Chapter 6: You Are Not a Lottery Ticket
An important question in business is whether success is a matter of luck or work.
Objectively, it is impossible to say. Empirically though, successful entrepreneurs are rarely successful only once -> success in business is a matter of skills – not luck.
Generations ago, luck was “engineered”. Luck was preparation, dedication, and hard work to achieve a purpose. “Lucky people” believed they made their own luck. As such, calling someone lucky for their success was considered stupid.
When we call a company lucky, we assign the concept of “luck” to the past. When we think deeply about it, that would mean that that company did something at a point A in time, which turned out to work at a point B later on.
As such, if we call a company lucky, this would mean that not the past, but the future, is just chance.
Is it, though? Is the future chance…or design?
Can you control your future?
It depends. If you think your future is certain, you will work to achieve that state. If you think the future is indefinite, you’ll just leave it to chance and give up on trying to master it.
Indefinite attitude toward the future explains what’s most dysfunctional in our world today.
Process trumps substance. When people do not know what to do, they use rules to assemble a portfolio of various options and choose the one that ends up being the best.
That’s the same thing for school: students are taught everything and anything without thinking about the ultimate purpose of these skills.
A definite future is different. Instead of doing everything and nothing, the person does something specific to build a specific future.
This isn’t what young people do today because everyone lost faith in a definite future.
An optimistic definite future defined the US between 1950 and 1960.
In the 1950s in the US, people took big plans seriously and thought about how to make them work.
Unlike definite optimists, indefinite optimists expect the future to be better…but have no incentives nor desire to design it. Instead of inventing new products, they just upgrade existing ones. This describes the USA of today.
In China, the future is definite but pessimistic. This means that the future is known, but since it will be bleak, one needs to prepare for it. Every country is afraid that China will take over the world. China is the only country afraid that it won’t.
In Europe finally, the future is both indefinite and pessimistic.
People fear the future but have no idea what to do about it. As a result, nobody is in charge in Europe. Europeans just react to events as they happen, solving crisis after crisis, and hope things don’t get worse.
All they can do is wait for the future to degrade, eating and drinking, which explains Europe’s famous vacation mania.
Our Indefinitely Optimistic World
Indefinite finance
A definitely optimistic future needs engineers to build underwater cities and spaceships.
An indefinitely optimistic future needs bankers and lawyers.
Finance embodies indefinite thinking because it is the only way to make money when you have no idea how to create wealth (understand: value).
Bright people head to Wall Street because they have no real plan for their careers.
They find out that finance itself is indefinite. Since no one knows anything because no one has any vision, diversifying through investing in a portfolio of companies becomes the norm.
The indefiniteness of finance is weird. When a founder sells his company, he gets money but has no idea what to do with it, so he invests it in a bank. The bank has no idea what to do with it, so they invest it in different companies. The companies try to increase their share price by generating cash flows. They can then distribute dividends or buy shares back, and the whole cycle repeats.
-> No one knows what to do with money in an indefinite world.
Money becomes more valuable than anything else you could do with it. So you seek to maximize its amount…for its own sake.
Indefinite politics
In the past, politicians were accountable to people during election times. Today, they are accountable constantly.
Society is more focused on predicting what people will think in a couple of weeks (with polls) than it is on making big plans for the next ten or twenty years.
Since we have no idea of the society we are building, governments just mainly provide insurance for whatever problem we may hit next. Solutions to big problems are more insurance and more money, raising the level of entitlement within society as a result.
Indefinite life
We have been searching for the solution to eternal life for centuries.
However, we have been making very little progress since the 1950s. The reason is that instead of diving deep into how the body works, pharmaceutical companies just assemble a bunch of molecules hoping it will yield some results. They act with no purpose in mind, and no road map to achieve it.
They just do and try out random stuff.
Is indefinite optimism even possible?
What type of future are we headed towards? If households saved money, they could do something specific later on. If companies invested, they could reap the rewards of their investment. Unfortunately, neither of them do either.
So the question is: how can the future keep on getting better if no one plans for it?
Definite optimism works when you build the future you want.
Definite pessimism works because you build what has already been built without expecting anything in return (China relentlessly copying the West).
Indefinite pessimism works because what you expected ultimately happened, and you were prepared for it.
Indefinite optimism though is progress without planning.
That’s basically what evolution is: a bunch of genes trying new stuff at random, waiting for the one combination to work.
In the startup world, indefinite optimism brought the “lean startup” method that “adapts and survives” in an “ecosystem” where they “compete” and must “evolve”.
However, lean is only a methodology, not a goal.
The goal, since it is an indefinite world, does not exist.
As a result, new companies only upgrade new products. They are not building anything new.
Marginal improvement to products that already exist will let you reach a local maximum, sure. But not a global one.
The Return of Design
Many saw Steve Jobs as a master of design for his product. It’s not wrong. However, he was especially skilled at designing a future and vision for his company.
Jobs carefully planned all of Apple’s goals years in advance.
He knew where he was coming from, and knew where he was going.
He started with the iPod in 2001 and kept on creating new products until people understood the vision he had all along 10 years later.
Jobs lived in a definite optimistic world with milestones to achieve. He could plan long-term, an underrated quality in an indefinite world. As long as he had goals for Apple, he wouldn’t leave nor sell the company, and would keep on pursuing his milestones.
This explains why startups that sell always sell too high, or too low. When it is the founder that wants to sell, he is likely exiting the company because he does not have any more vision.
As such, the price of the startup is likely too high.
When another company seeks to acquire the startup, it is likely to desire to buy too low because the founder is likely to have a vision (which is why he hasn’t sold yet).
You Are Not a Lottery Ticket
We need to find a way back to a future we want to build. The best way to do that is with a startup. A startup is the largest unit over which you can have mastery, with the greatest potential impact on the world.
Getting back control over our future starts by rejecting the idea that chance somehow plays a role because Chance is not controllable.
You are not a lottery ticket.
Chapter 7: Follow the Money
The Pareto principle states that 20% of producers produce 80% of total output. This is possible due to the Power law, the law that explains exponential growth or compound interest.
This law is present everywhere, from economics to tomato production, to volcanoes (20% of volcanoes are responsible for 80% of the destruction).
This is particularly true in venture capital.
The Power Law in VC
Most VCs invest in a wide range of companies hoping to find those that will make returns for their funds.
Most VCs are wrong.
Venture returns don’t follow a normal distribution (2 will fail, 6 will be average, 2 will be great). They follow the power law: a small number of them will create almost all of the value for the fund.
-> these are the ones you should focus on as a VC, instead of focusing on a wide range of companies.
The rule is that your best investment will (and should) bring in as much or more than the total value of the fund. So you should invest in companies that have the potential to do that.
Why People Don’t See the Power Law
The reason why VCs among all people don’t see the power law is that they live in the present. They spend more time with problematic companies, trying to fix them than they do investing in their champions.
What to Do With the Power Law
The power law is important to everyone because everyone is an investor (in time, effort, money, etc).
If you create a company, you should make sure that the company could experience the power law. Whatever choice you make, make sure it will be valuable decades from now.
In our indefinite world, the most common answer to the question of the future is to diversify.
But it’s dumb. Investors that understand the power law do not diversify.
They make very few bets – and invest everything they have there.
You should do the same in life because life isn’t a portfolio.
A startup founder cannot diversify himself. You can’t run twelve companies at the same time and hope one will work. You should choose one thing, one bet to make, and go all-in on that.
Unfortunately, school teaches the other way around.
Every student learns a bit of everything to hedge against the future.
People aren’t creating their lives. They are preparing for it.
If you start your own company, you must remember the power law to operate it well and focus on the “one things” that work as the most important things are singular.
One market will do much better than all the others. One distribution strategy will dominate all the others. And you will be much better than others at one thing.
Chapter 8: Secrets
Every one of today’s most famous ideas was once a deep secret (Pythagora’s theorem, for example). Your job is to unearth these ideas with the two contrarian questions:
- What important truth do very few people agree with you on?
- What valuable company is nobody building?
If there are many answers to these questions, there are many companies that are waiting to be started.
Why Aren’t People Looking for Secrets?
Ted Kaczynski, the Unabomber, believed that in order to be happy, humans had to solve problems. There are three types of problems to solve: easy, difficult, and impossible.
Kaczynski thought that all the difficult problems had been solved and that it was why the general population was so depressed. ‘
What they resolve in their daily life is whether easy, which yields no satisfaction, or impossible, which yields frustration.
Kaczynski wanted to destroy society and technology to let people start over and solve difficult problems again. He was crazy, but his loss of faith is everywhere around us.
People today love to go back into the cultural 60s and 80s when life was…lighter.
All fundamentalists think like Kaczynski.
Everything is whether black or white, with no space for middle ground and complexity. The world is made out of easy truths and mysteries we cannot question or seek to solve. As a result, people no longer question.
Why?
It may have started with geography. In the 18th century, there were still a bunch of places to discover. But not anymore. On top of this, four social trends have taken away our wish to look for secrets.
- Incrementalism: we are taught at school that progress is made one small step at a time. If you end up learning more than asked, you won’t get any marks for it. Rather, you get the highest mark to do what is expected of you.
- Risk aversion: People are scared of secrets because they are scared of being wrong. Being lonely and right is difficult enough. Being lonely and wrong is nearly impossible.
- Complacency: the elite are the ones best equipped to search for secrets, but why bother if you can collect rent and go home?
- Flatness: globalization has transformed the world into a global village. Prior to looking for secrets, people often wondered why someone smarter had not realized the idea they have in mind. This may dissuade them. The world has become too big for an individual to think they can solely change it.
The Case for Secrets
You can’t find secrets without looking for them. You also need faith that whatever you are trying to achieve is a secret that can be solved. If you think something is impossible, you’ll never try to achieve it.
Believing in secrets, as such, is an effective truth.
How to Find Secrets
There are two types of secrets: secrets about people, and secrets of nature. Natural secrets live around us. To find them, one must study some undiscovered aspect of the physical world.
Secrets about people are different.
There are things people don’t know about themselves or hide from others.
As such, when you build a company, you have to ask yourself two distinct questions: what secrets isn’t nature telling you? What secrets aren’t people telling you?
Natural secrets are often uncovered by scientists, and are higher valued than people’s secrets.
However, the latter is often underrated, maybe because you don’t need a Ph.D. in physics to understand them.
Questions to ask to find people’s secrets are “what are people not allowed to talk about?” “What is forbidden, or taboo?”
Sometimes, looking for both natural and human secret lead to the same answer. Eg: the fact that capitalism and competition are opposites.
Whether you study this question from an economic point of view or ask “what are people running companies not allowed to say?”, you would find out the truth.
The best place to look for secrets is where no one else is looking.
What to Do With Secrets
Unless you have conventional beliefs, it’s rarely a good idea to tell everybody everything that you know. As such, you should tell your secret to people you need to, and no more.
The middle between telling nobody, and telling everybody, is a company. The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside.
A great company is a conspiracy to change the world.
When you share the secret, the recipient becomes a fellow conspirator.
By walking the road others have walked before you and keeping your eyes open, you can find hidden paths. The paths you need to take.
Chapter 9: Foundations
A startup messed up at its foundation cannot be fixed.
Beginnings are special because this is when the biggest rules, trends, and structures that will define the entity are established.
They will no longer be changed afterward, so they need to be well-established.
As a founder, your first job is to get the first things right as you cannot build a great company on a flawed foundation.
Founding Matrimony
Choosing a co-founder is like getting married. If the founders develop irreconcilable differences, the company is the collateral.
Founders should share a prehistory before they start a company together – otherwise, it is just rolling dice.
Ownership, Possession, and Control
Everyone in your company should work well together within a structure that helps them keep everyone aligned for the long term.
To anticipate fights, it is useful to distinguish between three concepts:
- Ownership: who owns the company’s equity legally?
- Possession: who runs the company on a day-to-day basis?
- Control: who formally governs the company’s affairs?
In practice, founders own, managers possess, and board controls. The more people you distribute these powers among, the more risks you may stumble upon misalignment.
On the Bus, or off the Bus
Anyone working for your company should be involved full time. Consultants don’t work because they don’t care. Part-time doesn’t work, and remote doesn’t work either.
You are whether on the bus, or off the bus.
Cash Is Not King
To get committed people, one should compensate them generously. However, not too generously. In fact, a company does better the less it pays its CEO.
High pay for CEOs incentivizes them to defend the status quo and not take risks. Low pay for the CEO sets the standard for everyone else.
High salaries teach workers to claim value from the company as it already exists instead of investing their time to create new value in the future.
Any type of cash, even compensation, is more about the present than the future.
Vested Interests
Startups don’t need to pay salaries because they can offer ownership, which is much better. However, to avoid disputes, equity should be distributed very carefully not to make anyone jealous. As such, it should remain a secret.
Anyone who prefers equity over cash means they are deeply committed to the company. Equity can create incentives, and yet, everyone should remain broadly aligned.
Extending the Founding
Setting the rules that align people in the company will happen only once: at the founding, when it is inventing products and services. The best companies keep on inventing new products and as such keep on being “founded”.
This moment stops when the company stops inventing anything new.
Chapter 10: The Mechanics of Mafia
A company does not create a culture. It is a culture. People you work with should like each other and enjoy their respective company outside of work.
If you can’t count durable relationships among your colleagues, you haven’t invested your time well.
The PayPal mafia was built out of the fact that the people they hired were excited to work with the PayPal founders.
They were talented, sure, but they actually wanted to work together because they shared the same vision.
Recruiting
You should never outsource your recruiting.
When hiring, you should wonder why the person you are looking for would come and work for you when they could come work somewhere better.
Don’t propose them explosive shares, working with nice people, or on difficult problems – all companies do that. Offer them to work on the problems you are currently working on.
You will attract the best people if you can explain them why you’re doing something important that no one else is doing. You should also see that your company is a perfect match for the employee you seek to recruit. Otherwise, don’t hire.
Your company should promise to do irreplaceable work on a unique problem alongside great people.
From the outside, everyone in your company should be different in the same way. But they should all share the same obsession with the mission of your company.
Do One Thing
The best way to handle employees is to make them responsible for just one thing. Defining roles not only yields better results, but it reduces conflicts as most fights happen when colleagues compete for the same responsibilities.
It’s about eliminating competition between employees.
Cults
Cults are groups where members only hang out with each other and ignore their friends and families. Doing so, they may benefit from reaching certain truths denied to the outsiders.
The best startups are slightly less extreme than cults, the difference being that cults are wrong while startups are probably right.
Chapter 11: If You Build It, Will They Come?
Sales matter and is often underrated, especially by startups where engineers believe that because they are building cool stuff, customers will just come and buy them. This is not the case.
The reason why advertising matters is that it works.
Sales Are Hidden
Salesmen are actors and good salesmanship is hidden. That’s because it happens without anyone being aware of it. This is why people working in sales, advertising or marketing have a title that has nothing to do with their actual position.
People who sell advertising are called account executives.
People who sell customers work in business development.
People that sell companies are called investment bankers.
And people that sell themselves are called politicians.
The most fundamental reason that even businesspeople underestimate the importance of sales is the systematic effort to hide it at every level of every field in a world secretly driven by it.
If you have invented something new but have no way to sell it, you have a bad business – no matter how good the product is.
How to Sell a Product
Superior sales and distribution can by themselves create a monopoly without a superior product. The opposite isn’t true.
Two metrics set the limits for effective distribution. The customer lifetime value, and the customer acquisition cost.
The more expensive your product is, the more you have to spend on ads (and the more it makes sense to do so).
Complex sales
Deals in the 7-figures. These deals will happen once or twice a year, and you have to spend an enormous amount of time doing them (usually with governments). At this range, there is no salesperson in the company but the CEO.
These businesses succeed if they achieve a minimum of 50% of yearly growth for a decade.
Personal sales
It’s about cultivating and growing relationships with people that need your product the most, starting at the bottom. If you try to sell the president when you should sell the employee, you will fail. Sell the employees first, and make your way to the top.
Distribution doldrums (the dead zone)
In between personal sales, and traditional advertising, there is a dead zone.
Imagine you are selling a SaaS product for small and medium-sized businesses. The product doesn’t make enough to justify salespeople, and advertising would be too broad for your target market.
This is why so many of these businesses don’t use tools that bigger firms use. There are no good distribution channels.
Marketing and advertising
This channel works for low-priced products with mass appeal. This can work for a startup when the CLV and CAC make other channels non-viable.
Viral marketing
A product becomes viral when users invite their friends to use the product. Internet memes, viral videos are good ways to drive viral marketing.
What they did in PayPal was to pay customers to sign up and give them more money when they got a friend to sign up.
Whoever is first to dominate a market through viral marketing will be the last mover in the market.
The power law of distribution
Find THE sales channel which works.
Selling to other people than your customers
You don’t only need to sell your product. You also have to sell your company to your employees and investors. That includes selling your company to the media.
Chapter 12: Man and Machine
Many worry machines will replace humans that will end up jobless. This is wrong. Computers complete humans, they don’t replace them.
The most valuable businesses will be built by entrepreneurs that seek to empower people rather than replace them.
Substitution VS complementarity
Globalization means substitution
People compete for jobs and resources. Computers compete for neither. When globalization happened, a human in China replaced humans in Europe and the US. Humans do substitute humans, but machines don’t do that.
As such, delocalization is not sustainable. The workers in China will get richer and eventually demand the same perks enjoyed by their Western counterparts.
Technology means complementarity
People and machines have far less in common than we think. They are good at different things.
The gains from working with computers are much higher than the gains from replacing people with other people.
Complementary Businesses
Computers are tools that help humans be more productive, and they should be considered as such. Palantir builds software that helps analysts track that which they seek. They don’t replace analysts.
As such, the real question to ask is how can computers help humans solve hard problems?
Chapter 13: Seeing Green
At the beginning of the 21st century, the green transition became an imperative and hundreds of companies were built to create green tech. Years later, most of these companies collapse. The reason is that they ignored the seven questions that every business must answer before being created.
1. The engineering question: can you create breakthrough technology instead of incremental improvement?
A company should have technology that is 10X better than its nearest substitute.
2. The timing question: is now the right time to start the business?
3. The monopoly question: are you starting with a big share of a small market? Huge markets are highly competitive.
4. The people question: do you have the right team? If the company is tackling a tech problem, it should mainly be run by engineers, not business people, and the other way around.
5. The distribution question: do you have a way to deliver your product?
6. The durability question: will your market position be defensible 10 and 20 years into the future? Are you the last mover in your market? Can other companies become better at what we want to do than us (China)?
7. The secret question: have you identified a unique opportunity that others don’t see?
Nail all seven, and your business will thrive.
The Myth of Social Entrepreneurship
There is the idea that companies have great power but are avid of profits.
Likewise, NGOs are after the good of society but have weak power.
In theory, social entrepreneurs want the best of both worlds. In practice, they often fail to do either.
There is ambiguity in the word “social”. Does it mean it is good for society, or seen as good by society?
In reality, progress isn’t held back by differences between corporate greed and nonprofit generosity. The problem is that both of them are exactly like their peers. NGOs push to resolve the same issues, and corporations all copy each other.
What is good for society is to do something different.
The best projects are overlooked, not cheered on.
The best problems to solve are the ones nobody else even tries to solve.
No sector will ever be so important that merely participating in it will be enough to build a great company. As such, don’t seek to enter “multi-billion dollars markets”.
Chapter 14: The Founder’s Paradox
Some people are extreme in certain things, but most people are in the middle. Plot everyone on earth in a graph and you’ll get a normal distribution.
In this graph, founders usually end up on both ends of the graph. When you plot their traits, you get an inverse normal distribution (a dip instead of a hill).
Where do these traits come from? It’s tough to say. However, founders often start off being a little different, and end up…even weirder at the end.
Take Richard Branson, Sean Parker, or even Lady Gaga. Are these people really how they are, or is it a stunt? Probably a bit of both.
Extreme founders are not new. Oedipus was extreme in his own way, Romulus as well.
History only remembered the most extreme of people, and seldom remembered average people.
The reason is that when society would be torn apart, society needed a scapegoat.
Like founders, scapegoats are extreme and contradictory. They are weak enough to be killed, but strong enough to be solely responsible for whatever miseries happened.
These are the roots of monarchy: every king is a living god, and every god, a murdered king.
About Founders
From Gates to Jobs, history teaches us that founders are important.
Not because they are the only ones whose work has value, but because they have the power to bring the best work out of everybody else.
The single greatest danger for founders is to become so certain of their own myths that they lose their minds.
But an equally high danger for every company is to lose all sense of myth and mistake disenchantment for wisdom.
Conclusion
No matter its trends, the future won’t happen on its own.
We cannot take for granted that the future will be better and that means we need to work to create it.
The essential first step is to think for yourself.
“Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both recreate it and preserve it for the future.”
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