Expose yourself to opportunities to become more lucky
What is luck, and how do you get some
Luck plays a massive role in the success of early-stage companies due to resource constraints. While the mindset of self-efficiency helps work towards a goal that is not wholly under one’s control, it is not beneficial to understand the mechanics behind luck. We will examine strategies to improve results with a deeper understanding of luck and how we define it.
Luck and sales – a comparison
Let’s compare the role of luck in sales. To be more concrete, we define luck as anything that is not entirely inside the agent’s control. Writing an email to a prospect is the locus of control of the sales agent. The prospect of quitting her job after years of pursuing the opportunity is not. Thus, we have established that closing a sale involves luck. For simplicities sake, let’s assume for this thought experiment that the closing rate is fixed and independent of the agent’s actions and the product’s features. Only time involvement is necessary.
Let’s look at two companies: a startup building aeroplanes and a corporation producing the same thing. The startup has one person in its sales team. The corporation has one hundred. Of course, the one hundred sales agents are costly, but they also bring in more revenue on average. The only reason the startup has only one sales agent is that it cannot afford more.
Over the long term, each sales agent will bring in the closing probability times the sales value. In the short term, though, the sales rep either closes at sales value or does not close at a value of zero. Having many agents will also create an expected revenue over the short term. One agent does not have to close a deal if another one does. This law of large numbers gives excellent plannability.
For the startup, however, this is another story. If the one sales agent does not close, there is no one there to compensate for this fictitious loss. Like on a roulette table, it will likely lose a couple of rounds in a row. In the same image, winning a couple of rounds in a row is not unheard of.
The problem is that the unlucky sales agent will now create a public image of a company that does not push product. A very lucky sales agent creates the public image of a successful and highly growing company, including all consequences.
Hence, the binary nature of the outcomes and the probabilistic choice of the outcomes creates extreme results in the startup of either going out of business or extremely perceived success. In contrast, the actual, measurable effect is limited for the larger corporation that creates enough tour around to stay afloat.
Obviously, the reality is more complicated than this mind experiment. However, we can accept in part the fact that outcomes of a task in which mechanisms from input to output lie outside the agent’s control contain luck which is hard to impact.
A man walks into a bar
So where can we improve on our outcome, then? The obvious tried and true way is to work on the probability by enhancing processes, insourcing process steps and gaining more control over the processes. Process feedback is the magic potion for this approach. The other possibility is working on the quantity and quality of the opportunities. We want to focus on the latter.
Now imagine you are a young man looking for a romantic partner. The potential success is partly determined by the availability of matching partners you can reach and by physical and psychological factors that can be adjusted by differing degrees. Sitting on the couch watching TV will most likely not result in success, as the quantity of potential mates is just too low. Thus, we will have to go out to find potential mates. A bar is usually a good idea.
On the other hand, we must also consider the potential quality of our matches. Therefore, we should find locations where people of our liking are likely to mingle. A night is usually relatively short, and we don’t have time to talk to everyone. Thus, we must optimise the time spent with people and talk to the best potential matches.
Suppose, for one, nobody wants to talk to us. In that case, we might be poorly prepared – i.e., we forgot to shower – we might be at the wrong location or target the wrong audience. The first point is process optimisation and is very obvious. Being at the wrong location is annoying since we spent much time getting somewhere and now have to spend even more time getting somewhere else. We know this action as “pivoting”. We need to become more flexible if we target the wrong audience but with the right message. For example, by expanding our preferred age range or accepting smokers as potential mates.
On the other hand, if we find ourselves in high demand, we must use our time wisely by quickly getting to an understanding, pushing the process forward, and being pickier.
The problem in both cases is, of course, that we often do not know what our exact problem is. Thus, we optimise in a system of connected equations.
Finite and infinite games
We just found five strategies to improve our luck game in the area of opportunities. How we go about it depends if we play a finite or an infinite game. In the finite game, we only have a limited number of moves. As we have seen, our outcomes seem to be extreme. We will want to go for the first closing to surpass our threshold for success.
If our game is infinite, we have an infinite number of moves. In this scenario, we want to maximise our utility. If we face a finite or infinite game depends on many factors such as funding level, runway, type of product, pre- or post-PMF, among others.
Generally, the earlier the company stage, the more finite the game will be. Unless you need to up someone by having more prestigious clients, optimising for the next customer makes more sense instead of optimising the total customer value.
In transitioning from a finite to an infinite game, you build operational debt. Operational debt is like technical debt in that it is necessary to fulfil metrics in the early stages of your company that were never meant to stay on forever. In our sales example, operational debt creeps in from low-value, high-maintenance customers. In other instances, you might end up with an investor or an employee that does not fit you perfectly. All cases differ in complexity and the entrepreneur’s ability to handle them. The entrepreneur generally has the same duty in proactively handling operational debt as the engineer for technical debt.
Know what you can endure
Many founders do not know how much bad luck – that is, adverse outcomes – they can accept before running out of money. With a healthy margin of safety that considers personal risk tolerance, startup companies should be able to plan what needs to happen outside their sphere of influence. The best tool for planning, in my experience, is a stagger chart that Andy Grove described in his must-read “High Output Management”. Like the sales wisdom, “the sale is closed only when the ink is dry, and the money is in the bank”, every opportunity is zero until it turns one. Thus, we learned some tools to optimise for opportunities rather than the mathematical concept of expected value that lures into a false sense of security in the scenarios described here.
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