Expect Uncertainty | Ep 808

It's interesting how stressful entrepreneurship can be because of uncertainty. And so, like right now, if we were to look back the last 15 years, we'd say something to the degree of, man, the stock market just went up 15 straight years. Like, this was amazing. What a time to have invested, right? And Morgan Housel wrote a little blog about this, and so I thought it was so interesting. He said, wait a second, that's not true. Like, we had a 20% dip in 2011, We had a dip in 2016. 2020 obviously happened in that period of time. We had wars that didn't end. And so all of these things were kind of happening. And I say this not as a political statement, but more so that everything seems better in retrospect because there is no uncertainty. We know how the story ends. And so I think in some ways, it's like that can give us certainty that our current situation despite the fact that it feels terrible, it always resolves or we die. And so like, if you die, you don't have to worry about it, and if it resolves, you don't have to worry about it. And so that's kind of been a helpful framework for me because I think a lot of the stuff of what makes entrepreneurship difficult isn't really the tactics. Like learning the things that you have to do, those are just kind of knowledge deficiencies and we have to learn those for sure, but I think everyone here would agree that that's not what makes your job every day hard. Like learning how to set up a landing page, maybe you don't know how to do it, but like it's not going to kill you, you know, to learn it. It's when, you know, your manager leaves and takes half of your team and all of a sudden your payment processor shuts down and you've got leads that are coming in but you can't make payroll, like that's the stuff that makes it really stressful. The actual tactics of business are relatively straightforward. And so I say this just as a reminder almost to myself that it's— the future is likely going to be better, the past is not as good as we remember it to be, and so I think that's relatively a hopeful message for entrepreneurs. The second thing, and so this is a little bit more strategic, is I do a lot of quarterly and annual planning with the portfolio companies, and so I have gone through that motion a lot of times, and so I've distilled this down into kind of like a little mini framework that's worked really well for me because you go through 10 or 20 or 50 or 100 of them and you're like, OK, I think I know how this is going to go. And so I define strategy as prioritization of resources. And if I wanted a longer definition, it would be prioritization of limited resources against unlimited options. And so fundamentally, the people who move fastest, or businesses move fastest, are the people who are the best allocators of those resources to the things that get the best returns. And so for— Many of you here, you'll have this big list of things that you're thinking about doing, right? And the objective of this Q&A session, hopefully not just necessarily for your question but for someone else's question, is that when you go home or when you fly back, you're going to have all your notes on one side, and you're probably going to have a fresh piece of paper or document on another screen. And you're going to be like, OK, I have 9 pages of notes. What am I actually going to do? And then you're going to write like 3 to 5 things on that other page. I just want to make sure we get those 3 to 5 things right, because that is what makes this worth it or not. So I break this into what, how, and who. And although this seems really simplistic, I've also found that simple frameworks are the ones you actually end up coming back to and using. And so fundamentally, every single what that you got from today and yesterday should ladder up to one of 3 objectives. So number 1 is it should increase the number of customers that we get, so number of new customers, number of sales. It should increase the lifetime gross profit per customer or should decrease risk. So fundamentally, these are the things that make a company more money. This is what makes a company valuable. So if we are going to consistently sell more customers and they're going to be worth more in the future and we believe that that future is incredibly certain, that is a very valuable business. If you just erase this and say a very high risk way and you sell tons of customers that have tons of profit, it's a zero value business. And so these are kind of the three components. And so I would teach this to your team because it'll give them a framework so that they can better understand your decision-making process. So let's say the team comes to you and says, hey, I think we should redesign the website. Maybe some of you have had that. I think I have it every day. It's like, I already did it last year. I don't feel like doing it again. It's so ugly. Just deal with it. But then we'd ask the question, OK. So let's redesign the website. Fine. Where does that fit here? They would say, OK, well, I think it's going to help us get more customers. I'm like, OK, how? Well, I think maybe it could help us convert more of our traffic. OK, how much more do you think it's going to convert versus the control right now? Because the control is pretty tested. Um, 5%. OK, great. How long is that going to take? It'll probably take 8 weeks. How much is that gonna cost? Say we hire a design firm, whatever, $25 grand. Okay, fine. Now, and this is the kicker question, is there anything else that we could do for 8 weeks and spending $25,000 that could increase the amount of money that we make in this business by more than 5%? If the answer is yes, although that is a good idea, it's not the best idea. And so that's why we're not doing it. And so I think helping people understand that it's not that they have a bad idea, it's just what are we going to trade to execute this? And so let's just say, we say, you know what, our objective in our business right now is we need to get more customers. That's our— that's kind of our biggest level constraint that we have right now to grow the business. Fine. Then it comes down to, okay, how are we going to solve this issue? We're going to do more, we're going to do better, we're going to do new. So there is some math behind this. I was talking to Dickie about this last night. If you have a smaller business, call it, let's say, less than $3 million a year, almost every time the solution is more. And so I'll give you a really simple example of this. So let's say you have one salesperson who does outbound and generates leads for you and you make whatever, 5 sales a month. Okay. You could probably improve the conversion rate of your funnel. You probably improve the conversion rate of the emails that you send or the calls or the script, All those things are things you could probably improve. But if you just doubled the amount of sales guys you had, you'd probably get pretty close to doubling sales. Now, when you're bigger, let's say you've got 20 sales guys, you'll have a close rate, let's say, of 30%. That's your sales team's close rate. Okay. So at this point, do I think that I can get a 20% lift in total sales by getting the entire team up to from 30 to 36? I don't know, we're doing pretty well on sales. Or do I think I should hire 4 more guys, or maybe 6 and then know I'm gonna lose 2, and have 4 that stick and hit KPI? So then the, both of these ways will get us more customers, right? I could hire 6 more guys and train them up, or I could try and drill the team harder, maybe tweak the script so I can get a 20% lift in close rates. And so the difference between which path you take is the discrepancy between actual and benchmark and the likelihood that you'd actually hit it, right? So how likely is it and how much effort is it going to take for me to get 6 more guys on the team versus me drilling the sales guys to get that 20% lift in close rates, right? Now if you're below KPI, then don't hire more guys, get the team ready. And so what often happens is there's this ping-ponging that goes back and forth between more and better. And so it's kind of like this accordion of like you grow the tree and then you prune it, and then you grow the tree and then you prune it. And so there's no right answer here. But for almost everybody, more is very boring and also the mathematical right answer. Reason I say this, it is the lowest risk-adjusted return lever you can pull. Said differently, if you have— let's say you've got a— like imagine you've got a Jenga. You guys know Jenga, like the little wood blocks, right? So if you've got a Jenga building that's this high, And it's standing, so it's fine. And let's say there's some holes missing to make this realistic. If I take any one of those bricks, there's a chance that I could put it somewhere else and make the building taller. But of all of the other unlimited possibilities for that brick, which is like I could put it on the floor, I could throw it over there, the likelihood is that the building actually gets weaker. And so once you have something that's very tested, more of that thing that works is the highest likelihood thing that will work. Because changes to the control, once it is very tested, have in all likelihood will be things that actually make it worse. And so this year for Schools homepage, for example, we ran 16 very kind of prominent split tests that we ran on the page. 14 of them made it worse. And so probably because I spent a really long time on the beginning of the page and trying to, you know, guess what we thought would work really, really well. And then basically most changes from the control just made it worse. And so I say that because there's unlimited things that are not the thing that's working, and the vast majority of the things that are not the thing that's working also won't work. And so we have this idea around, oh man, I have this idea for something better that I might be able to do in the business, right? And some of you guys have some of these things here. But what we don't include is the cost of change. And so the cost of change is guaranteed in any implementation, even the things that work, but the upside isn't. And so I would say that as I've kind of matured as an entrepreneur, my willingness to do new things has diminished. I want to take fewer very big swings, but a lot of the everyday bets that I used to be willing to make, I'm just not willing to do anymore because I know the cost of them and that likely it's not going to be as good as I thought it was going to be in my head, and my team is always going to feel like I'm constantly changing things. And so Leila said this to me and it really— I don't know, for whatever reason it hit. But basically, if we know— and this is just my rough estimation— that we get a 20% decrease in execution in any function whenever we make a change. It's just like, it seems pretty consistent. Like, if we change the sales script, we're going to have a decrease in sales by 20% for them to learn the new script. If we change customer success process, we're going to have a decrease immediately 20%, which then actually gave me a litmus test for, OK, if we're going to try and improve something, it has to be over 20% in terms of what I think is going to happen, like very reasonably, in order for me to actually even enact the change. And so the subpoint underneath of that is, that your business will never be perfect. And so there's 100 things that I think I would want to change about yesterday and today that you guys went through. I can think of a million of them, right? But some things just— the thing I wrote down is some things stay fucked. And so— and comma— and that's OK because it actually still yields a better business. Because if you think about the fact that you always want to change things, then change becomes a constant, which means that you have a 20% decrement on performance across multiple functions of the business at all times because you're always changing things because in the pursuit of I always want to do something better, you actually always do it worse. And this has taken me a very long time to learn. So along with our example, I'm going a little long on my preamble, but hopefully you find it valuable. So once we have our what, OK, this is what we need to have happen. Let's say our strategy is we want to do more. OK, fine. So if I see every quarter that we said, hey, we need to hire more sales guys, and 2 quarters in a row that thing hasn't happened, it's usually because I have a who issue. And so I've seen a lot of you, and I've had many conversations where you have what would otherwise be considered a pretty sound, reasonable strategy, and it's like, no, we tried that and it didn't work. Well, a lot of times it's not because the strategy was wrong, it was just the execution of the person who was owning it was wrong. Either they didn't have enough bandwidth, right, or they just weren't good enough. And so I would say that my tolerance for mediocrity has gone down over time. And I think that that is a one-way direction with almost all of them. And so I try to think to myself, OK, 10 years from now, I'm going to think everybody that's on my team, myself included, is inadequate. And so how can I try and screw with my mind's perspective so that I can raise the bar for the people that are coming in? Because they're the ones who are ultimately going to build the people, build the business. I just would use this as my little moniker for how I think through this when you're making the decisions. Is the thing going to increase the amount of customers? Is the strategy we're gonna use more, better, or new? And then finally, who's gonna own it? And I walk through this at a very high level with a lot of the companies in the portfolio, and this is how I walk through it.