Entrepreneurs, like gamblers, make bets every day. They risk their money on labor, product development, advertising, rent, etc., hoping their bets will pay off handsomely. Most of the time, you win a little or lose a little, but sometimes you can win big.
However, there is one big difference between the gamblers and the entrepreneur. The gambler plays a game created and controlled by others. You may do well with skill for a while, but the odds are stacked against you. And as they say in the casino business, the house always wins.
Things are different in the business world.
You can use your skill to stack the odds in your favor. In other words, you can hack your luck and become the house.
The Benefit of Boldness
Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.
– Jeff Bezos
As Bezos says, big winners pay for many experiments. An idea venture capitalists learn quickly.
You will often hear VCs talk about how the significant returns come from a small number of their investments; most of the others either return the money or fail.
The lesson I learned from playing the VC game is that at the start, you are playing an option game, not an investment game.
You need to view the money you “invest” early on as a way to buy an option on the right to invest deeply once the business shows its ability to scale. That’s where you make your real money as an investor.
You want to make affordable bets that buy you the data you need to find the winners. And when you find a winner, you put the pedal to the metal and scale it up.
As someone running a business, you are both the investor and the designer of the experiments.
The key question becomes how to design great experiments with lots of upside.
Shifting Your Frame of Reference
This challenge for the business leader is sometimes called thinking outside the box.
However, in my experience, true outside-the-box thinking leads to fantastical ideas like building flying trains powered by unicorns. That’s a great way to write a fantasy or science fiction novel but not a great way to find business ideas.
No. Thinking outside the box is not what you need.
What you need is a better, bigger box within which to think.
Let me explain what I mean using my experience with most CEO clients.
They come to me looking for ways to grow their business profitably.
And they often become fixated on the question of incremental growth: How do I grow 10-20% faster, or, at the extreme, how do I double the size of the business?
And there’s a problem with this line of thinking.
The business that’s struggling to grow does not have a proven, scalable business model. That’s why it’s a struggle.
With a proven, scalable business model, you invest and grow. It’s simple.
The one question that’s proven to help people find this scalable business model is this: what would the business look like if it were ten times bigger?
In practice, I ask the question more specifically based on the business size.
For example, I asked Tom, the CEO of a $40 million business, to imagine what his business would look like at $400 million. How would it work? Who are the customers? What are you selling them? What does the relationship look like? How do you serve them?
Those questions, asked that way, took him out of his current system and opened up his intuition and imagination.
We spent most of the day working through those questions to build a vivid vision of the future business and a strategy for realizing that vision. Four years later, the company had grown to over $265 million in revenue and over $70 million in EBITDA. (BTW – Tom’s sold his company for over $600 million.)
The 10x Strategy System
Instead of investing lots of effort into what amounts to a single, you invest that same effort to hit a 10-100x home run.
That’s what good strategy does for you. It amplifies effort.
While I think of this dynamic as the 10x strategy, I want to be very clear – it’s not just having a big goal.
It’s fundamentally rethinking how your business system works so that you can identify the simple scalable model you need to find.
You see, your current business system has a limited capacity for throughput. You can usually squeeze out 10-30% more simply by working harder.
But at some point, that system stops scaling. And most of the time, your system cannot support 10x growth.
The 10x question leads you to think outside your current system and imagine a more powerful, higher-capacity system.
The Rule of Simple Systems
The trick here is to imagine a business that is not only bigger but also much simpler.
This comes from Gall’s law that large complex systems that work start as simple systems that work.
You are looking for that core simple system that you can replicate endlessly.
For Tom, this meant focusing on one compelling application with one customer segment and eliminating everything else. Everything was aligned to this strategy.
All the energy was focused on making this simple model work and replicating it as fast as possible.
Customers who didn’t fit were fired. Plants that didn’t fit were sold. Products that didn’t fit were discontinued.
He called it the “Program Account” strategy. It was not the sexiest of strategy monikers, but everyone in the company understood what it meant and how they could contribute to making it happen.
Another way to describe this simple system is to call it a unit model. You invest a certain amount of cash into the unit, and the unit produces a relatively certain return.
This is easy to imagine in some businesses, like retail – each store is a unit. In other businesses, the unit might be the customer relationship.
If you can find and specify that unit model in your business, you will be on your way to something incredible.
While I’ve seen some people do this on their own, having an experienced thought partner really helps.
The One-Day Strategy Consult
I use a process called the One Day Strategy consult to help people find their scalable business model.
You bring your knowledge of your customers, business, and industry; I bring my strategy experience.
And together, we do the work to find your simple, scalable system.
Contact me here, if you’re interested.
The Path to Success: 10 Lessons from 150+ Startups