Entrepreneurs: Learn from the averages, don’t succumb to them
As an entrepreneur you spend a lot of time telling other people about your business. Early on you do this to learn—you solicit feedback from people smarter than you. Later your goal may be fundraising or recruiting—but you will still get a side of feedback and advice for free.
There is a common pattern you will hear from people outside your business which is important to identify or you risk drawing the wrong conclusion from it. The telltale sign are statements like this:
“Companies in your space need to …”
“Given the stage you’re at, you should …”
“No one with your background has …”
When you’re talking with wise people, these statements are generally true so it’s worth listening. But they are also admissions of ignorance and you must treat them as such. These are attempts to draw a conclusion about your business based on a general pattern you seem to fit. It’s a form of statistical thinking.
Statistics are generalizations about the world which are helpful when you are ignorant of the particulars. As soon as you have knowledge of the particulars, the generalization is mostly useless.
For example, if you find a lump in your neck and you go in for a biopsy, while waiting for the results your doctor may tell you there is a 90% chance it’s cancer based on its size and location. But as soon as the biopsy results come back and it’s negative—the lump is benign—then the statistic is irrelevant. It’s still true: 90% of lumps of this size and in this location do turn out to be cancerous. But the cause behind this pattern is unknown which is why it was possible for yours to be an exception.
In business, just like in medicine, it is helpful to understanding what the typical outcomes are for people who have already walked the path you’re heading down. But only when you are ignorant of the underlying cause that drives the range of outcomes. Want to predict your net margins? Look at competitors in your space. Want to budget for hiring a senior engineer? Talk to startups who have hired similar people and learn the typical salary. Want to evaluate a term sheet from an investor?
Entrepreneurs: seek to change the world. Set out to achieve something no one before you has. Bring about some change in the world you want to see. To accomplish this, you need to figure out key ways to achieve a different outcome than those who have ventured before you. Understanding typical outcomes is a starting point, not a constraint. Most people who give you advice about your business will treat them as laws of nature and think you are naive for thinking they don’t apply to you.
But you can be the exception. The key is to understand the cause behind the patterns you see. Once you understand the cause and can control it, then historical outcomes are irrelevant.
Find the competitor who has exceptional net margins and understand what they’re doing differently. Look to industries where net margins are in the range you’re targeting, learn how they’ve achieved them, and figure out which of these learnings you can apply. Want to hire a senior engineer but can’t afford the typical salaries? Understand what’s driving the price up. Is it because most senior people are older and have kids? Then reach out to the youngest in the field or find those without kids.
Work to understand what drives the typical outcomes if you wish to be atypical. Do this by learning to ask questions that reveal the cause behind outcomes. And seek out the exception cases as key examples to study and learn from.
You can be the exception. Now go forth and change the world.