Do when doing is cheap. Stop when it’s expensive.
Last week Leo published a great article about Startup Cargo Cults. Here’s a snippet:
Last week Leo published a great article about Startup Cargo Cults. Here’s a snippet:
Our brains are wired to take examples of success and extract “lessons” from them, but these lessons often range between innocuously wrong and dangerously wrong…
The common thread in all of the examples below is not that these behaviors are always wrong. (They’re not.) It’s that these behaviors are often wrong because they’re blindly copied from others without critical examination. There are many great reasons to use MongoDB or hire 10x engineers or start a VC blog, but “because that’s what everyone else is doing” is not one of them.
He goes on to list specific Cargo Cult behaviors, such as investing time into content marketing, joining accelerators, raising VC, hiring expensive engineers, etc. You should read the whole thing, but my main summary takeaway is as follows:
Regardless of what type of work you do, you need to think very, very carefully about the activities that you spend your time on, and know exactly what they cost to you (taking into account opportunity costs — this is key), and what you’re getting out of them.
When it comes to the ratio of value to cost (incl. oppty cost): Do things when they’re cheap, and stop when they become expensive.
We have a company in the portfolio that did a tremendous job of growing initially by paying for downloads via ads on social media networks. Conventional startup wisdom says “if you have to pay for downloads, then your product isn’t compelling enough to go viral on its own”, but damn, homie, these downloads were cheap. A few thousand bucks a month of ad spend was yielding insane growth (and certainly there was plenty of organic growth happening at the same time). The company scrapped its way to a very significant userbase on an utterly pedestrian shoestring.
Well, what happened after doing this for a few years? They saturated their audience, and CPIs climbed steadily. Eventually the price crept to the point where it wasn’t blatantly obvious that this was a good use of company resources. What to do?
Smartly, the company turned off their ad spend and spent the next few months searching (successfully, it turns out) for whatever tactic was going to propel their next wave of growth. This sounds like the obvious move when the argument is laid out in paragraph form, but you’d be surprised at how many companies will continue pouring money into unprofitable behaviors because they are reluctant to slow down growth (and of course VCs encourage this behavior by obsessing over growth rates… or at least, they were doing this for most of 2014–2015). We often do things long past the point at which they’re no longer worth doing.
[This is what SaaS metrics like LTV / CAC are supposed to measure, by the way: The company’s ability to get yield on their spend. There’s two ways to improve yield — either increase LTV (via pricing power & retention) or lower CAC (marketing in ways that are progressively less expensive).]
One classic definition of “entrepreneur” is one who “[creates] value by moving resources out of less productive areas and into more productive ones”. In High Output Management, Andy Grove talks about how a manager’s job is to consistently increase “leverage”, which is another way of saying “improve yield per hour of your time”. Regardless of our professions, we should all strive to be such “entrepreneurs” and “managers”.
Interestingly, there’s a lot of advice floating around out there about how “A professional is someone who can do his best work when he doesn’t feel like it.” But I’m not so sure that’s right. Taleb (predictably) provides a counterpoint in Antifragile — He writes on days that he’s predisposed to do a lot of writing, and flâneurs on days that he doesn’t:
[My] mood, my sadness, my bouts of anxiety, are a second source of intelligence — perhaps even the first source. I get mellow and lose physical energy when it rains, become more meditative, and tend to write more and more slowly then, with the raindrops hitting the windows, what Verlaine called autumnal “sobs” (sanglots). Some days I enter poetic melancholic states, what the Portugese call saudade or the Turks hüzün (from the Arabic word sadness). Other days I am more aggressive, have more energy — and will write less, walk more, do other things, argue with researchers, answer emails, draw graphs on blackboards. Should I be turned into a vegetable or a happy imbecile?
I.E., he’s a professional writer who only writes when it’s inexpensive for him to write, based on his temperament. Similarly (and imitatively), I did not spend hours and hours writing this blog post — I waited for a time when I was poised to write it as inexpensively as possible. I’m writing this from an airplane with no WiFi, and I had already had a strong coffee in the airport before getting on the plane, so after reading Leo’s article I was sufficiently excited and caffeinated enough to bust this out in about 75 minutes. Given that it’s unlikely that more than a few thousand people will ever read this article, dedicating a day to edits, rewrites, soliciting feedback, etc. just doesn’t seem particularly smart. Even though I really want you to think I’m a genius, and I could easily spend a week polishing this post until it’s perfect, I need to be mindful about the opportunity costs of spending time on this piece and how they compare to the expected benefits (knowing what I know about the expected returns from posting an article on Medium). Paul Graham can afford to spend 40 hours fine-tuning an essay — whereas I cannot — because his yield is stratospheric compared to mine.
Crucially, we are often bad at tabulating the total costs we bear in our activities. Leo talks about how content marketing & social media are often “default” activities for companies and investors, even though the returns from that effort are often murky (or dreadful). I’ve personally seen plenty of companies who invest thousands and thousands of dollars in “content marketing” because it’s “what companies are supposed to be doing” (this is a great tipoff that the speaker is participating in a Cargo Cult). Later, once they partake in some belt-tightening and slash their content marketing budgets, nothing bad happens at all. How much money are companies spending on marketing resources (and people) that are returning a fraction of the value of that spend back to the company?
Even “free” social media marketing is not free. Let’s say you’re a CEO who occasionally drums up new business by posting about your product on Twitter and commenting on others’ tweets. How much time do you spend doing that each week? Are you including the 30 minutes you spend engrossed in your feed after you sent your tweet? Keeping in mind that Twitter employs hundreds of people whose entire job is using various psychological tricks (incessant dopamine squirts from a never-ending feed) to keep you there for far longer than you probably want to be. One way to make tweet-marketing less expensive would be to have the policy of I only go on Twitter to post about the product when I have something in particular that I want to say… and once the tweet is composed, I send it and then immediately sign off of Twitter. That would be helpful. But even with such a policy, is that time well-spent? Are you tracking the yield, or just guessing? Just because an action sometimes leads to a benefit, it doesn’t always follow that this action is a smart thing for you to be doing. One time I went on a great date with a woman I met because we sat next to each other on an airplane. This doesn’t imply that flying on planes every day is a sound strategy for finding a girlfriend.
As entrepreneurs, or investors, or business professionals, or human beings, we need to always be on the lookout for actions that are uniquely inexpensive for us at a given point in time. Recent examples of this in the tech world:
Slack raising additional funds at a crazy high valuation even though they didn’t necessarily have specific plans for that money (effectively saying if you’re going to give me such great terms, I’m going to take it).
Microsoft buying LinkedIn only after its price plummeted.
The large amount of acqui-hire M&A that’s been happening lately for cash-burning companies whose funding has dried up (and acquirers taking their time with the acquisitions because they know that the target companies’ situation becomes more precarious with time).
Increased hiring of cheap overseas startup talent on a contract basis via outsourcing platforms like Upwork.
Aspiring software developers opting for boot camps or self-education rather than expensive 4-year CS degree programs.
Startups moving away from the Bay Area in response to outrageous prices for labor and rent.
Accordingly, we should be on the lookout for behaviors where we are irrationally “price inelastic”. Meaning that we participate in activities or buy products without consideration to the costs. Whenever a market is price inelastic — whenever the market is behaving like a Cargo Cult — there are people out there trying to screw you. College tuition rises 9% per year because colleges know that people will keep paying long after the yield from that spend & time has turned negative. Ambulance rides cost thousands of dollars because the buyers of those services are rarely in a position to negotiate. Content marketing consultants charge fortunes for (frequently) ineffective services because companies feel compelled to have a “content strategy”. Lawyers charge $40,000 to create boilerplate financing contracts because there’s no way to avoid paying for their services (for now). We use Facebook, Twitter, Instagram, Snapchat and so on because we feel that we cannot afford to be left out — no matter how marginal the return on our time. Religions have sold various shades of indulgence products because avoiding eternal damnation is priceless. These activities are often “expensive” and thus deserve much, much more scrutiny than we normally grant them.
Let us all be “entrepreneurs”, in the classic sense — those who do when doing is cheap.
I’m a venture investor at Toba Capital who specializes in B2B SaaS companies. Get more from me on Twitter at pmmathieson.