power law

Inversion: The surprising secret of winning in business.

jitha

2013 was a big year for me. But at the end of it, I was left wondering if it had been a hopeless waste of time.

I had been thinking about quitting my job and starting up, for a while. But I took the plunge in Jan 2013.

Got two solid co-founders, an interesting SaaS idea, and a few months of runway. Thus began the entrepreneurial dream.

Fast forward 10 months.

The product was ready, customers were mildly interested. But it was clear it wouldn’t work.

It was a structural effort-value mismatch. A long sales process and too much integration effort, but not a must-have product.

We tried many things but the writing was on the wall. The revenue would never justify the effort.

And here’s the other thing: we were running out of runway (personal savings). We couldn’t continue paying salaries for much longer.

So that was it then – end of the entrepreneurial dream? 12 squandered months, and then sanity prevails?

Time to go back to a regular salaried job?

Before we talk about what happened next, let’s take a short break and talk about… tennis.

The Amateur Game of Tennis.

One of my favorite David Foster Wallace (he of “This is water” fame) lines is from his essay, Derivative Sport in Tornado Alley:

I couldn’t begin to tell you how many tournament matches I won between the ages of twelve and fifteen against bigger, faster, more coordinated, and better-coached opponents simply by hitting balls unimaginatively back down the middle of the court in schizophrenic gales, letting the other kid play with more verve and panache, waiting for enough of his ambitious balls aimed near the lines to curve or slide via wind outside the green court and white stripe into the raw red territory that won me yet another ugly point.

It wasn’t pretty or fun to watch, and even with the Illinois wind I never could have won whole matches this way had the opponent not eventually had his small nervous breakdown, buckling under the obvious injustice of losing to a shallow-chested “pusher” because of the shitty rural courts and rotten wind that rewarded cautious automatism instead of verve and panache.

In professional tennis, Federer wins by hitting the ball accurately to the far corner. But in amateur tennis, you win simply by not hitting the ball out of bounds.

In fact, in amateur tennis, you don’t win matches. You avoid losing them.

It’s boring, yes. But that’s a feature, not a bug.

And it’s surprising how far you can go, by just following this dictum: Keep it simple.

Ankesh Kothari has another great example, in How to participate in the Olympics without any skill:

Elizabeth Swaney participated in the 2018 Winter Olympics in freestyle skiing. She skied straight without performing any tricks that the sport is known for. And she came in dead last. That’s not the surprising part however.

The surprising part is that she had never won any skiing competition in her whole life, and yet she qualified for the Olympics!

How can one qualify for the Olympics without winning any competition at all?

Swaney did one thing better than anyone else. She showed up. She attended all of the qualifying events in the two years before the Olympics. All of them. She didn’t miss a single one. And in all of the events, she skied straight, never falling down. Many of the contestants would do tricks and swirls and jumps in the air to show their skills. And many of them would inadvertently fall. Swaney never fell once.

And that’s how, she outperformed her more skilled colleagues and got enough points to qualify for the Olympics without winning any competition. Because she never failed.

Now, this is not just an idea from sport. You’ve heard of it before…

Inversion: A surprisingly powerful idea.

The power of Inversion

One of Charlie Munger’s pet mental models is Inversion.

It’s a simple but profound idea.

To win, don’t lose.

Morgan Housel has a great paragraph about how Warren Buffett did exactly this:

There are over 2,000 books picking apart how Warren Buffett built his fortune. But none are called “This Guy Has Been Investing Consistently for Three-Quarters of a Century.”

But we know that’s the key to the majority of his success; it’s just hard to wrap your head around that math because it’s not intuitive. There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called “Shut Up And Wait.”

If you take away Buffett’s top 10 bets, he would look quite mediocre. The two secrets of his success are:

  1. Not striking out. He stays within his circle of competence, so he never risks complete ruin.
  2. He’s been doing this consistently for 75 years

That’s what winning is mostly: not losing.

Over a 40 year career, as long as you don’t shoot yourself in the foot, you’ll win.

In a power law world, optimize for staying in the game.

In a power law world, effort ≠ outcomes.

Luck plays a big role. One big break can make all the difference.

In such situations, it’s important to stay in the game.

It’s like surfing – you need to stay in the water. You need to be patient, and lie in wait for the big wave.

It’s hot out there. You might be ready to leave in an hour. “The water’s quiet today, let’s go grab a beer.”

And just as you step out, there comes a monster wave!

That’s why…

Do what you can to stay out there.

Don’t burn out. Keep adequate runway.

Keep experimenting and trying different things – you don’t know what will click.

But don’t take existential risks. Take small risks that you can manage.

Nowhere is this truer than in the case of startups. 90% of startups fail. A tiny proportion reach steady profitability. And a much tinier proportion create life-changing wealth.

So… I’m going to give you some strange advice.

Don’t be like Elon Musk.

Elon Musk is the archetypal visionary entrepreneur. Ignore naysayers, stick to your vision, and win big.

But again, don’t be like Elon Musk!

He bet all his wealth throwing one last Hail Mary. And he did that several times. Funding one last launch for SpaceX after all the previous ones had failed. Saving Tesla from the jaws of bankruptcy.

In this universe, it all worked out and he’s the world’s richest man. But it so easily might not have worked, and he would have flamed out.

Pablo Escobar's Brother Says Elon Musk Stole His Flamethrower Idea, Wants $100 Million Payment
Instead, he’s selling flamethrowers.

So don’t be like Elon Musk. Be like Phil Knight instead.

In 1966, his company, Blue Ribbon Sports, was running out of cash to expand. His bank refused to give him working capital. And the only other bank in town had already rejected his application!

So he went back to work as a CPA at PwC. Plowed most of his salary back into the business to make it work.

He did this for 5 years.

First, the company stayed barely alive. But soon, some of its experiments started working.

The company still exists today, btw. You may know of it as Nike.

Quick interlude: If you like what you’re reading, don’t forget to subscribe! Many say Sunday Reads is the best email they receive all week.

Coming back to my story.

Where did we leave off?

Oh yes, me staring at a blank wall and a vanishing bank balance, wondering if this was it.

But then I asked myself, “Did you really expect that your first idea would be a hit?”

Of course not. So, the answer was clear: Do whatever we can to keep going.

So I went back to my consulting firm. Luckily I had enough trust in the system to work part-time (8-16 hours a week) on specific projects.

I put all my income back into the business. My co-founder did the same.

We pivoted the company and hired developers to build a consumer-facing app instead.

And the payoff came soon after.

We launched the product within 5 months. And within one month of launch, we had 18K users. We were onto something!

I’ve written before about what happened next. How we went from ~20K users to 200K users, with *zero* marketing spend.

But it all started with that one move. Flipping from default dead to default alive.

What did I learn?

At the highest level, this is what I learned: To win, don’t lose.

To win, don't lose. Invert.

In life and business, winning is not as much about spectacular victory, as it is about *not losing*.

Do the small things right and don’t die, and over a 40 year career, you’ll win big.

More specifically, I came away with three lessons:

#1. Optimize to stay in the game, in a power law world.

When luck is a big factor, you need to have as many “at-bats” as possible. So prioritize staying alive.

To win big, you need to take risks. You need to experiment. But never take the risk of ruin, no matter how small.

Don’t play Russian roulette, even if the gun has a hundred slots and just one bullet.

Take risks, but also protect yourself. When in doubt, remember the barbell strategy (I also wrote about the barbell strategy for crypto investing here).

#2. When you see an opening, swing hard!

When the big wave does come, that’s the time for action!

In late 2014, we saw an opportunity to partner with PAYBACK (India’s largest loyalty player at the time, with ~50M users). We went all-out to get the deal (including a lot of negotiation prep: Never Split the Difference is a great resource. My summary here).

We also guerrilla-ed our way into a free video endorsement from a movie celebrity. But that’s a story for another day.

#3. Keep it simple.

When you’re about to try something new in your business, ask yourself:

  • Is this like curving the ball into the top corner? What if I miss? Is it game over?
  • Or is there something simpler I can do, to keep the ball in play?

When in doubt, keep the degree of difficulty low. Make it easy.

Stack a few easy steps on top of each other, and voila! You have a 10/10 triple somersault.

PS. There are many great examples of successful entrepreneurs who kept their previous jobs when they started up.

The most fascinating is Herb Kelleher, who kept his private law practice for 14 years after starting Southwest Airlines.

Read that again – 14 years, running a frigging airline as a side hustle!

More in my twitter thread here.

Zero to One, Peter Thiel (10/10)

jitha

Zero to One is 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.

(Check out the book on Amazon here.)

To get more such book summaries every week, along with other great reads on startups, business, and tech, don’t forget to sign up below.

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.

To get more such book summaries every week, along with other great reads on startups, business, and tech, don’t forget to sign up below.

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The Power of Exponential Growth OR Why you are not late

jitha

[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.

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Further Reading:

 

Linked to: Power Law

Filed Under: Mathematics & the Sciences

The Pareto Principle and the Minimum Effective Dose

jitha 1 Comment

[Note: I shared this mental model with my email subscribers on Dec 11, 2016. If you want to receive a new mental model every week, join the club.]

 

Out of more than 120 wholesale customers, a mere 5 were bringing in 95% of the revenue. I was spending 98% of my time chasing the remainder. – Tim Ferriss, Four Hour Work Week

What it is:

Most of us are familiar with the Pareto Principle. 80% of your sales come from 20% of your clients. 20% of people produce 80% of your enjoyment and propel you forward. But 20% produce 80% of your anger too.

A few factors have disproportionate influence.

Some of us are also familiar with Pareto’s more extreme cousin – the power law.

But fewer of us make the jump to its immediate corollary – the Minimum Effective Dose (MED). 

 

I first came across this in Tim Ferriss’ books. He defines it as “the smallest dose that will produce the desired outcome”.

The logic goes – if 20% of tasks produce 80% of the results, then you need to focus only on this 20%. In most avenues of life, where perfection is not the goal, this 20% is all you need to be effective.

This was one of the big ideas of 2015 for me. It transformed how I think. See more here.

Minimum Effective Dose

The Minimum Effective Dose (MED)

Examples:

  • MED in business: Whether your customers, your vendors, or your advertising – choose the few that give you the most value, and forget about the rest.
  • MED in daily productivity: What’s the no. 1 most important task of your day. Do that first. (“Minimum Viable Day”, anyone?).
  • MED in health: Stop eating white carbs. See Tim Ferriss’ slow carb diet, or Gary Taubes’ Why we get fat. (But maybe I’m oversimplifying – I’m not a health expert).

[Tweet “If 20% of tasks produce 80% of the results, then you need to focus only on this 20%. #pareto #MED”]

Rules to follow:

  1. Identify which tasks have the most impact on your objective.
  2. Focus on them. Forget about the rest.

This suddenly reminded me of Warren Buffett’s Two List strategy.

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Further Reading:

 

Linked to: Power Law, Parkinson’s Law

Filed Under: Economics, Business & Investing, Productivity

Winners don’t do things differently. They do different things.

jitha 4 Comments

No, I haven’t made a typo in the title. The age old saying “Winners don’t do different things. They do things differently.”, made famous by Shiv Khera in his book You Can Win, is wrong.

I remember when the book came out, everyone quoted it as gospel. Every individual can be great. All you need to do is work hard, and work smart. And they would all nod knowingly at the last clause. So that’s what I did – studied hard, went to a good B-School, got a great job and worked hard (and smart) there.

Pic00003

But unfortunately, this saying isn’t true. And it’s becoming more false as technology eats the world (to co-opt Marc Andreessen’s pet phrase).

 

This mentality of doing things smarter now pervades all aspects of our life. But it suffers from one fallacy – what I call ‘focusing on the numerator’.

It’s like a company that focuses only on improving its profit margin. It brings in cutting-edge efficient machines, implements Just-in-time production techniques, and what have you. But with all these productivity improvements, how much could the profit margin increase? From 15% to 20%? 40%? 100%??

Even in the best (and impossible) scenario, the upside is capped at 100% of revenue. What if you focused, instead, on the denominator? What if you looked for ways to achieve a step jump in revenue? Suddenly, there’s far more value to capture, even if you are inefficient.

 

What you work on matters, and matters far, far more than how hard you work. This is an example of a Power law, which I’ve written about before.  In the early 1900s in England, there was a profession of people called ‘knocker-uppers’ (no, it’s not what you think). Their task was to wake people up every morning. They would walk the streets with a long stick, and tap on windows till people woke up. Many of them worked hard. I’m sure they worked smart too – with well-balanced, aerodynamic and sonorous sticks. Still, they lost their livelihoods in a jiffy when alarm clocks came into the market.

Moral of the story: Do more valuable tasks, instead of doing less valuable tasks efficiently or smartly. Doing something unimportant well does not make it important.

Pic00001

This is how the world is today – it’s the new normal. The companies that win are the ones that innovate 10X and ‘change the game’. Not the ones who innovate incrementally. As Peter Thiel says in his book, don’t move an industry to greater efficiencies (i.e., from 1 to 1.1). Focus instead on moving something from zero to one.

[Tweet “Do more valuable tasks, instead of doing less valuable tasks efficiently or smartly.”]

Look at the biggest companies around us – Google (search advertising), Apple (iPhone), Amazon (e-commerce, e-books, etc.). They didn’t just improve search algorithms, build a better phone, or sell books through a simpler distribution chain. They revolutionized their respective industries. Not by doing things differently or more efficiently, but by doing different things.

And it’s not just companies – it’s visible in every aspect of life. No longer can you say, “Karm kar, phal ki chinta na kar” (“Work hard, don’t worry about the result”) in all honesty. If the recipe sucks, it doesn’t matter how good a cook you are.

[Tweet “If the recipe sucks, it doesn’t matter how good a cook you are.”]

This may be bad news. But it’s good news as well. Once you start looking for this ‘focus on the numerator’ behavior everywhere, you can make more valuable decisions about your company, your products, and your time.

A few examples of the implications, off the top of my head:

  1. Product Management: Instead of A/B testing and optimizing your nth new feature, focus on getting more people to use your product. Andrew Chen puts this well in a recent article.
  2. HR: Instead of trying to getting the best out of your team, learn how to build a better team. [This is more important in technology businesses, and less so in traditional brick-and-mortar companies.]
  3. Health: You can try to manage your cholesterol by eating french fries cooked in refined oil or unsaturated oil or whatever the flavor of the season is. Or, you can just stop eating french fries!
  4. Personal Finance: Focus on earning more, not spending less. A direct corollary of the revenue-profit point I made earlier. It’s ironic, but I’m the prime target for this lesson. As a Tam-Brahm, I started expense budgeting almost before I could walk. I’ve spent countless hours balancing my expenses, tracking my receipts, and strategizing lower spends, when I could have instead focused on doing more valuable things. Which means anything else, basically.
  5. Personal Productivity: Be effective, not efficient, as Tim Ferriss says in The Four Hour Work Week. Do two important things, instead of 10 unimportant ones. Again, a slap on my face – so far, I was firmly in the ‘get more out of your day‘ brigade.

TL:DR: In work as in life, we should strive hard by all means. But we must think hard first – is what I’m doing the most valuable thing I could do? Let’s build more important things, instead of optimizing our lives away.

Pic00002

What do you think? Are there any other examples of ‘focus on the numerator’ behavior? Drop me an email at [email protected], comment here, or tweet at @jithamithra.

[Note: This article first appeard in Yourstory.]

 

The reading list that transformed my professional life

jitha 7 Comments

Bookshelf_Small

6-9 months ago, when everyone was posting lists of the top 10 books they read, I was unfortunately busy with work. And then, when I wanted to post my own list, it was much too late to do so – people had moved on to sharing Upworthy articles instead.

Nevertheless, what’s far more useful is to talk about the top things I learnt from books – the ideas, insights, stories that changed how I think about life and work. After all, that’s why you read books – to improve yourself in some way – isn’t it? Well, at least all books apart from the Twilight series.

So, here are the 5 ideas that transformed how I think about life and work, and the books I read them in. Rather than describing these ideas in detail, I’ll also share links to articles that offer a short version. But I would definitely recommend you read the book themselves too!

 

1. System 1 vs. System 2 Thinking – Thinking Fast & Slow

An understanding of psychology is, in my view, an essential skill for anyone whose daily life involves interactions with other people to get stuff done. The human mind is not only not rational, it is also irrational in a few consistent and repeatable ways. Understanding these cognitive biases and fallacies that we suffer from can go a long way in helping you get what you want in interactions with people.

[Tweet “The human mind is not only not rational, it is also irrational in consistent and repeatable ways.”]

One of the key concepts I’ve come across in this area is that the human mind is really two distinct personalities – let’s call them System 1 and System 2. System 1 is the more automatic, quick-and-dirty, heuristic based, lazy thinker – get to an answer quickly by applying habits and patterns, often at a subliminal level. System 2, on the other hand, applies more careful, overt deliberation to any problem, coming to a solution in a more considered manner.

At any time, you’re thinking in one of these two modes. For example, when you’re doing math, you’re carefully thinking of the problem and solution – that’s System 2 in operation. When you’re tying your shoelaces, you’re usually not thinking about the loops and knots actively – you just do it. That’s an example of a System 1 task.

Now, at most times, the mind defaults to System 1 – which tries to recognize and apply patterns without thinking too much. And the result is that it can get tricked in fairly predictable ways – what we call cognitive biases. Two examples of these are anchoring (where an initial number suggested to you often influences your answers to a numerical question) and availability bias (you tend to overestimate the probability of an event if you can remember examples – this sometimes results in people paying more for earthquake insurance than insurance for natural calamities – even though the latter includes earthquakes!). Won’t go into detail on these biases here – you can read the articles I’ve linked to, and the book. But I’ll blog about them soon too!

Another interesting implication of the dominance of System 1 is that you can trick your brain into certain emotions. For example, you know that when you’re happy, you tend to smile. But did you know that this can work in reverse – that you can trick your brain into happiness, by simply smiling? This was a ridiculously amazing insight for me – to know that causality works both ways, and I can control my emotions. I’m a ‘moist robot’, in Scott Adams’ words.

Book: Thinking Fast & Slow – one of the best books I’ve read – and I actually prefer fiction.

Further reading: 15 Lessons from Behavioural Economics – Slideshare, Scott Adams on Programming the Moist Robot

 

2. Making Skewed Bets – Fooled by Randomness & Antifragile

When I was in business school, I read Fooled by Randomness, by Nassim Taleb. At that point, I thought it was the best book I had ever read – so many brilliant ideas, one after the other. I read it again recently, and while I’m a little less effusive, it’s definitely worth a read – it’s long-winded and unnecessarily complicated in parts, and the language is often self-absorbed – but if you can look beyond that, the insights will hit you at an unrelenting pace.

But the most important insight for me – in that it almost exclusively governs my world view since I read it – is that of making skewed bets. The world is innately random – your success depends far more on your luck than on your ability. At first glance, this seems to encourage laziness. Why work hard when your destiny doesn’t depend on it? But looking deeper, the implication is that you should try and expose yourself to ‘positive’ luck as far as possible, while limiting the impact of ‘negative’ luck. In simpler terms, expose yourself to very high upside, while limiting your downside as far as possible.

This is called making a skewed bet – where if you win, the gains are a windfall; but if you lose, you don’t lose that much. A lot like financial options or a startup – if you make it, you make it. And if you fail, then your losses are limited – the cost of the option, 1 year of salary, etc. Of course, the probability of a loss may be 90%. But if you make 10 skewed bets, then you’ll make a windfall gain on 1 of them – and that may be more than enough.

Another important way to keep yourself open to good luck is by simply staying on the field. Thomas Edison got the light bulb right on his 1000th attempt – and that happened only because he kept trying different things, and didn’t give up after 999. To surf a ‘killer wave’, you need to first be in the sea, navigating the 100 tepid waves before.

[Tweet “To surf a ‘killer wave’, you need to first be in the sea, navigating the 100 tepid waves before.”]

Book: Fooled by Randomness. Antifragile, a subsequent book by Taleb (even better), actually takes this one idea and distills it far more.

Further reading: The hard part about surfing

 

3. Goals vs. Systems / Success as a process- How to fail at almost everything & still win big

Taking the previous point further – success, then, seems to be a process rather than a brilliant idea, inch-perfect execution or just good luck. Try a lot of different things, observe, learn, and iterate. So that you slowly, over time, collect all the right materials for the magnifying glass of luck to ignite. You do all the right things and keep improving, so that when Lady Luck knocks, you’re ready.

Success is therefore a system (take several skewed, high-reward/low-cost risks), rather than a goal (I want to get rich). Now that’s at a macro-level, but this makes sense even at the micro-level – rather than adopting a goal of doubling your user base and throwing money at it, take a systematic approach of trying different things, observing, and then betting the farm on the 2-3 marketing techniques that work.

Scott Adams (of Dilbert fame) carefully charts out this approach in his book.

Book: How to fail at almost everything & still win big. I would venture that this is one of the best and most actionable books I’ve read. But read at your own peril – as they say, one should be careful when taking life and business advice from a cartoonist.

Further Reading: Goals vs. Systems – a short blog post applying this concept to life in general.

 

4. Power Laws, or why working hard is not enough – Zero to One

I’ve already blogged about this here, but it’s worth reiterating. Today’s business world is not a normal distribution, with most people distributed around average payoffs. Rather, it’s an exponential distribution – very few companies will make most of the money to be made. Therefore, success depends far, far more on what you do, than on how you do it.

random-vs-power-law-distribution-2

In a power law distribution, very few sample points account for a majority of the population’s value.

The power law will permeate all your decisions (e.g., one marketing hack will drive 90% of your traction, one product feature will drive 90% of repeat users, etc.). Won’t go into more detail here – definitely read the post!

[Tweet “Success depends far, far more on what you do, than on how you do it.”]

Book: Zero to One

Further reading: The Power Law, or why working hard is not enough (my blog post, again)

 

5. Attractor States – Good Strategy Bad Strategy

The previous three concepts have all been around the idea of work and success. This one is different, and is a tool that I’ve found quite useful in jump-starting creative thinking about problems.

Let’s say you’re trying to think of a startup idea in a given space. You could look at what users do now, what they buy, how they consume, etc., and try to find areas where you can add value. Or, you can look at how the industry will inevitably evolve in the future and see how you can accelerate that.

The author calls this concept an ‘attractor state’ – given industry trends today, what do you see as the logical next frontier over the next 10-20 years? And how can you participate in that, rather than making incremental changes to the status quo? To paraphrase Wayne Gretzky, the ice hockey legend – don’t skate to where the puck is, but to where it will be.

This is a slightly nebulous concept, so let me provide an example. Let’s say I want to create an offering in the payments space. One option is to join the crowded current market, and provide a mobile wallet solution, a payment gateway, etc. Another way is to think of where the industry will be in 10-20 years – its attractor state. I’m not a payments expert, but seeing how it has evolved over time (barter -> gold -> paper money -> credit cards -> mobile wallets), there’s a clear trend towards individualization. The reasons mobile wallets are a great innovation is that everyone carries a mobile today, and they don’t share mobiles – it is a unique identifier of a person. Taking this individualization further, the next wave of advancement has to be biometrics – where unique characteristics of your person (iris, voice patterns, fingerprints, etc.) are your identifier, based on which transactions can be completed from your account. You don’t need to whip out your phone or credit card – just staring at a tiny lens is enough to connect to your payment account.

How does this help an entrepreneur? With this end-game in view, entrepreneurs can think about how they can add (and capture) disproportionate value in the long-term – the products and services they can start building today, to accelerate the attractor state. In the case of payments, it could be future biometric sensors, systems for collating massive customer data, POS terminals for accepting payments, etc. – each of these possibilities could be game-changing.

[Tweet “”Don’t skate to where the puck is, but to where it will be.” – Wayne Gretzky”]

Won’t go into much more detail here – but I’ll write a blog post or two on this concept soon. I find it an incredibly powerful way to improve your creativity when thinking about problems and solutions.

Book: Good strategy Bad Strategy. Apart from a discussion of attractor states, this book also has a great discussion of chain linked strategy and focus as a source of competitive leverage. I’ve blogged about this here.

Further Reading: Will write a detailed post on this soon!

These are the five concepts from books that changed my world-view. It may be asking too much to hope that they fundamentally alter your thinking too, but I hope you find these perspectives and books interesting. Do comment!

PS. Have you signed up for the Startup Weekly yet?

The Power Law, or why working hard is not enough

jitha 19 Comments

hard work

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:

random-vs-power-law-distribution-2

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.
    [Tweet “What you work on matters, and matters far, far more than how hard you work”]
  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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