Two Dangerous Human Behaviors

What's up, everyone? This is Alex Lieberman, co-founder and executive chairman of Morning Brew. Welcome back to Founders Journal, my personal audio diary, where I give you, the business builder, the tools you need to think better in order to build better, whether that's building a business, a team, or a new product. Today I am talking about 2 dangerous behaviors every founder should be aware of. Let's hop into it. So understanding human behavior is incredibly important when running a business. It's also just fascinating. And obviously you're in such an incredibly concentrated microcosm when you're running a company of observing people in all different environments. And there are few people more qualified at understanding people and turning it into leadership lessons than Warren Buffett's right-hand man, Charlie Munger. Now, it's no secret Munger has an amazing handle on human psychology. And so I've been catching up on startup essays recently, And there's a specific founder who I've been going deep on old essays of, and that is Marc Andreessen. Marc Andreessen is a successful multi-time entrepreneur, and he's also the co-founder of Andreessen Horowitz, which is one of the most successful VCs in the world. And in this specific essay of Marc's that I'm reading from many years ago, and in this essay that Marc wrote over 10 years ago, what he basically did is he took lessons from Charlie Munger's book, which is called Poor Charlie's Almanac. It's named after Poor Richard's Almanac, and Mark analyzed Munger's different lessons or mental models from analyzing humans. He looked at them through the lens of startups and their founders. And so what I want to do with you is I want to share 2 of those lessons or mental models by Munger, how Andreessen broke them down, and how these 2 lessons have resonated with me in my own business and running that business. So let's start with the first. The first lesson is what I'll call the danger of incentives. Very simply put, incentives are extremely powerful, and people will do illogical or immoral things based on incentives. So to give you a quick example, a financial advisor who recommends the wrong product or a harmful product to their clients because they are paid more for selling that specific product is an example of misincentive. And it sounds crazy, like who would do this? But the Wells Fargo huge controversy in the last few years was a function of misincentives and how advisors were being paid for opening new accounts. So that was Munger's model. Now, here's Andreessen's take on it. Marc Andreessen basically says that he agrees totally in the power of incentives as well as the power of misincentives. And he actually adds that within a startup context, it's why stock options work so well in young companies, because stock options motivate people to increase the value of a company long term. Because oftentimes when you get stock options, First of all, they're normally out of the money, meaning you cannot make money from your options on day one. And second, they vest over time, meaning you have to be at the company usually for 4 years to see all of your equity that you've built up. And specifically with stock options, he goes on to say how it's most powerful, or options are most powerful when there are fewer people in the company or a company is smaller, because with fewer people, those people in the company can see and feel their impact in a way more meaningful way. Andreessen also goes on to say that whenever you're building a startup, it's not just important to think about what you're intentionally incentivizing someone to do, like, you know, incentivizing a salesperson to sell ads to large brands, but you need to also think about what you're unintentionally incentivizing someone to do. It is so key that you put in place what are called counter goals so people don't game the incentive systems in your company, and you can assume that people will always try to game these systems. And so to give you an example, if you're incentivizing a recruiter in your company, someone who's in the HR org and they're responsible for recruitment, if you're incentivizing them based on the number of hires that they make in a quarter because your goal is to grow your company really quickly, you better also set a goal for the quality of these hires 3 months after they've started so that the recruiter doesn't just optimize for quantity of employees. One more example for you, and then I'm going to give my thoughts and we'll move on to the second Second lesson, Mark Andreessen tells this amazing story—one that I haven't heard because I don't think I was alive when it happened, or I was like three years old. Basically, in the late '90s, there was a major data center vendor that incentivized its salespeople based on the bookings of long-term data center leases. And what happened was there were no counter goals tied to revenue or tied to customers' ability to actually pay for the leases. And so what happened to this company in Silicon Valley? Bookings went through the roof because salespeople were just trying to lock in as many long-term leases as possible. Revenue was flat because clearly salespeople were giving discounts because they weren't disincentivized from giving discounts. And cash on hand or cash on the balance sheet of the business went down significantly because clearly salespeople were bringing on clients that signed contracts but couldn't actually pay for them. And ultimately, this incentive system or lack of disincentives drove the company to bankruptcy. And so I've talked about this on a past Founders Journal, which I'll link to in the show notes. But you just need to be so careful with how you reward people. Any time you are providing an incentive to your employees in the form of commissions or bonuses or title increases, or even the amount of face time that you're giving to employees, you need to ask yourself 2 questions. First, you have to ask yourself, What action am I intentionally rewarding, and is this what I want to reward? And second, what bad behavior am I unintentionally rewarding, and how can I create a counter-reward to stop it? So that's the first lesson by Munger, adapted by Andreessen to a startup context. Now let's talk about the second lesson or the second dangerous human behavior that we all are just hardwired to do. The second lesson is we all desire to be liked and loved. And this, as you can imagine, can be incredibly dangerous. As Charlie Munger says, what will a man naturally come to like and love apart from his parents, spouse, and child? Well, he will like and love being liked and loved. Man will generally strive lifelong for the affection and approval of many people not related to him. And it makes sense when you think about it. Animals have been rewarded for being liked and loved for eternity. It has allowed for there to be safety and survival. But there are tradeoffs when you seek to be loved and liked by others. First, you ignore the faults of those that you seek love from, whether it's a boss, a co-founder, or a company. Second, you will distort facts or truth in order to gain love from others. And third, you favor people, products, or actions that are associated with the object of affection that you're trying to attract. And so here's how Andreessen talks about this concept within a startup environment. A desire to be liked or loved creates a number of really dangerous habits for entrepreneurs. First, CEOs have to make hard decisions about a company strategy constantly, and oftentimes when these decisions are made, Employees, advisors, investors, competitors, the press. They won't agree with the strategy or like your decision. And so here's the issue. If you care more about being liked than making calculated decisions, your company will be run on emotions versus logic. Second example, very similar. CEOs, just like having to make hard decisions on strategy, have to make hard decisions on people. CEOs have to be able to fire people who are not the right person in the right seat at the right time. And firing is an incredibly difficult and stressful process that honestly does not get easier. But it is absolutely necessary in every business. And similar to company decisions, if you aren't open to being disliked, what ends up happening is you'll either fire people too late or you just won't fire them at all. And you cannot run a business that way. Just speaking from my own experience, this has been one of the biggest places that I've had to grow as an entrepreneur. I very naturally have this deep desire to please people, to be liked, to be loved. I even think it comes from a place of insecurity. And at times in the past with Morning Brew, you know, it's taken months too long to fire someone, or I've gone from feeling very confident about a decision to feeling very not confident after someone who I trust or someone who I want want to like me share some sort of counter to my decision. And so I'm continuing to work on this, but I actually think this is one of the greatest blind spots for entrepreneurs and leaders. And so those are the 2 dangerous human behaviors we need to understand so that they do not control us in business. The power of incentives and disincentives, and the desire to be liked and loved more than to do what's necessary. Next episode, I'm going to cover a few more of Munger's brilliant business mental models, share the commentary from Andreessen, And also how it's impacted me in my own business. Now, I'd love to hear from you. What are future episodes you want to hear me talk about on Founders Journal? Shoot me an email to alex@morningbrew.com. I'll get back to you as quickly as possible, and just maybe those will end up being future episodes. And before we go, I want to give a huge shout out to the team that helps make this podcast possible. Our show is produced and engineered by Dan Bauza. Our associate producer is Bella Hutchins. Brian Henry is our executive producer. Alan Habercheck is Morning Brew's director of audio. Holly Van Lubin is our fact checker. Emily Milliron is our video producer and editor. And I'm your host, Alex Lieberman. Thanks for listening, and I'll catch you next episode.