2022 Annual Letter
It’s not usually a good idea to write a letter about multi-decade plans, because writing such things in advance locks you in; it prevents you from constructing a good post-hoc narrative when you’re looking back. So I’m going to borrow a trick from Howard Marks: I will write about something idempotent in business and in life, and then use it to hide the fact that most business narratives are post-hoc fabrications.
My topic this year is about getting lucky whilst working forwards towards indeterminate goals, at least in the context of business. This context is extremely specific. Let’s say that, for whatever reason, you’re one of the few unreasonable people who would like to run a sizeable, interesting business. How might you think about working towards your goals?
When framed like this, the implication is that you’ll want to take said goal and work backwards into a series of actions to take. We often consider working backwards the smart thing to do; it certainly makes for a good story. But for most people this is not what actually happens. Instead, what folk seem to do in their lives is that they look around at whatever resources, skills and interests they have, and then they work forwards into opportunities, often taking advantage of chance events that they encounter along the way. In other words, you do random things and get lucky, and then you make up your goals as you go along.
If you accept this premise, then the question in both business and in careers isn’t “how much does luck play a role in success?” Such debates are pointless, because the answer is always “a little bit of both.” Instead, the right question to ask is: “given that luck always plays a role, how should one think?”
When phrased like this, the answer becomes clearer, if a little flippant: “well, you have to get lucky”. You might think that this answer is not useful (“getting lucky is not a plan!”) But an acceptance of luck allows us to place some guardrails around planning for the future. Some of the implications of this frame are obvious. But not all of them are.
Let’s go through the obvious implications first, before working our way down to the less obvious ones.
The first implication is that you don’t want to blow up. Blowing up takes you out of the game; it means that you cannot get lucky. Blowing up in the context of entrepreneurship means a specific thing: you either run out of money or you tap out — that is, you become so psychologically compromised that you cannot continue in business.
Of the two, the dangers of tapping out are more pernicious. It is usually clear what you must do if you need money: you go get a job. Or you can sell your time for money by doing some consulting on the side. But tapping out is more dangerous, and harder to recover from. The costs of doing something that you do not like are less legible, and you can go surprisingly far by lying to yourself. I have seen people grind it out on a business they don’t particularly enjoy over the course of a decade, before finally throwing in the towel at the end. I’ve seen friends tank it in a venture-backed startup, only to flame out between three and seven years; I’ve seen peers get tied down with advancement games in their fancy corporate jobs and lose their desire to do something of their own. This is never a disaster, but it is not a great way to compound — at least not in entrepreneurship.
The second implication is not that obvious. If you want to get lucky, the limiting factor isn’t money but time. More specifically, it is the freedom to explore opportunities over a long period of life. The tricky thing about this is that money often buys time. But not all money does so equally.
The real issue is leverage — the time you pay to get the resources you need in order to buy the time to bet.
It is illustrative to discuss an ideal situation first, before we talk about the consequences of this idea. The ideal situation is that you come from wealth: if you, say, have a pot of capital that you may spend however you wish. In this situation you do not spend time to get money; you have money to use immediately. This allows you to buy a long stretch of your life to make your bets.
But let’s say that you don’t come from wealth, and you need some way to pay for you and yours whilst you place those bets. How might this go badly?
One way this can go badly is that you quit your job to start a company … only to find yourself stuck in a low leverage business. Let’s say that you start an outsourcing business. As far as businesses go, outsourcing businesses are ok. Assuming that you are not shit at hiring and are able to find customers, expansion is straightforward. Ditto for consulting businesses of other flavours. To an entrepreneur, this is good news. Revenue is easy; you don’t have to worry about product market fit. The only problem is that an outsourcing business is a terrible place to get lucky in.
Why is this the case? The key principle isn’t the type of business but rather the time demands the business places on you. A typical outsourcing or consulting business generates cash as a function of your time spent in the business. If your time is tied up, you cannot get lucky, for getting lucky requires you to run small experiments and leap on opportunities outside of the business over a period of years. “Oh, but what I’m going to do is I’m going to use the services business to fund my experiments and get lucky.” I hear you say. This is technically possible, but in practice it is very difficult. (I should know; I did it for my first boss). The real issue is that the cash generated by your outsourcing business rarely comes for free: the time and focus costs it places on you will tie you up for years on end.
There are many businesses that have similar time-to-cash demands. For instance:
- A cohort based course built around your individual brand depends on your continued involvement, with attendant time and focus costs.
- An events business built around your personal network depends on your continued role as rainmaker.
- A high touch advisory business depends on your personal expertise.
- And so on.
The really dangerous bit about these businesses is that they are so easy to start. Personality-based businesses and consulting agencies are the easiest businesses to make work at the start of one’s entrepreneurial journey. And, to be clear, if running a successful small-to-medium sized business is all you want, starting out with such a business is fine. The problem is if you want more than that; if your dreams consist of more … interesting business outcomes.
There is one major caveat to this observation, and perhaps you know what it is. Like me, you can probably think of exceptions: low leverage businesses where the founder is able to extricate themselves from day-to-day operations and are able to spend time on external opportunities. But those exceptions are exceptions because it is not easy to do this. I learnt this by watching my seniors, my betters, and some of my peers attempt to execute this very playbook whilst I was still in university. Every single one of them failed over the next 10 years. One got divorced in the process; that’s how hard he tried to get it to work. My overarching point is that certain businesses are inherently lower leverage, and demand a higher level of skill to remove yourself from them. You should be aware that certain businesses are bad in this way. If you do not have the skill to extricate yourself, and you want to get lucky, you probably should not start one.
This is easy to say, but hard to do. Oftentimes you don’t know you lack the skill until you fail to do so. The vast majority of SME entrepreneurs I know stay involved in their businesses — either willingly or otherwise — until they are kicked out or they burn out. It takes a special kind of operator to design a business that can thrive without them. Most operators I know are not that good.
The third implication is that you want your bets to compound. This phrase has become so overused recently that I want to be more specific with what I mean. In an entrepreneurial context, you want the bets that you take to become monotonically more interesting over the course of your life. To put this differently, the goal of winning is so that you can take significantly more interesting bets going forwards; at some point you want to move beyond starting companies to perhaps acquiring companies, or perhaps funding increasingly interesting projects with promising people, to perhaps experimenting with art or seeding charities or whatever it is that grabs you; in general such things are not available to people in their 20s.
This seems pretty easy to agree with, so let’s work out some concrete implications that you might disagree with.
One implication is that doing a venture backed startup with no base in place is often a bad idea. What do I mean by this? Well, consider the following assertion:
- Starting a venture backed startup is a no-lose proposition. If you fail, you can always go get a job.
Except that this is not true, at least not through the lens of these three principles. Yes, you can go get a job, but you can’t get (as) lucky in a job. If all you have is a job to fall back on, every startup failure forces you out of the game; every startup failure forces you into roles where you cannot make bets that are at least as interesting as the startup.
Now consider the alternative assertion:
- Starting a venture backed startup with a base is a no-lose proposition. If you lose, no loss. You have a base that doesn’t really change things. You can go back to making more bets.
This is a materially different position to be in.
Founding a venture-backed startup is great and nice, if you succeed — or if your startup gets to a point where there is a step change in the opportunities available to you. But what if you don’t get to that point? Most startup founders I know do not succeed. There’s a Steve Blank quote that I think about a lot that goes “you take on the business model of the money that funds you”. The nature of venture capital narrows the conditions in which a business is considered successful.
In truth, the vast majority of startups fail without materially changing the opportunities that are available to the founders; worse, said founders might have gotten better opportunities with lower risk if they had spent those years in a more conventional career. Because each startup is a three to 10 year bet, the average startup founder’s life looks more like a Hollywood starlet, except sadder: they tilt at windmills maybe four, five times in their lives, and then give up, tap out, and go work for someone else.
Ditto for the bootstrapped entrepreneur who starts a low leverage business. At the end of their time with the business, they discover that their business is unsellable, or sellable for only a low multiple. They cash in their chips, wait out the lockup period, and discover that their opportunity set isn’t materially better than when they were running the company. This, too, is not a bad outcome. But it’s not ideal; it’s not a recipe for compounding.
So far I’ve outlined three principles that I hold loosely in my head:
- You don’t want to blow up.
- You want to get to a point where you can make many bets over a long period of your life.
- You want your activities to allow you to take monotonically more interesting bets the older you get. Bets should build; you don’t want to make less interesting bets after cashing in your chips.
And you want to avoid the many pitfalls that I’ve described in the preceding paragraphs.
Why am I so negative? Where do these principles come from? What am I actually saying here?
I’ll deal with the last question first. This letter is really a counter-point to the typical founder narrative. That narrative goes: “start a venture backed company, work hard, become successful, and then the path dependence of your success will carry you forwards to ever more interesting outcomes over the course of your life.”
This is technically true; the path is possible. Yes, the journey is tough. And yes, you must give it your all when you’re in the thick of it — that I agree. But let’s be honest: this narrative is only true if you succeed. What if you do not? Look carefully at all those who have tried to pursue this narrative, and failed. Seek out those who are older, who have washed out of entrepreneurship. There are many of them. Some of them are happy — senior executives or staff engineers or VPs of product or marketing or sales at various companies. But some of them are not happy: perhaps they still harbour dreams of business ownership. (I know a few who are looking to buy businesses today, and more power to them.) Do you want to be like them? Will you accept your lot if you fail?
The answers to these questions are highly personal, and I cannot speak for you. It is ok to say ‘yes’; I am not being prescriptive here. But my answer is ‘no’. I’m not saying it won’t change, by the way. Life has a way of throwing curveballs; curveballs can change people. But my answer was ‘no’ when I was 24, and my answer is ‘no’ today.
There is a famous maxim, often attributed to Charlie Munger, that goes: “all I want to know is where I’m going to die so I’ll never go there”. A variant of this maxim that I took from Nassim Nicholas Taleb is “take care of the downside, and let the upside take care of itself.” I’ve internalised this idea so deeply that I sometimes forget that it is older than Munger and Taleb combined. I have looked at my elders and put myself in their shoes and I have concluded that I would not be happy where they are. Sometimes the best way to succeed is to avoid dying.
So now you know the origin of these ideas. These principles come from watching people around me fail. They are the product of inversion. These principles are derived from:
- Watching people start consulting businesses, yearn for something greater, and then shut down with little to show for it 10 years in.
- Watching people do multiple venture-backed startups over the course of their 20s and 30s, until the natural demands of life and love force them into risk-averse corporate jobs, unable to take bets for a few decades.
- Watching a tiny handful of people get lucky, cashing out of their first startup and parlaying that luck into interesting new opportunities for the rest of their career.
- Reading biographies of successful businesspeople who were skilful enough or lucky enough to climb some corporate ladder until they reached a point where they could take interesting bets, and paying special attention to the people they passed on the way to that interesting life.
Ultimately you won’t hear of this perspective as much, because the press is so incentivised to talk about successful people. VCs in particular seem inclined to talk about life as a series of high expected-value bets — which is great if it works out for you, and is great for the VC since they enjoy the upside opportunity for every bet you take, across a portfolio of many lives.
But you are not a VC, and your time is not as leverageable as their capital. You have just one life. Expected value is of little use to you if you lose. Your bets have unrecoverable time costs. The question is what you should do with this information?
The only good context-free answer, as far as I can tell, is that you want to get to a point where you can compound your luck. Concretely, this means a pool of capital or a stream of capital to give you the base you need to place your bets. Every successful businessperson gets lucky. The best ones seem to get to a base level of success first, from which they are able to make materially different, higher quality, higher return bets, over the course of three to four decades. Sometimes they get lucky in achieving that base level of success: they succeed in their very first venture, and do so early in life. But other times they simply build a life where they have the freedom to take many bets, and eventually one works out.
I’m starting to reach this point, I think. I’ve structured my life to be able to chase down interesting business questions. I’ve not fallen into the many traps that have snared so many of my peers. Like my old boss before me, and the small group of business mentors I admire, what’s left is to get lucky.
The issue that I have is that I’ve not pursued that many bets, and my base doesn’t buy me as much freedom as it could. I am writing this whilst recovering from a concussion during my four month Judo experiment. Both things should change once I’m done with this stint.
I may be damning myself by writing this, but this is, I think, the life that I want. Four decades of interesting, compounding bets. If my body and my circumstances allows me to, I think that’ll be fun.
6 January 2023