Entrepreneurial Psychology

Raymond Law — Tue, 25 Mar 2008 22:15:00 -0400

This is a very entertaining article by Marc Andreessen about Charlie Munger’s Poor Charlie’s Almanack. The following are some of the quotes that I find particularly interesting and it resonates with me. I can go back to read this to remind myself of some of these principles instead of reading the whole long article.

One: Reward and Punishment Superresponse Tendency

This is why stock options work so well in startups – and the fewer people in a startup, the better stock options work, since when there are only a few people in a company, it’s usually crystal clear to each person how her work will impact the value of the company.

As a company grows, stock options and other forms of equity-based motivation become less and less useful as an incentive tool, since it becomes harder for many employees in a large company to see how their individual behavior would have any effect on the stock price of the overall corporation. So, more tactical incentives kick in, such as cash bonuses.

Even engineers need counter-goals: incent engineers based purely on a ship date, and you’ll get a shipping product with lots of bugs. Incent based on number of bugs fixed, and you’ll never get any new features. And so on.

Two: Liking/Loving Tendency

Second, an entrepreneur, like any manager, has to fire people who aren’t great or who aren’t right for the tasks at hand. This naturally makes people not like you, particularly the people you fire. But again, not doing this backfires: nobody great wants to be in a company populated by mediocre or ill-fitting peers.

Finally, some entrepreneurs have emotional resistance to pursuing a strategy that does not meet with immediate approval from press, analysts, and other entrepreneurs. This is worth watching carefully – if everyone agrees right up front that whatever you are doing makes total sense, it probably isn’t a new and radical enough idea to justify a new company.

Three: Disliking/Hating Tendency

So when your startup’s competitive juices get flowing – especially for the first time – and you find yourself fixated on a competitor, be sure to take a step back and say, is this really what we want to be focused on right now – is the market we’re both in really large enough to warrant this? If so, sure, go for it, guns blazing. But if not, stepping back and thinking about how to focus instead on creating a large market might be more valuable.

Four: Doubt-Avoidance Tendency

In my view, entrepreneurial judgment is the ability to tell the difference between a situation that’s not working but persistence and iteration will ultimately prove it out, versus a situation that’s not working and additional effort is a destructive waste of time and radical change is necessary.

Five: Inconsistency-Avoidance Tendency

I think this is something that every entrepreneur needs to watch very carefully. Sometimes it’s simply a matter of timing – and if people just aren’t ready for a new idea, you usually can’t make them ready, and you have to wait for them to change or for a new generation of customers to come along.

My favorite way around this problem is the one identified by Clayton Christensen in The Innovator’s Dilemma: don’t go after existing customers in a category and try to get them to buy something new; instead, go find the new customers who weren’t able to afford or adopt the incarnation of the status quo.

Six: Curiosity Tendency

The only important thing I can think to add – aside from the importance of hiring curious people – is that lack of curiosity can be a huge danger to a startup in the following way: often, your initial strategy won’t quite work, but you can learn as you go based on other things that happen in the market and eventually iterate into a strategy that does work. Obviously, insufficient curiosity can prevent you from seeing the new data and lead you to continue to pursue a losing strategy even when you wouldn’t have to.

Raymond Law: Entrepreneurial Psychology

Entrepreneurial Psychology