In 2025 we ran our first cohort-based course, titled Speedrunning the Idea Maze (StIM). It was our very first live course, and it was designed to test two hypotheses — or at least, two that I’m comfortable sharing in public.

The first hypothesis was that we could amortise the cost of case production across a higher-priced product. One may charge higher prices for live courses, first because the experience is perceived as more valuable, and second because more can be done with the medium (it is difficult to transform students through writing alone; it is more possible if you’re designing a series of live exercises with feedback). We were already paying the costs of case production anyway, so what happens if we can repackage it where it brings in more revenue — that also results in more value for our customers?

The second hypothesis was that we could accelerate our participants’s understanding of the idea maze, by compressing decades of experience into a few hours. The basis of this belief, and what we learnt executing it I have covered elsewhere.

What I want to talk about today is one very specific thing that we covered whilst executing the second cohort of this course — recently concluded as of 13th February 2026. I want to talk about the reaction our students had to one idea, and then use that as a jumping off point to talk about the idea in business more generally.

First, a quick summary of the primary concept of the course.

StIM’s core concept is Effectuation — that is, the observation, originally published in 2001 by academic Dr Saras Sarasvathy, that all expert entrepreneurs think in the exact same way. In StIM, our central challenge was to get students to see effectuation in the wild and in their own lives. In parallel, we got students to think effectually in response to hypothetical scenarios.

Our end goal was to change the way they saw things. Successfully changing perception changes behaviour: if you are able to think effectually you will see a range of possible actions you’d never consider. As a result you will act more entrepreneurially.

The word ‘effectuation’ comes from ‘effect’ in ‘cause and effect’. The easiest way I know to describe the idea is to talk about two approaches to cooking for a dinner party:

1. In scenario one you are holding a pizza party for a group of five friends. You plan out your menu, figure out what it takes to make enough pizzas for your friends, and then you go to the supermarket to buy those ingredients and prep dough and toppings. Sarasvathy calls this causal thinking — you are setting a goal, working backwards into a plan, and then executing that plan.
2. In scenario two you are holding a dinner party, and you don’t really know what you’re going to make. You open your fridge to figure out what ingredients you have. Based on those ingredients, you improvise your way to a dinner menu. This is effectual thinking — the endpoint is indeterminate and you are working based on what you currently have (and also what you can easily create).

The point that Sarasvathy makes isn’t that one style of thinking is better than the other — entrepreneurs do a mix of both — it is simply that when starting a new venture, entrepreneurs think more effectually than causally. In fact, the set of actions that you do as a result of effectual thinking is what lay observers would call “acting entrepreneurially”. They are materially different from the kind of causal thinking you would observe in more corporate environments.

The actual process of effectuation in entrepreneurship proceeds as follows: all good entrepreneurs start out from 1) who they are, 2) what they know, 3) whom they know and 4) what they have, and effectuate forwards into the unknown, in search of some customer demand they can serve … in a configuration that is acceptable to them.

As they do so, they follow the following three principles:

1. They take many affordable loss bets, using each bet to generate new information.
2. They have an uncanny ability to turn stakeholders into partners. (Partners here are defined as parties who have a vested interest in their success). Most typically these are their customers, but many entrepreneurs are also able to create situations where their investors, suppliers and even landlords have a stake in them and want them to succeed.
3. They are ok with many of the outcomes they are able to effect. So for instance they are comfortable iterating forwards and going “Oh, I guess the only viable business configuration for this problem is a consultancy. Alright then!” And instead of looking at it as a dead end, they tend to treat it as a means to build more resources from which to effectuate forwards from, in the near future. (Or maybe not, they may also just choose to give up and try again).

You see how this might show up in actual stories of entrepreneurship. In business school, new venture creation is often taught through the logical method of figuring out a market to sell to, picking a product to make, coming up with a market positioning, calculating the total addressable market for that positioning, thinking about potential competitive advantages, and then raising funding to attack the identified opportunity. This is causal thinking in action, and it is what the academy does best. Of course you’ll want to work backwards from some set of goals. Of course you’ll want to create a business plan. And of course what is taught bears no resemblance to how entrepreneurship is done in the real world.

In practice, entrepreneurial stories tend to be random and highly path-dependent. Less “we planned this” and more “We got our start making engines at old Otto’s gas-engine works over in Cologne, and then Gottlieb thought he’d like to make one small enough to bolt onto a horse carriage and he went off and did exactly that, and then we thought, ‘hmm, what if we got into making proper motor cars?’ And before we knew it we were selling cars and folks really seemed to like them! Then we expanded to France because this Austrian fellow Jellinek over in Nice wanted to race our cars on the Riviera and asked us to name them after his daughter Mercedes, and it seemed so easy to just set up a sales office …”

(Yes, that is the actual origin story of Mercedes Benz).

Some interesting things fall out of this framework, once you sit and think about it for a bit. In StIM, we pointed out that one consequence of effectual thinking is illegibility. That is: since you’re improvising in response to demand, settling only for configurations that are acceptable to your unique requirements, you’ll often find yourself in weird situations where things are working but you have no idea how to describe what you do. Mercedes Benz is a coherent car company today, but it was an oddball operation during its early years. In many cases the entrepreneurs themselves don’t know why what they’re doing works, only that it seems to. Figuring out the ‘why’ can lead to growth, but this initial insight may remain under-publicised for many years. Over time, though, success leads to attention, which leads to analysis, which ultimately leads to more legible explanations. But it is the success that leads to legibility, not the other way around. In other words, when you are effectuating, the odds are pretty good that you’ll end up in a highly illegible place. You should expect to have great difficulty explaining what it is you do to your friends and family.

When we presented this idea to our cohort, folks started nodding their heads. “I feel this so much,” one student said. Another student, who was more experienced with entrepreneurship, said: “I’ve been illegible my whole life. In my current venture our partners want me to make it legible right now, but I feel like that’s entirely the wrong move.”

In class, we pointed out that novice entrepreneurs tend to go after legible things too early. They often sought legibility before they were sure that the business they had built actually worked. Why do they do this? We posited that they did this because they cared about identity, and that they cared about what others thought of them. In my experience, such entrepreneurs want to be able to tell their friends and family “we make AI-powered contract software for lawyers.” They want to go on conference panels and be addressed as “John Doe, CEO of ABC Corp, the enterprise platform for AI-powered customer support AI agents.”

But this is a mistake. Good businesspeople are perfectly willing to sacrifice legibility in the search of a unique configuration that works for them. One thing that I like to tell folks is that the late great Charlie Munger was completely illegible for a period between his 30s and 40s. From Damn Right, journalist Janet Lowe’s biography of the man (all bold emphasis mine):

While Munger was going through this period of enormous change, expansion, and development, his family sometimes were in a quandary when they tried to describe what Charlie did for a living. Molly Munger had trouble explaining her father to her friend Alice Ballard, a Philadelphia blue-blood and debutante. Alice had scored 800 on the verbal portion of the SAT and like Molly, attended Harvard Law School. To a California girl, Alice seemed worth impressing, but Charlie was of no help.

“My college roommate’s father was a partner in an old-line Philadelphia firm. She was descended from William Penn. Charlie called on Fred Ballard (Alice’s father), who later said, ‘I have no idea who [Munger] is from what he said of himself. He could be working for the CIA.’ Daddy made no coherent explanation of himself. He had this ratty little office in the stock exchange. What did he do — working in a ratty little office? And a fledgling law firm … he bought odd companies like K&W — the automotive chemicals company.” Nevertheless, Molly’s faith in her father was unshaken. “It didn’t matter to me. It seemed like, ‘You just don’t know him. If you don’t know it now, you’ll know it later. He’s fabulous.’”

At the point of his death, Munger was known (and widely celebrated) as a legendary investor, the vice chairman of Berkshire Hathaway, and the right hand man of Warren Buffett. But that was much later. In their 30s through their 40s, Buffett and Munger were highly illegible. Their business dealings were so odd, in fact, that the SEC opened an investigation into their cross-holdings in 1974. This forced the pair to consolidate their activities under Berkshire Hathaway, and to take up the role of Chairman and Vice Chairman respectively. Oddly enough this move made them more legible; this legibility persisted to the end of their careers.

I want to pause here and draw your attention to what it must’ve felt like. In the 1970s, Munger was a) running an investment partnership, b) had started a law firm with his old colleagues, c) was wrapping up the last of his real estate development projects in LA, and was d) doing random business takeovers with one Rick Guerin and a folksy 30-something oddball named Warren, based out of Omaha. I want you to put yourself in Munger’s shoes. If someone asked you what you were doing during this period … what would you say?

A more contemporary example might also help. I still remember when TikTok burst on the scene in the late 2010s. I remember feeling confused. My frame of reference was Facebook, Twitter and Instagram: social networks, where you had to ‘friend’ or subscribe to see a person’s posts in one’s feed. I thought that TikTok would also be a social network, but everything about the app felt off. Subscribing to folks didn’t seem to make much of a difference to the content one saw; there was no feed, not as I understood it. And it was clear that it was very, very addictive. It was much later that I (and collectively, the entire tech industry, probably) understood that TikTok was some other, more interesting thing.

TikTok was created by ByteDance, and ByteDance founder Zhang Yiming is a pretty good example of what we’re talking about. ByteDance started out making throwaway apps. They saw themselves as a machine learning company, not a specific app company. Their first success was Toutiao — a news app, powered by a recommendations engine they then spent years perfecting. This same technology was later applied to short videos. Zhang wasn’t thinking about existing app categories when he created TikTok. He was a good businessperson. He cared only for what worked; he let the categorisations come later. Today, of course, TikTok is legible. We understand better the strengths and weaknesses of its model. But it was illegible for a long time, and often misunderstood. Zhang Yiming didn’t care.

An Advantage

In business, illegibility is often an advantage. In last year’s letter, I wrote that the ‘biggest problem in business’ is competitive arbitrage: you make something good, then people notice, then they copy you and cut their prices, then others copy them and cut their prices, and then everyone in the category spirals downwards in price competition until margins bottom out at the opportunity cost of capital.

Illegibility is often a good first defence against this. Nobody can copy you if they don’t understand what you’re doing. This is not new; the venture investor Jerry Neumann is known for saying that “uncertainty is every startup’s first moat.” Without uncertainty, large enterprises will instantly spot the full consequences of a new business, and will act to crush startups at infancy. (We are seeing this at play out in the current AI moment, for instance.)

Uncertainty isn’t exactly the same thing as illegibility, though both are related. Uncertain things are illegible, but not every illegible thing is uncertain. Illegibility may come from many other sources. It may come from doing an old thing in a new way. It may also come from perceived incoherency — that is, multiple things that may make sense that do not appear to make sense when put together. (I write perceived incoherency because it is important to have actual coherency — otherwise it is not likely that what you’re doing actually works).

I don’t want to overstate this and say that illegibility is something to aim for. It’s more accurate to think of illegibility as the most common side effect of a good process. To understand why, it’s instructive to invert the question: what is legibility, really? Legibility occurs when what you are doing fits into one of a few known forms in the heads of others. Those forms exist because they are well-worn, and therefore well understood. A doctor is legible, as is an M&A lawyer. On the other hand, a 40 year old who invests in equities through an investment partnership, owns control investments in multiple holding companies, issues warrants from some of those companies, acts as a founding partner in a law firm and does real estate developments on the side is a shape that fits no known form.

So on one hand you have legible forms. On the other hand you have unique individuals. As a unique individual, it is highly unlikely that everything that you want in your life fits a known form. If you wish to find a unique configuration that fits the contours of all you want, it’s highly likely that you’ll have to break the straitjacket of your chosen form. This leads to some illegibility.

(The alternative, of course, is to change your preferences, to fold down your dreams and to set them aside).

But ultimately, fitting what you do to what you want leads to relatively mild illegibility. The strong form of illegibility — the thing that causes the organisations you build to be truly weird, is when you have a willingness to break known forms in the pursuit of what works. A business mentor and I were talking about this in passing last year. His quip was simply “if it works, it likely doesn’t make sense to the average outsider.” This applies broadly.

In fact, “does it work for your chosen goals?” is a good test for whether the illegibility you’re looking at is the result of a good process. Some folks are illegible because they lead fundamentally incoherent lives — what they are doing does not get them closer to what they actually want. Such illegibility is not the outcome of a good process.

To put this a final way: if your goal is to do what works, it is almost guaranteed that there is no clean label for what you eventually figure out. The high order bit is that it works and it fits your goals, not that you can put a name to it.

As with many such things, this is a tradeoff. But I think it’s worth it.

Cedric Chin
27 April 2026

There are two ways to build a large business. The first way is to build a valuable company in a massive market. This path is fairly well known: you must build something people want, your company must be protected against competitive arbitrage (it has a ‘moat’); typically there has to be an opening in the environment to enable the company to grow. This opening may look like any number of things: it may look like a new, overlooked market that eventually becomes big, or a change in consumer preferences, or a new technology that didn’t exist before. If markets are static and no change exists, there should not be any opportunity for a new company to grow large — incumbents will crush it. Finding the right opening demands some amount of luck, something I’ve written about elsewhere.

The second way is to build a conglomerate.

I am using the term ‘conglomerate’ loosely here. Some folks prefer ‘platform company’ or ‘rollup’ to describe specific instantiations of the conglomerate model. This distinction is not important to our discussion. Defined loosely, we’ll use ‘conglomerate’ to mean any set of businesses that are held in a structure where the capital in one business may be reallocated and used in any of the other businesses, due to central control. Berkshire Hathaway is a conglomerate, as is LVMH, and Koch Industries, and Samsung, and the Graham Holdings Company, and City Developments Limited, and Reliance Industries and so on.

If you compare these two paths:

1. The way that an individual business gets large is that it must pick the right opening, in a large market, at the right time, and then build a moat to fend off competitors.
2. The way that a conglomerate gets large is that it successfully acquires (or starts) multiple valuable businesses over a long period of time.

Many people talk about the first path. Fewer people talk about the second. It is my intention to discuss the second path in this letter; it is the path that most Asian tycoons follow when building their empires. It is the path I am most interested in following. It is the path that Postcognito is on.

If you study conglomerates for long enough, you eventually bump into three big ideas.

1. First, that conglomerates are good for owners-operators, even if they are often regarded as bad for minority investors.
2. Second, that moats at the individual business level are important.
3. Third, that moats at the conglomerate level are important.

We shall go through these points briefly, before getting to our core point.

Conglomerates Are Good for Owner-Operators

Conglomerates are seen as bad for minority investors because of the conglomerate discount. This is the phenomenon where markets value a group of unrelated businesses as less than the sum of its parts. The discount typically occurs due to a belief that the conglomerate will not be able to run the businesses as well as a focused company would; also, that most serial acquirers lack the ability to generate a positive return from their acquisitions. This is broadly true.

The discount is valid if you are a public markets investor in the West, and much of the writing on the conglomerate discount is from the perspective of such an investor. But if you are an owner operator, the discount is not as important. In exchange for a valuation haircut in certain public markets, you gain the advantage of increased business resilience. This is not a small thing! Conglomerates offer clear advantages to the businessperson: if you own a collection of businesses, you are diversified. Your business fate is no longer dependent on the secular destiny of any one particular industry or location; you are spread across many geographies and markets.

This is especially valuable once you understand that even the strongest businesses with the largest moats may fall on hard times. For multiple decades, the newspaper business was seen as having this impregnable fortress of a business model. But then the unimaginable happened. When the Washington Post declined as the result of Internet disruption, Donald Graham, heir to the Post family and son of renowned WaPo publisher Katharine Graham, gritted his teeth and sold the newspaper to Jeff Bezos of Amazon. Fortunately, in the final decade of Katharine’s tenure as leader of the WaPo, she had turned the company into a conglomerate — harvesting its considerable cash flow for disciplined acquisition of other businesses. Donald kept the rest of the companies that made up the original Washington Post Company, and renamed it the Graham Holdings Company. This body of collected businesses continue to do exceedingly well without its flagship paper.

Of course, there is much to say about conglomerate structure. It is possible to be a badly-run conglomerate; in fact there is a rich set of histories — if you know where to look — of horribly-run conglomerates from the 1960s and earlier. The best performing conglomerates today are almost always decentralised, with much redundancy in the organisation, and loose (but disciplined) control from headquarters. The vast majority of bad conglomerates — tracing all the way back to the aforementioned US conglomerate boom of the 60s — stem from bad control structures and sloppy incentive design. A serious study of good (and bad) conglomerate structures, along with the incentive design of such structures, is left as an exercise for the alert reader.

(I should note that even the notion of what ‘good’ looks like is worth discussing, since conglomerate structures in the East differ from the West. Perhaps this will be the topic of a future letter.)

Moats at the Individual Company Level Matter

The second big idea is simple: conglomerates grow either by buying other companies, or by starting new businesses of their own. In either case, they should own good businesses.

What is a good business? The technical answer is that good businesses should generate a return above every dollar of invested capital over the long term. What you are doing when you buy (or build) a new company is that you are acquiring a stream of future cash flows. To generate these cash flows, you have to put money into the business, on top of whatever you paid to buy or create it. To justify this investment, the business’s future cash flows should either grow over time, or at least not diminish. You don’t want to invest in an asset whose cash flows only diminish over time.

How do such cash flows shrink? The answer is the central problem of business. The name that I like to use for this is ‘competitive arbitrage’: you discover a lucrative opportunity, make a lot of money, and then everyone sees that you’re making a lot of money and copies you but with cheaper prices. This repeats as other people copy them, until everyone’s profits are destroyed and returns in the entire sector are ‘competed down to the opportunity cost of capital’ — that is, until no investor is willing to put money into such businesses.

The tricky thing about competitive arbitrage is that it can take a long time to play out. If you opportunistically chase business opportunities only according to how lucrative they are, not how protected they are, you will find yourself subject to such competitive forces, perhaps over the course of decades. This means you can waste a significant portion of your life. It is therefore important to study instances where the process is accelerated, in order to avoid it. To cite one recent example, I found it interesting to study the phenomenon where direct-to-consumer e-commerce rollups have failed. The majority of D2C brands have no moat, and therefore no defence against competitive arbitrage. Attempts to collect such businesses on leverage, so shiny for a brief moment, have resulted in terrible outcomes for the investors involved.

Good businesses are businesses that find some way to resist competitive arbtirage. When they do so, they are said to have a ‘moat’. It’s clear that having a moat at the individual business level is important — as a conglomerator, you don’t want to buy assets that become less valuable over time.

Moats at the Conglomerate Level Matter

Moats also matter at the conglomerate level. A conglomerate competes in a market of acquirers for the businesses it wants to buy (or build). For a conglomerate to become large, it, too, must have an advantage against its competitors in the same way that its individual businesses must be able to defend against their competitors.

It is instructive to study what the great conglomerates have as their moats. In some cases, such as with Samsung and with many other Asian conglomerates, the competitive advantage is the controlling family’s close ties with a country’s political power structure.

But let’s take Berkshire Hathaway as an example. The core advantage that Berkshire had in its intermediate years was access to insurance float. In other words, Buffett had access to capital at a cost far lower than any other acquirer on the market; the ‘interest rate’ of internal float was lower than the cost of borrowing capital from external sources.

If this insight is well known — which it is — why has the advantage persisted? The answer is simple: it is extremely difficult to run an insurance company in the way that Buffett has done; most insurance companies are not run for the benefit of float. In some ways, the history of Berkshire Hathaway may be read as the discovery of this insight (Buffett, in the words of Charlie Munger to his friend Rick Guerin in 1963, “knew more about float than anyone” years before he even bought into Berkshire), followed by a few years of experimenting with float in banks vs in insurance companies, followed by a decade of missteps in insurance whilst getting the strategy to work, followed by the discovery of Ajit Jain through an executive search firm in 1986, followed by two beautiful decades of having gotten the strategy to work and reaping its benefits.

There are not many Ajit Jains in the world. Nor are there many insurance companies that are run in the way that Berkshire runs theirs. For instance, Buffett has pointed out that there are periods in super-cat insurance where underwriting new policies is simply unprofitable, and therefore the solution is to have everyone ‘play golf for a few years’. This is only possible if employees have no fear of losing their jobs during this period. This is a structural advantage. No other insurance company can do as the Berkshire insurance companies do, because they are not owned by Berkshire.

In the terminology of 7 Powers, Ajit Jain is a Cornered Resource, and the structural advantage is a form of Counter-Positioning. Together, these advantages — in addition to a handful of others I have elided for the sake of brevity — have protected Berkshire’s growth and made the conglomerate more successful than its creators have thought possible.

Contrast this story with another successful conglomerate, Constellation Software. Constellation’s key insight, starting in 1995, was that businesses that provided mission-critical software to specific industries were excellent businesses to buy. Sure, many of these businesses could not grow as much, since they had maxed out in whatever small markets they were in. But the capital demands of the software business are negligible; their markets are small enough that no large competitor would think to enter; many of these businesses completely dominate their niches, and — most importantly — these companies made software that could never, ever, be ripped out of their customers. (We are talking about the software that runs nuclear power plants, or metro systems, or dental offices.) You could say that the cash flows of these special types of software businesses were better and stronger and more guaranteed than first lien debt.

Constellation took this insight and built a large conglomerate around it. They bought these high quality businesses, harvested their cash flows, and then used that cash flow to buy more such businesses, and on and on in an ever compounding loop. The conglomerate went public in 2006, and then proceeded to compound at an average rate of 34% a year for the next 17 years.

But unlike Berkshire, Constellation had no moat at the conglomerate level. And so Mark Leonard, its founder, eventually stopped writing annual letters for fear of copycats, and began to say in their annual shareholder meetings: “the only thing you need to get started in this (software conglomerate) business is a phone and a cheque book.” CSI has been struggling to keep up its rate of growth in recent years. There is now a name for the software businesses that they buy: “vertical market software” — which is a sure sign that Leonard’s original insight is now fully legible; private equity has become a huge player for such companies. Needless to say, there is a lot of competition in the space.

But: for a glorious period, Constellation had the field almost entirely to themselves. They grew large on that wonderful run.

The Game

What is the shape of the game of conglomeration? The game goes something like this:

1. You find, raise, or build an initial pot of capital.
2. You use it to acquire businesses that are protected, with moats.
3. You harvest cash from the businesses that you own to purchase more companies.
4. Rinse and repeat.

There are variations on this form but this is the basic shape. You will find many people who will tell you that they want to build a ‘holdco’, and many of them will cite this basic formula.

But actually this is a lie. If this were the basic shape, everyone would be able to play this game and build large companies. This is clearly not the case; your average holdco of small companies do not ever become very large. No, the real game is this:

1. You find, raise, or build an initial pot of capital.
2. You acquire long duration, cash generative assets that are overlooked. It isn’t enough to acquire businesses — anyone can do that. What you need to do is to find a secret — something that throws off cash over a suitably long time horizon that is illegible (or mispriced) by other acquirers. It is no accident that Buffett was obsessed with float through the 60s, and then took a full decade to figure out how to use it; Constellation wouldn’t nearly be as successful if Leonard did not have his observation about vertical market software companies in the 90s (when most investors did not understand the dynamics of the software business).
3. You exploit that initial period of misunderstanding to grow. And then hopefully you build a moat at the conglomerate level.
4. You end up with a big business.

A logical conclusion here is that it is not intelligent to talk about the secret. If you’ve found one, you should move quietly as you grow, whilst looking for ways to build a conglomerate-level moat. Such a moat is not always possible.

But perhaps that is not necessary: by the time others have found out, you’d have built a large business already. The lack of a conglomerate-level moat is only a problem for your ability to acquire new businesses. The quality of each individual business in your portfolio is what determines if your conglomerate can die.

And this is why the conglomerate model is so powerful. It is very hard to kill a business that is constructed of many different long-duration, moat-protected assets. Conglomerates tend to last for a long time because they are diversified; they tend to protect generational wealth for the folks involved.

Which is why the game is worth playing in the first place.

Cedric Chin
26 January 2025

There’s a particular type of joy that comes from running companies that you fully control, and this year, I got a taste of what that felt like.

The joy comes from the following things:

1. You get to pick who you work with. If you are wise, you will pick only those who are competent, who have excellent character, and who you enjoy associating with.
2. More importantly, you can cut out from your life people who you do not want to associate with. This reads like an unalloyed good, but it really isn’t: there are tradeoffs. About which, more in a bit.
3. Given the above two things, you can go into the world together and prove that certain ideas you’ve noticed actually works. And since this is business that we’re talking about, you can do this in a way that makes everyone wealthy.

In exchange for these properties, you make the following tradeoffs:

• You give up on opportunities — potentially very lucrative opportunities — that involve people you do not want to associate with.
• You maintain control of some kind of holding structure that enables such work — which in turn means that you don’t ever put yourself in a situation where you give up control. (Think about what you’re giving up here).
• You accept that this is the main thing you do for decades. (Think, also, what you’re giving up here).

The implications of these tradeoffs are pretty far reaching. For starters, there are few cooperative structures that allow for such a life. Since you do not share in the spoils with uninvited external parties, it’s almost guaranteed that you would need to do some plotting to set things up. This typically means being smart about capital structure.

But what rewards you do reap if you get there.

Of the three properties, the one that I find the most interesting is the third one, on experimenting with business. Over the past year, I’ve had the privilege of testing a few interesting business ideas against reality, alongside a team that I like and respect. I hope to share the spoils of such experimentation with my team when they emerge — which they should, some as early as next year. But even as is, I think there’s something pretty remarkable about a commercial enterprise built around harvesting the fruits of business curiosity.

I don’t want to make it seem like this is something I’ve figured out on my own. There’s a wonderful interview between John Collison and Charlie Munger that was recorded a few months before Munger’s passing late this year. At some point Collison asks about Munger’s decades-long working relationship with Buffett. He replies:

Charlie: [01:04:21] You’re very lucky to have a good life partner. Yes, I’m sure you’re also very skillful and talented, but it’s a blessing to do it with a good partner than to be all alone doing it. And of course it’s better. Of course it’s a blessing. Warren and I have not just succeeded in making money or something.

We have had a lot of fun, actual fun. We enjoy doing what we’ve done, mostly. We’re associated with a perfectly marvelous group of human beings. It’s almost unfair. The people with Warren and I associate with all day long are such high-grade people. Of course it is a pleasure to associate with high-grade people all day long. Talented people, too.

John: [01:05:02] When you’re saying it’s fun for you and Warren together, just the relationship is fun outside of the results. What does that look like? Is it staying up late watching funny YouTube videos? Is it…

Charlie: [01:05:09] No, no, no. We get fun doing, doing and understanding. We both like learning something new, preferably something useful that’s new. And we both like accomplishing a certain amount and the fact it’s difficult and you’re still able to do it, of course it’s a pleasure. (emphasis mine)

There’s also this revealing snippet from an interview with Paul Graham, who founded early Internet startup Viaweb with his friend Robert Morris, and then later did Y Combinator with the same people he enjoyed working with.

Jessica Livingston: I want to ask you about when you retired in 2014. I want you to tell the story about that. Because Y Combinator was on a high. So why did you leave?

Paul Graham: Well, because I hadn’t actually meant to be an investor. I was writing essays, and software. And then we thought “ok we’ll start a VC thing as well.” And this thing that we started which was meant to be a part time job, ended up becaming more than a full-time job. It was gradually taking over my whole life. And I could’ve kept doing this until I died. I mean, YC is still going after all these years right? So at some point I’m either going to do this and nothing else for the rest of my life. Or if there’s anything else I want to do, I have to leave at some point.

But it was Robert [Morris], really. Robert never volunteers advice. Robert would come out to [YC] interviews in California. So Robert was there visiting for interviews, and it was always fun when he would come, it wasn’t just for interviews, [because] we got to hang out with Robert. So we were walking down to the centre of Palo Alto and at one point he stopped and said “you know, you should make sure YC isn’t the last cool thing you do.” And I couldn’t even understand what he meant. It took me months to realise. But I sent him an email and I said “when you said that, you meant I’m wasting my time, didn’t you?”

And he said “yeah, basically.” He said, “you’ve already proved your point, it works, why are you still doing it?”

Which is not the normal model of people working on companies. When it works, that’s when they keep doing it! But Robert has a different view of the world. And so I thought to myself “hmm, maybe he’s right.”

And then my mother got sick. I used to have to fly up to visit her every weekend. And so on one of these flights, I was thinking, “alright”, I remember, looking out the window of the plane thinking “ok, I’m going to recruit someone to run YC.”

And so Graham retired. I realise — listening to both clips back-to-back now — that what drove him was really the same thing that drove Buffett and Munger over the course of their lives: pg saw an interesting, unnoticed quirk in the world, and he wanted to prove that it could work. And it did, and everyone he roped into the project became wealthy.

It’s not hard to look at these people, chart the arc of their lives, and think to yourself “this is what I want for me and mine too.”

Which is exactly what I tasted, for the first time, this year.

Cedric Chin
25 December 2023

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.

Inversion

So far I’ve outlined three principles that I hold loosely in my head:

1. You don’t want to blow up.
2. You want to get to a point where you can make many bets over a long period of your life.
3. 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.

Cedric Chin
6 January 2023