Read on Twitter
1/25: I’ve been told that some of the simple concepts I routinely share with Founders get adopted by their firms as “truths” (which is flattering). I was asked to outline a few of them in Tweet form. Unpacked:
2/25: One of my favorites is a concept called “0.8 to the 5th”. It’s an acknowledgment that contingent probabilities suck. If a business plan has many “ands” joining process steps to create outcomes then its stuck in the world of contingent probabilities.
3/25: Most businesses are complex with strings of three, four, and sometimes five or more dependencies linked together. The best Operator in the world only has in the ballpark of an 80% chance of hitting an aggressive goal if it’s one of many complex priorities on his/her plate.
4/25: While 80% sounds pretty good, when all of the goals are contingent on each other the chances of achieving the desired outcome are very low. The implications of 0.8 to the 5th are stunning and intimidating.
5/25: Having less than a 1 in 3 chance of hitting plan is not a fun statistic to stare at, and this is what one should expect from a World Class Operator. Average Operators don’t have a chance in this type of environment.
6/25: Reducing the chain of contingencies is a lot of what I help Founders think through. Investing in things that remove contingencies might look expensive but are usually cheap in retrospect. 0.8 to the 4th is a heck of a lot better than 0.8 to the 5th.
7/25: And what’s nice is that by reducing the number of battlefronts a management team is fighting on they should be able to increase the probability of accomplishing their other goals. So 0.8 to the 5th becomes 0.85 to the 4th becomes 0.9 to the 3rd, etc.
8/25: Eventually the business has a fighting chance of success, especially if everyone in the system has a maniacal focus on reducing contingencies and delivering on the tasks at hand. Detailed blog post with examples: http://fintechjunkie.com/2015/05/01/the-tyranny-of-0-5-to-the-5th/
9/25: Another favorite is the concept: “You can’t accelerate time.” The unfortunate truth is that most complex businesses can’t be cracked overnight and this is especially true if they require today’s investments to result in a stream of results that trickle in over time.
10/25: The return profile of money invested in originating customers today might take months, quarters, or even years to understand. Everyone likes to show quick progress but the cadence of growing certain types of businesses doesn’t always fit this profile.
11/25: If a business’s financial model suggests that the economics at month 12 or month 24 post-customer-acquisition matters, then the business needs to gather data over 12 or 24 months to gain confidence in its projections.
12/25: For some products there are ways of analyzing early performance results as a method for gaining comfort with future performance estimates, but many times these estimates are inherently flawed. And for the most complex products there is no substitute for real data.
13/25: You Can’t Accelerate Time. Full Stop. Moving quickly can work if the business is fungible and customers are understanding. Growing a business that requires making irreversible decisions before performance is well understood is equivalent to gambling with investor money.
14/25: To Founders - Before you become a steward of Investors’ money make sure you and your investors understand what the business will have learned before the money runs out.
15/25: If it isn’t enough, adjust the model accordingly or raise enough money to prove out the next series of critical assumptions. If you can’t do either then you’re likely dead before you start so don’t start.
16/25: To Investors - Before you invest in a complex, annuity oriented business, identify the critical assumptions that need to be proved out before the business is at “the next stage” and ask the Founder to pull together a plan that proves out these assumptions.
17/25: If you’re willing to fund this plan, great. If not, ask for the plan to be refined. But, you should avoid funding a business to get part-way to the next stage without expecting to write the next check yourself.
18/25: It’s better to just move on because a half-funded business will typically struggle. Tick tock, respect the clock! Detailed blog post: http://fintechjunkie.com/2016/07/18/you-cant-accelerate-time/
19/25: The next concept requires us to step back in history for a moment to the “Age of Sail”, a time in the 16th and 17th centuries when naval battles progressed from “grapple and board” combat tactics to battles resolved by “floating artillery.”
20/25: The most advanced weapon of the time was the cannon and for 200 years investments were made in its design and use. Why? If one ship had cannons that fired a small percent farther than those of another, it should win ONE HUNDRED PERCENT of the battles between them.
21/25: Minor improvements led to devastating advantage and justified investment in improvement. Many products and services behave in the same way. This is very true in financial services businesses for reasons that become apparent when the drivers of success are picked apart.
22/25: In lending businesses in particular, very small advantages can literally suck the oxygen out of a market and create havoc for the competitive landscape. Why? Because we live in a world of near perfect information and good customers generally make rational choices
23/25: While there are times that customers make choices based on “less quantifiable reasons”, it’s always good to ask and answer the question “If a rational consumer we’re faced with perfect information, would they choose your product?”
24/25: I ask this question all the time and use it to know when a company has a “reason to exist” when viewed from their target customers’ standpoint. Full blog post with examples: http://fintechjunkie.com/2015/04/07/let-the-confessions-begin/
25/25: Lots more at http://www.fintechjunkie.com . Happy to summarize other generic concepts if requested! And remember that retweeting is the best encouragement that you can give!
