,” they drove to nearby counties to load up on phosphate detergents. Hoarding quickly developed; and in the rush of obsession that frequently characterizes hoarders, families were reported to boast of twenty-year supplies of phosphate cleaners.
The second reaction to the law was more subtle and more general than the deliberate defiance of the smugglers and hoarders. Spurred by the tendency to want what they could no longer have, the majority of Miami consumers came to see phosphate cleaners as better products than before.
That’s also why book censoring doesn’t work.
Or rather, it works too well. It’s every new writer’s dream for their first book to be banned.
Readers not only want the book even more than before, the book also gets a halo effect of “truths they don’t want us to hear”.
Have you noticed other examples of psychological reactance? Of how we overvalue unimportant freedoms we’re about to lose? Hit reply or comment, and let me know!
It is easy to know False Positives but impossible to know False Negatives. This, and a reluctance to fire, is why companies focus on reducing False Positives — it is their only measurement. The phrase “Hire slow, fire fast.” comes from this asymmetry. Companies hire slow because they fear False Positives.
We should not be afraid of False Positives. We can quickly fix a False Positive hiring decision. However, we should be afraid of False Negatives. We can never fix a False Negative mistake. And the cost is unknown and uncapped. Facebook passed on Brian Acton (WhatsApp cofounder) and it cost $8B and a board seat.
It sucks to let people go. I hope we get better at not hiring False Positives. But False Positives is the only way we learn. We learn nothing from False Negatives. And there is a huge risk we miss out on a 20x employee.
The way we get better at hiring is to hire, learn, and improve. Do not be afraid of hiring False Positives. Give people chances. Be afraid of missing the 20x employee.
So don’t spend sleepless nights on whether someone is a great hire or not.
There might not be full consensus among all the interviewers. Some might disagree for subjective reasons.
But if you (as the hiring manager) are still convinced, go ahead. It might work beyond your expectations.
I’ve seen it tons of times. And it’s happened to me personally too – I’ve hired someone despite my colleagues saying it’s a bad idea, and he / she was a lifesaver.
The person you didn’t hire might be the superstar you needed.
#4: What to look for in candidates.
Marc Andreessen lists three things in his article: drive, curiosity, and ethics. And they’ve rung true to me throughout my career.
What is drive?
People with drive have an inner locus of value. They will not do shoddy work just because they can get away with it.
They have boatloads of determination. They will walk through brick walls to achieve whatever their goal is.
They persevere in the face of ambiguity. Decisions in the workplace are not math problems with clear-cut answers. Can they commit to taking the risks and push through regardless?
You want to hire doers.
But don’t ask candidates if they have “drive”. Ask them to describe something they’ve done that was hard. Could be a previous business, a side-project, even a hobby.
What about curiosity? Why is it important?
Channeling Marc Andreessen again, “Curiosity is a proxy for, do you love what you do?”
You want to hire learners, not experts.
They will encounter new situations, that they have never encountered before. Will the joy of the struggle motivate them?
Ethics are harder to test for.
But if you get the slightest inkling from their background, avoid. Or at least dig deeper.
Now, you’re wondering: all the above make sense. What’s the insight here?
The insight is what’s missing from this list.
Raw intelligence is overrated.
Most roles, even at SpaceX, are not rocket science.
Of course, the candidate should have the right basic skills for the role.
If it’s a client facing role, they better be able to look you in the eye when speaking to you.
If it’s an analytical role, they better be able to think and speak logically. Even if they are bad at math.
But beyond that, not much else is needed.
Experience in the specific role is not important.
Every time I’ve seen hires who’ve “done this exact thing before”, it hasn’t worked out.
Unless they also have drive and curiosity, they tend to be less scrappy and task oriented. “I’ve earned my stripes, now I’ll just guide others.”
The moment it veers off into the unknown (and it will), what value is the experience?
You’re hiring a person. Not a role.
Hire for what a person can do, not for what they’ve done.
#5: A few tips for running an interview process.
Have a proper funnel to filter candidates.
CV → Phone Interview → In-person interviews → Final Interview.
If you need to hire 3 people and you get 30 CVs, maybe 6 reach the final interview.
This is important, because at the fag end of the process, you’re tired, desperate, and just want to make an offer.
Every candidate will accept or negotiate at different speeds. So you tend to “move down the list”.
Make sure that final list is filtered enough.
Write interview questions down ahead of time.
Reading questions off a page might make your interview come across as “stilted”.
But that’s OK. Better than pretending you’re a great improviser.
Side-note: it’s always better to ask someone to describe something they did (“tell me about a time when…”) than about something they know (“what would you do in this hypothetical scenario…”).
Notice your confusion.
When something doesn’t quite fit, push through and find out.
Every single time that I’ve ignored the slight pause in my head, it hasn’t worked out in the end.
Don’t ignore your unease. Look at it closely – “why is this interview feeling off to me?”.
You might realize it was an unconscious bias. Great, you can now work on overcoming that bias.
But sometimes, you find certain clues gnawing at you below the surface, that something isn’t quite right.
Do reference checks, and listen between the words.
Always do reference checks.
Keep in mind though: Most references downplay deficiencies when you speak to them.
“Sometimes wasn’t that motivated” – ouch, best of luck getting quality work out of the person.
“Was great at solo tasks” – might not be a team player?
“Made mistakes once in a while”. Not detail oriented at all.
To be clear: I’m not saying just believe what the references say. But pay attention to what they’re saying, and test further in the interviews.
You should try and do reference checks even with people who the candidate hasn’t offered as references.
Yes, I agree it’s a tad controversial.
But here again, important to still give the candidate the benefit of the doubt.
If the reference gives a negative opinion, don’t assume it’s true. But dig deeper with the candidate on that part of their experience.
#6: How to let people go.
Decisively, but with sensitivity.
Given principles #2 and #3, you’re left with a quandary. Any time you hire, there will be false positives. 1 in 3 hires will fail. You will need to let some people go.
I wish there was a way around it. But there isn’t.
Like I often tell myself during self-pep talks (what, you don’t give yourself pep talks?), “Yes, this will be painful. But inconvenience is never a reason to not do something.”
Don’t hem and haw, just do it. Consider, as Andreessen says:
First, realize that while you’re going to hate firing someone, you’re going to feel way better after the fact than you can currently imagine.
Second, realize that the great people on your team will be happy that you’ve done it — they knew the person wasn’t working out, and they want to work with other great people, and so they’ll be happy that you’ve done the right thing and kept the average high.
Third, realize that you’re usually doing the person you’re firing a favor — you’re releasing them from a role where they aren’t going to succeed or get promoted or be valued, and you’re giving them the opportunity to find a better role in a different company where they very well might be an incredible star.
Be decisive, but sensitive.
It’s your fault that you hired them into a role where they can’t succeed. Apologize for your failure.
#7: Diversity will not happen on its own. You’ve got to make it happen.
An organization’s culture is defined by who we hire. Not something to be blasé about.
Henry Ward has the best framing of this in How to hire:
You don’t want people who fit into your culture. You want people who grow your culture.
Now, diversity is not just in race and gender. It’s also in ways of thinking.
In my first job, we had a cookie-cutter hiring process for fresh grads: Hire MBA grads, from one business school (“we’re small, and no bandwidth to go to multiple schools”).
We suffered for it, and we didn’t even know.
Later, I saw the impact of hiring wider first-hand. And it became clear.
When perspectives differ even a little bit, they make a huge difference to your output down the road. Questions you didn’t consider, paths you didn’t go down – they all start to matter.
Our natural predilection is to hire people “like” us. Who went to the same schools, have the same hobbies, etc.
We need to fight this. Every time we hire similar, we “protect” our existing culture and entrench it.
Guess what, that magnifies the negative points of our culture too.
Hire different, not similar. Grow your culture, don’t protect it.
As a final word, never take your team for granted. They’re still there after all this. They’re incredible people.
Hope you liked the article! If you’d like more such reads regarding business, management, startups, and anything in between, make sure to sign up for Sunday Reads. Don’t miss the next one!
I’ve been managing teams for most of my working life. For the first 7 years, it was simpler – working with a direct team and maximizing our output.
Then it got harder. As I first built my own company, and then focused on business development for other companies, it was no longer about just my team.
Instead, it was more about influencing other teams. Work with Marketing to plan the launch of a big partnership. Brainstorm with Product on the UX for the new solution. Burn the midnight oil with Engineering, to get the integration out by morning.
First reflection from all this – it’s not easy! (duh).
Leading your team requires answering a few questions, that are not straightforward. These are some of the questions I’ve had to grapple with over time:
I’m a doer, but now I have to “manage” a team. Where should I begin?
How can I make sure my team’s output is good enough, without micro-managing?
I have a great team, but how do I get a solid day’s work out of them?
I don’t have a team of my own, but I have to work with several different teams. No power, only responsibility ?. How do I drive output?
How’s my team feeling? Are they happy with my leadership?
Wait, what is my value-add as a manager?
These questions have become even more relevant now. Traditional face-to-face management is a relic of the fast-receding past. We now need to manage our teams remotely. And we need to remain effective, without micro-managing.
Second reflection: I realized that effective team management can be distilled into a few key principles.
Five to be exact.
Everything you’d read in an “Ultimate List of 100 Team Management Tips” derives from these core axioms.
Whether a decision is big or small, there is some overhead to making good decisions. You have to debate the choices, reflect on them, make the decision, and then follow-through to execution. Making decisions takes something out of you.
As a self-interested manager, it’s clear where you want to go – make fewer decisions, but get the same output. i.e., managerial leverage.
How do you make fewer decisions? By focusing not on tactics, but on strategy. Not on the chaos, but on the concept.
By not deciding on each specific choice you’re asked to make, but by laying out a principle for all such choices. So that your teams can make these choices on their own – you don’t need to decide on that topic again.
(i) Truly generic – current occurrence only a symptom
(ii) Unique for the organization, but happened to others
(iii) Early manifestation of a new generic problem
(iv) Truly exceptional and unique
Only one of these is unique.
Of the problems that you are asked to solve, almost all are generic problems with a standard solution.
So, as a manager, your approach to any problem should be to first assume it’s generic. Identify the higher-level problem of which this one is a symptom, and develop a rule or principle to solve that.
Assume a problem is generic, and develop a rule, policy, or principle to solve that.
I’ve seen this pay handsome dividends.
I head business development for a retailer of beauty products. Most days, my team is negotiating with brands that we carry, or brands that we want to carry.
Most negotiation impasses are standard. If the economics aren’t working, it’s due to 3-4 reasons. If the brand doesn’t agree on our purchase targets, there are again 2-3 ways to get on the same page.
When a new team member encounters such problems, I don’t just share the solution. I also make sure to talk through the logic while doing so.
How to identify the underlying problem causing this impasse.
How to resolve that specific type of problem.
How to problem-solve together with the brand.
After a couple of turns through this process, they get it. The next time such a problem occurs, I only find out after it’s solved. Success!
To build leverage, always solve problems at the level of principle.
Remember: Decisions are an opportunity for managers to guide their teams on the right way to do things.
Make the effort to explain context to your team members. Even though you want to feel like Yoda and deal in one-liners.
You might disagree with me. You might say, sorry Jitha, I don’t have time. I’m busy fighting fires right now.
No. You ALWAYS have time to build leverage.
That’s how you prevent the next fire.
Before we move to the next principle, here’s a quick cheatsheet (you can find a link to download this and the other cheatsheets at the bottom of the article).
Principle 2: Train your team (all the time!), and give better feedback.
Training and giving feedback are very high leverage activities. In fact, they’re the highest leverage things you can do as a manager.
Why is that?
Let’s say a person in your team is struggling with modelling the financials for a new initiative. You spend 4 hours today walking through that with her. 4 hours = 10% of one work week.
If this improves her performance by even 1% every day, you keep reaping the benefit all year.
And like bank interest, this compounds too.
Learning how to do one task often unlocks a new insight in another related task. Now that she knows how to model financials, she also does cost-benefit analyses better.
She’ll also train her teams and stakeholders tomorrow, in the same way you have.
And all the benefit comes back to you! Remember the Manager’s Equation.
Training is a gift that keeps on giving. It’s like Amway, except it’s not a ponzi scheme.
Every conversation is an opportunity to train. Every decision (see principle 1) is an opportunity to train.
One of the most important tools for training is the performance review. Done well, it can give you a 10x team. Done not-so-well, you have a dysfunctional and demotivated team.
A few rules for giving feedback:
Rule 1: The only objective is to improve your employee’s performance.
Nothing else matters.
Rule 2: Measure the right things (outcomes).
A corollary of rule 1 is that you must focus on outward contribution. On results.
Efforts don’t count, outcomes do.
There are several advantages when you focus on outcomes over efforts:
Everyone has a clear North Star to gun for. For someone in your Finance team, it may be “Hit the budget”. For someone in HR, it may be “Less than x% attrition this year”. No ambiguity. When everyone, from the most senior to the most junior, has the same values and goals, you maximize your output.
It makes people management easier. If you told everyone, “Just work hard”, they would do their best to “look busy”. But if all that matters is output, then people will actually work hard. And on the right things.
It unlocks more opportunities to learn. By framing the conversation on output, you pay less attention to visible effort. Instead of whining, “Jack doesn’t seem to be working hard enough.”, you wonder “wow, his output is great despite looking like he’s slacking. Maybe I can learn from him.”
Rule 3: Focus on the right (few) areas in giving feedback.
Focus on a few major areas, where superior performance can lead to outstanding results.
A good heuristic for this is: focus on strength development, not on removing weaknesses. Whereas our instinct is to focus on weaknesses instead.
It’s clear that the greatest scope for improvement is when you strengthen what someone is already doing well, so they can do it better.
Instead of asking, “What is she bad at?”, ask “what does she do well but can do better? What does she need to learn to excel at this?”.
Rule 4: Don’t tell them what to do. Ask questions instead.
Instead of pronouncing judgment on a team member’s performance, ask questions.
“Why did you choose this particular approach?” is far more useful than “you should have done this other thing instead.”
“What parts of this task do you find tough?” is far more useful than “you always screw up this step.”
Two other reasons why questions are better than assessments:
You don’t have enough context of the details. Suppose there’s an obstacle there that you didn’t think of?
It trains them in self-assessment. Next time, they’ll figure it out themselves.
And when you do have to instruct, offer suggestions, not orders. Remember principle 1, you want them to own the problem, rather than give it up to you.
Rule 5: “Ask one more question”.
You know the feeling. The call with your teammate is about to end, and it’s gone well. You feel like you’ve gotten through, and he has everything he needs to complete the task. There’s one tiny doubt that’s nibbling at the edge of your mind, but you let that pass.
No. Notice your confusion, and ask that one more question to clarify that.
You often learn that a simple question, which you almost didn’t ask, is the difference between flawless, on-time completion, and a week wasted on a wild goose chase.
This is particularly relevant when you’re working remote, and cannot catch non-verbal cues. As a friend told me, “The body language feedback of physical meetings is totally gone. And an over imaginative mind goes to town in its absence, dreaming up issues that might not exist.“
So ask that last question. It may be banal, but ask it anyway.
If you aren’t sure that the next steps are clear, ask, “Can you just play back the next steps, so I can remember them?” Or, “which of these pieces will you need my help on?”.
If you feel motivation is flagging, ask “how are you feeling?”. Or, “what’s the hardest part of this situation for you?”.
You don’t notice poor delegation until you look for it. And once you do, it’s everywhere.
If you ever think, “I might as well do this myself. It would take too long to explain everything and check the person’s work.”, you’re delegating poorly.
If your team members keeps coming back to you with the same problems, you’re delegating poorly.
If you have to call every few hours to check how it’s going, you’re… you get the drift.
If you delegate poorly, you get zero leverage. You’re working crazy hours, wondering why you don’t have a life.
But if you delegate well, it’s like walking on water. You almost feel a little guilty at how effortless it is, yet everyone marvels at your speed.
So, how do you delegate like a BOSS? Three things to keep in mind:
1. What to delegate:
Delegate activities that are familiar to you.
Why? So that you can quality-check the work better.
The more familiar you are with a task, the more you know the stumbling blocks. You know the weakest link. So you check that.
In my company, I have a slight reputation for finding errors in detailed financial models. It’s not that I check every formula and every cell – I just know where, and how, to look.
There’s also a deeper reason for delegating tasks that are familiar to you. As Henry Ward says in A Manager’s FAQ:
Delegate the work you want to do.
Employees will love working for you. The work you want to do is probably the work they want to do, and they will be happy employees because of it.
You will grow. Most people want to do the work they are good at. If you delegate the work you are good at, the remainder will mostly be work you are bad at. You will struggle, suffer, and learn. That is where growth comes from.
You will train future leaders. They will see you doing the hard, miserable work that nobody wants to do. One day they will want to do it too. Not because they enjoy the work, but because they see you doing it as their leader, and they want to be leaders too.
Why objectives? Because you want to measure outcomes, not effort.
Why preferred approaches? To simplify the task and make it a generic and regular task, instead of a unique and irregular one. Work simplification is a very high leverage activity.
Wait, why can’t I just tell people what to do?Because the more responsibility you have, the less leverage you have.
3. How to monitor:
This is an area that a lot of us struggle with. And we conclude by delegating less than we should. Why delegate, if I have to spend the same time later anyway, checking everything?
Delegation doesn’t mean you check every step of the work, in effect repeating the work. But it also doesn’t mean you don’t check at all – you’re delegating, not abdicating.
How you monitor depends on your teammate’s skill at that specific task, or their task-relevant maturity (TRM).
How to monitor
New to the task + low skill
Give precise, detailed instructions. Monitor with more rigor; periodic check-ins to guide, encourage.
Done this before + more ready to take on responsibility
Communicate goals and approaches. Offer encouragement and support. Check parts of output where weak; sense-check overall output.
Done this before + Comfortable to deliver output
Sense-check output. Also do random deep check of 1-2 pieces (like factories’ quality-check processes – random sampling).
As your team moves along the spectrum from Low TRM → High TRM, you can dial back the monitoring (but never down to zero).
And here’s a cheatsheet, so it’s easy to remember:
Principle 4: Fix things early.
Remember: Energy spent early has 10x payoff.
I’ve written about this before. Like direct marketers and Nigerian scamsters, managers need to qualify the funnel early:
Material becomes more valuable as it moves through the production process. So, fix any problems at the lowest value stage.
Let’s say you run an apparel factory. If the input cloth you received has quality defects, when would you rather find out? When the shirt is ready, or before the shirt goes into production?
Find rotten eggs early.
This is one of the biggest ways Project Managers support their teams in consulting.
In my teams, for example, we would agree upfront on what the output was, and when it was due. The team would create a “blank slide loop” on Powerpoint, with just two lines on each slide: the key analysis or takeaway from that slide. Once we’d aligned on that, I’d know that they are working on the right tasks.
Pay disproportionate attention early. Fix any problem at the lowest-value stage.
Principle 5: Do better meetings.
Meetings. The productivity killer. Can’t live with them, can’t live without them.
Meetings are the medium of managerial work. Whether it’s gathering information, delegating, sharing knowledge, or nudging, we need meetings.
How can we do better meetings?
Well, this is what I’ve realized after a gazillion meetings attended – with clients, with partners, with team members, with peers:
The way to do better meetings is not to do bad ones.
It’s a little like Charlie Munger said: “All I want to know is where I’m going to die, so I’ll never go there.”
You don’t have to be a meeting Jedi. There is no Six Sigma certification you need. All you need is basic “Meeting Hygiene”. Don’t do bad meetings, and that’s enough.
Here are the five rules of Meeting Hygiene:
Rule 1: Set up a meeting only if the issue cannot be resolved without one.
Five people in a room for an hour isn’t a one hour meeting, it’s a five hour meeting. Be mindful of the tradeoffs.
Rule 2: Be prepared for meetings.
Everyone attending a meeting should know the objective of the meeting. What are we trying to solve. What are the options at hand. What are the pros and cons of each.
If you’re organizing the meeting, always share a pre-read. And if you’re a participant, always read the pre-read before the meeting.
Always end a meeting with actions, owners and timing, so it’s clear what the next steps are.
Rule 3: Be early / timely.
I won’t explain this.
Rule 4: Don’t use meetings to make decisions.
Don’t defer decisions to meetings. Make a decision first, communicate it over long-form writing, and use the meeting to discuss divergent views.
Yes, I know this specific problem is complex. I know it will take you 30 min to write down the analysis, and you don’t have the time.
Do it anyway.
It’s better than a 30 min meeting with six people (180 person-minutes) going in circles.
As you begin to write more, you always default to an asynchronous discussion (over email / chat).
An email thread makes it clear when you need a meeting. The email thread is 10 messages deep, but there’s no decision. Many people aren’t agreeing. Or they are saying, “Yes, I agree”, but then saying something completely incongruous.
Apart from his updates on how we’re doing in our battle against the virus, there were two pieces I wanted to call out. One interesting, and one insightful.
Why are some countries containing COVID-19 better than others?
Scott evaluates the different theories for why some countries are doing better than others.
Stay at home orders: Don’t seem to have mattered at all.
General government policy: Also seem to matter much less than we’d imagine. We thought Korea and Taiwan are doing well because of their brilliant governments. Japan, on the other hand, denied the problem for a long time so they could still stage the Olympics. Yet, they’re not doing too shabbily.
Clearly, there’s still a lot to discover about this virus.
Lockdowns and taboo tradeoffs.
Second, and I found this far more insightful: He also talks about the importance of framing.
Coronavirus has killed about 100,000 Americans so far. How bad is that compared to other things?
Well, on the one hand, it’s about 15% as many Americans as die from heart attacks each year. If 15% more people died from heart attacks in the US next year, that would suck, but most people wouldn’t care that much. If some scientist has a plan to make heart attacks 15% less deadly, then sure, fund the scientist, but you probably wouldn’t want to shut down the entire US economy to fund them. It would just be a marginally good thing.
On the other hand, it’s also about the same number of Americans who died in the Vietnam War plus the Korean War plus 9/11 plus every school shooting ever. How much effort would you exert to prevent the Vietnam War plus the Korean War plus 9/11 plus every school shooting ever? Probably quite a lot!
Sure, you say, “This is a good example. But I already know the importance of framing, and anchoring.”
Great. Then let’s try another one for size.
Suppose you reopened the economy tomorrow. You tried as hard as you could to put profits above people, squeezed every extra dollar out of the world regardless of human cost. And then you put a 1% tax on all that economic activity, and donated it to effective charity. Would that save more people than a strict lockdown?
If a lockdown costs $5 trillion, then the 1% tax would make $50 billion. That’s about how much the Gates Foundation has spent, and they’ve saved about ten million lives.
Ten million is higher than anyone expects US coronavirus deaths to be, so as far as I can tell this is a good deal.
Large companies are unusually well-equipped to survive, and they’re better able to benefit from monetary interventions—which have been far faster and more effective than fiscal ones.
Meanwhile, small companies, individuals, and municipalities just don’t have the cash reserves or flexibility to react.
There are two ways in which this could play out:
The pessimistic scenario is front-end corporatization: small businesses just evaporate, their real estate is taken over by big companies.
Amazon and Walmart (and Jiomart in India) are the villains of this story.
The optimistic view is back-end corporatization: that software companies and lenders launch an all-out sprint to modernize and recapitalize small businesses, applying the scale advantage of big companies to solving the problems of local ones.
In that happier outcome, small companies hang on for dear life, and come back leaner and ready to fight. Unlike big companies, they won’t necessarily respond to efficiency growth with layoffs.
Shopify, Square, and fintech lenders are the heroes of this story. As are the SMEs that struggle through and survive.
Hypothesis #2: Everyone’s buying ETFs.
The Relentless Bid, Explained posits a different model. It’s an article from 2014, but it’s rung true throughout the crazy bull run of the last decade.
The [stock market] dips have become shallower and the buyers have rushed in more quickly each time. Sell-offs took months to play out during 2011 – think of the April-October peak-to-trough 21% decline for the S&P. In 2012, these bouts of selling ran their course in just a few weeks, in 2013 a few days and, thus far in 2014, just a few hours.
Why is that?
75% of the wealth business in this country [US] is largely driven toward fee-based strategies and accounts.
The vast majority of this snowballing asset base being reported by both wirehouse firms and RIAs is being put to work in a calm and methodical fashion: long-term mutual funds, tax-sensitive separately managed accounts (SMAs) and, of course, index ETFs.
What does this mean for the character of the stock market?
It means that, almost no matter what happens, each week advisors of every stripe have money to put to work and they’re increasingly agnostic about the news of the day. They’re well aware that their clients are living longer than ever – hence, a gently increased proportion of their managed accounts are being allocated toward equities. And so they invariably buy and then buy more.
In short, it means a relentless bid as the torrent of assets comes flowing in every day, week and month of the year.
The lighter volume on the NYSE in recent years also suggests this. Trades are only taking place at the margin and about half of it is ETF creation-redemption related.
Hypothesis #3: Zero Interest Rate Policy (ZIRP for the hip crowd).
Money is always swimming towards yield. All of Capitalism rests on this constant flow – of investments in search of return.
At an individual level, most of us have become accustomed to bank savings accounts effectively returning zero. That wasn’t enough for us though. Our money felt antsy, so it found index funds and other passive funds, to once again, find a bit of yield.
That same, tiny behavioral shift takes place at every level of the risk curve, from your savings account to the trillions of dollars managed by large pension funds.
So all these dollar-organisms all start swimming towards riskier waters. Treasury investors shift to corporate debt. Public equity hedge funds shift to late-stage private equity. Late-stage private equity shifts to mid-stage, mid-stage to early stage. Seed rounds become bigger. Angel investors become a thing. Unicorns, unicorns, and more unicorns. Ashton Kutcher.
Blackrock gets jealous of KKR who gets jealous of a16z who gets jealous of YC. There is just so much money looking to do so many new, riskier things.
Where does this take us? It takes us to bike graveyards.
If there’s any ideology that’s gone from radical idea to article of faith in less than a decade, it’s “Lean Startup”.
When the idea was first proffered by Steve Blank in the early 2000s, it took the world by storm. A simple idea. That generated so much momentum for a startup.
And by 2007, everyone could point to Facebook – or even better, Twitter – as proof that Lean Startup works. Facebook at least scaled with a consistent vision. Harvard → other universities → the world. Twitter was the original clown car that pivoted its way into a gold mine .
I’m a strong believer in starting up lean.
It’s how, in a past life, I iterated my consumer loyalty app to 200K users… with zero marketing dollars. Or how we launched a new lending segment at Indifi, and made it our top segment in 6 months.
So yes, Lean Startup works. And it is an article of faith. The word “lean” is almost redundant today. Of course a Startup has to be Lean. Of course you first build an MVP and test it with customers. Raise serious money only when you find product/market fit.
And then there’s Quibi.
Quibi raised USD 1.75 billion two years before launching its first product.
It then went on to raise another USD 750 million a year after that. Still a relaxed one year before launch.
If you haven’t heard of Quibi, you’d be forgiven to think it was a rocket company to rival SpaceX. But no, Quibi is a mobile content platform (short for Quick Bites), which launched a month ago.
The antithesis of Lean Startup. Will it work? Is this how we’ve got to do it now?
Get Big Fast Baby
The first insight about Lean Startup is that it bootstraps leverage from scratch.
There are only two priorities for a start-up: Winning the market and not running out of cash
Every start-up is in a furious race against time. The start-up must find the product-market fit that leads to a great business and substantially take the market before running out of cash.
That’s where leverage helps. Maximize the ROI on the cash, people, or other resources you bring to the business. Win the market as fast as you can, before you run out of cash.
Now, there are many types of leverage a startup can have.
Proprietary IP / best-in-class technology
Regulatory capture: Microsoft scaled only because of their hilariously one-sided deal with IBM.
The product itself: Instagram has in-built virality. In its early days, Instagram’s core use-case was to touch up photos, and post them on Facebook or Twitter. So, by simply using the product, you were marketing it to your friends.
Network effects: Uber
The revolutionary suggestion of the Lean movement was that the process itself could generate leverage.
Now here’s the thing – the leverage could simply be intuition.
The founder of Quibi is Jeff Katzenberg.
His catalogue of accomplishments is stunning. He oversaw The Lion King (the original), Beauty & the Beast, Aladdin, etc. at Walt Disney Studios. Then he co-founded DreamWorks, and produced Shrek, Kung Fu Panda, Madagascar, and several other massive hits.
Jeff knows more about film-making than 99.9% of the world’s population. Combined.
And the CEO of Quibi is Meg Whitman, ex-CEO of HP and eBay. A tech veteran.
Katzenberg and Whitman have boatloads of intuition, sharpened by decades building large media and tech companies.
“I said to Meg that, until day one, every decision that we make around content will be driven by instinct,” Katzenberg said. “Minutes after we launch, everything will be driven by data.”
And it’s true. They’ve doubled down, extracting every ounce of instinct from their extensive experience.
Everything was so meticulously planned. From the same interview:
A launch date a year in the future (and they were bang on time)
Crystal clear financial model for funding content production
Firm view on pricing tiers for the app
No testing hypotheses with an MVP. Just dive right in. With a few billion dollars in the bank.
What do you do when there’s no leverage?
The second insight about Lean Startup is that it was an answer to a specific question, posed at a specific point in time.
As Steve Blank says, the idea of the Lean startup was built on top of the rubble of the 2000 Dot-Com crash.
Most entrepreneurs today don’t remember the Dot-Com bubble of 1995 or the Dot-Com crash that followed in 2000. As a reminder, the Dot Com bubble was a five-year period from August 1995 (the Netscape IPO) when there was a massive wave of experiments on the then-new internet, in commerce, entertainment, nascent social media, and search.
After the crash, venture capital was scarce to non-existent. (Most of the funds that started in the late part of the boom would be underwater). Angel investment, which was small to start with, disappeared, and most corporate VCs shut down. VCs were no longer insisting that startups spend faster, and “swing for the fences”. In fact, they were screaming at them to dramatically reduce their burn rates. It was a nuclear winter for startup capital.
The Lean movement started during a nuclear winter for venture capital.
The idea of #leanstartup was built on top of the rubble of the 2000 Dot-Com crash.
Content follows a Power Law distribution. You can have a million shows, but viewership will concentrate around a few.
I couldn’t find a chart on TV shows, but here’s a chart about movie viewership from Michael Tauberg.
Netflix paid 6 years (!) of its content budget for Seinfeld, because Seinfeld is a “whale”. Like The Office and Friends, this is what people will subscribe to Netflix for. Not for Altered Carbon or Too Hot to Handle or whatever else.
That’s the math of the streaming video industry.
Consumers will pay for 2-3 subscriptions, and you do what you can to be one of them. You need proven hits like Seinfeld, not hit-or-miss new shows.
It’s like the SEO Red Queen Effect – if you aren’t in the first three results on Google, you don’t exist.
Quibi has some solid content. But unless it unearths a Seinfeld or Sopranos or Big Bang Theory in its first try (possible, it’s Katzenberg after all), it’s down for the count.
Well, that’s how the Quibi crumbles.
Related: Teledesic was the original fat startup. Raised two billion dollars for a satellite network… and then didn’t even launch.
As Tren Griffin writes in this short memoir, some investors received many times their original investment. Even though the company never provided service!
Have you ever received an email from a Nigerian prince, going somewhat as follows?
I’ve received a bunch of these over the years.
It’s a standard template. Someone in Nigeria or Congo or Dubai, is dying or is dead. They have several million dollars that they want you to help safekeep. They need you to make a small payment first for some ridiculous reason.
Would you fall for an email like this? Of course not. Come on, this is 2020! No one would fall for it.
One of the questions I like to ask my students is, “If you and I both owned a hamburger stand and we were in a contest to see who would sell the most hamburgers, what advantages would you most like to have on your side?”
Some people say they would like to have the advantage of having superior meat from which to make their hamburgers. Others say they want sesame seed buns. Others mention location. Someone usually wants to be able to offer the lowest prices. And so on.
After my students are finished telling what advantages they would most like to have, I say to them: “OK, I’ll give you every single advantage you asked for. I, myself, only want one advantage and, if you will give it to me, I will whip the pants off of all of you when it comes to selling burgers!”
“What advantage do you want?”, they ask.
“The only advantage I want, ” I reply, “is a STARVING CROWD!”
If you’ve found a starving customer, you don’t need much else to close the sale.
Material becomes more valuable as it moves through the production process. So, fix any problems at the lowest value stage.
To quote from the book:
All production flows have a basic characteristic: material becomes more valuable as it moves through the process. A boiled egg is more valuable than a raw one… A college graduate to whom we are ready to extend an employment offer is more valuable to us than the college student we meet on campus for the first time.
A common rule we should always try to heed is to detect and fix any problem in a production process at the lowest value stage possible.
Thus, we should find and reject the rotten egg as it’s being delivered from our supplier, rather than permitting the customer to find it. Likewise, if we can decide that we don’t want a college candidate at the time of the campus interview rather than during a plant visit, we save the cost of the trip and the time of both the candidate and the interviewers.
Let’s say you run an apparel factory. If the input cloth you received has quality defects, when would you rather find out? When the shirt is ready, or before the shirt goes into production?
Or you run a SaaS business. If your prospect is going to drop off the funnel next week, wouldn’t you rather find out today? Instead of after inviting them to an online workshop, doing a 1-1 free consulting call, and mailing them three times?
Or let’s say you have your team working on a complicated analysis. If they are making a basic assumption that’s wrong, would you like to find out once the analysis is complete? Or would you rather align at the start, and save a lot of time?
Catch errors early. If an egg is rotten, find out before you scramble it.
Far-fetched tales of West African riches strike most as comical. Our analysis suggests that is an advantage to the attacker, not a disadvantage. Since his attack has a low density of victims the Nigerian scammer has an over-riding need to reduce false positives. By sending an email that repels all but the most gullible the scammer gets the most promising marks to self-select, and tilts the true to false positive ratio in his favor.
That’s why phishing emails have spelling mistakes.
To self-qualify the funnel.
It’s not that the phishers struggle with English. That would be funny if it were true. Masterful confidence tricksters, but struggle to put together rudimentary sentences.
No, they speak English fine. It’s just that they don’t want people with high attention to detail to click on the link. If you notice such minutiae as spelling errors, then you’d notice other more suspicious details later and stop responding anyway.
They want only gullible prospects, with the least attention to detail.
They want to have a high percentage of such people pass through the next steps of the funnel. Share their passwords in a mindless fog. Click on executable links as an afterthought. Download Trojans in utter oblivion.
Phishing emails deliberately have spelling mistakes. So that only less-attentive people click through.
Lesson 1 – qualify your funnel as early as you can. And if possible, create a way for your audience to self-qualify. Don’t do sales calls with every visitor who stumbles across your website and shares their email. Instead, make them do the work of qualifying themselves. Have them join a webinar or download two white papers (both have zero marginal cost to you), before you do the hard pitch.
Lesson 2: Catch errors early. If your team is working on a complex analysis, first agree on the basic assumptions and logical flow. If it’s an investor presentation for next week, agree on the key messages and storyline today.
Lesson 3: Don’t click on emails from Nigerian princes.
Many pundits call COVID-19 a Black Swan event. And I have done the same. In countless conversations with clients, suppliers and others, ruminating wisely, “yes, it’s a black swan event. All bets are off.”
But is it really?
Black swans are supposed to take us by complete and utter surprise. Unpredictable before the fact, inevitable after.
But, a lot of people have predicted this pandemic. Not only predicted it, but also highlighted how unprepared we are. Among the famous examples, here’s Bill Gates, warning of a pandemic that could kill 33 million. And the resemblance of the current situation to the 2011 movie Contagion is eerie.
So, no – the epidemic was foretold.
Black swans are supposed to take us by complete and utter surprise. Unpredictable before the fact, inevitable after. But this pandemic was predicted.
Politics is about getting and keeping political power, not about general welfare. Leaders do what they can do to come to power, and stay in power.
That’s what happened.
In the early days of the pandemic, COVID-19 was an unknown quantity. Many hoped prayed fervently that it was “just another flu”. On the other hand, every head of state knew what a lockdown meant. Unemployment.
And in any democracy, unemployment means one thing for sure – the leader in power crashes out in the next election.
Like Upton Sinclair said:
“It is difficult to get a man to understand something when his salary depends upon him not understanding it.”
Digital advertising is one of the biggest new industries of the Internet era. In 2018, USD 273Bn was spent on digital ads globally.
What if I told you it was all fake?
Or more accurately, what if this article told you it was all fake?
The article has several examples of real-life experiments – e.g., when eBay stopped all its ads on Google for 3 months, the drop in online sales was 0%. Yes, you read that right – zero, nada.
But how? Aren’t people clicking on those ads? How can the impact of removal be zero?
Two factors drive this surprising outcome.
Do you remember the last time you searched for an app on Google? For example, I searched for “Spotify” last week. The first link was an ad, for Spotify.com. So I just clicked on that. And an ad-click counter somewhere in Google went up. This is called Selection Bias. Of the people who clicked on any given ad, you don’t know how many were looking for that item anyway.
Search engine algorithms are trained to show a given ad to people who are most likely to click on it. This Algorithmic Bias magnifies the selection bias. As the algorithm gets better (and Google’s algorithm is pretty mature now), increasingly, the people who are shown an Amazon ad are the ones who were planning to go to Amazon anyway.
In fact, some skeptics believe that ads don’t work at all. That no one is convinced to change behavior based on ads. Could it be true?
Well, do you remember the last time you clicked on an ad while not looking for that exact item? Me neither. (except for that banner selling N95 masks last week, but it was sadly out of stock).
But surely, you say – if digital ads didn’t work, why are marketers still spending hundreds of millions on them?
As the article says, quoting Steve Tadelis, “marketers actually believe that their marketing works, even if it doesn’t.” Good old Cognitive dissonance.
Yes, cognitive dissonance does play a role. But I think there’s a second element too. You know the saying, “what gets measured gets managed“. Google and Facebook report clicks and impressions, not actual incremental purchases. That’s what is available, so that’s what marketers track and optimize. They don’t track incremental purchases, because there’s no way to monitor that.
Digital advertising doesn’t work. And marketers don’t care.