Think Less

In several management paradigms such as Lean or the Theory of Constraints, one of the key principles in ensuring good flow of products or services through a process is keeping the amount of Work in Process (WIP) – that is, work that has been started but not yet finished – low.

For example, in a sales process, if your lead-generation team produces 100 leads a day but your sales team can only vet 10 a day, pretty soon you’re going to have an ever-growing backlog of unvetted leads. As that backlog gets bigger, the amount of time from when a lead is first generated to the time it gets vetted gets longer. If you want flow, keep WIP low.

These same dynamics – and even the word ‘flow’ – show up in human psychology as well.

Mikhail Csikszentmihalyi’s famous work on being “in flow” – that state of relaxed state of peak performance also known as being “in the zone” – posits that one’s emotional state is often a function of how the difficulty of a given task compares to one’s skill level in it: when the task is too easy, you’re bored; when the task is too hard, you’re frustrated or stressed. And the task is just about right – when you are being pushed to your limit but not beyond it – you enter flow.

Csikszentmihalyi’s model of psychological flow.

Also consider that in the popular Getting Things Done productivity system, one of the most important habits is consistently getting all of your ideas and to-do items out of your head and ‘on to paper’ (digital or not). This frees your mind from having to remember and keep track of it all. People who have gone through this process often find that they they are better able to focus and get more productive.

Less is More

In all of these cases, the amount of ‘stuff’ in the first step in our process- whether sales leads, the level of challenge in a given task, or the amount of to-dos in our list – exceeds the ability of the next step to handle all that stuff. Let’s call the step that’s producing the ‘stuff’ step ‘A’, and the next, step ‘B’.

One way to deal with this – to improve the flow – is to increase the capacity of step B. In our examples this might be hiring new salespeople, practicing to improve your skill level, or improving your memory. The problem with this approach is that while some solutions to increase capacity are cheap and easy (e.g. writing down all your to-dos in an organized way), most of the time these things take additional time and resources. In the meantime, the longer you get things continue on the same way, the more the backlog increases and the problem only gets worse.

Instead, what is often required – counterintuitively – to maintain and then improve flow is to first stop Step A from producing as much. Producing less before the bottleneck in the process reduces WIP and improves flow. After flow is improved, you can then more easily work on improving the capacity of the next step. And this all seems to work in both things and people alike.

“No Mind” = No Thoughts

I think is one of the reasons meditation is so powerful. One of the things you learn after just a few weeks of meditating is that we humans tend to be thinking – that is, producing thoughts – all. the. time. Indeed, it often takes many months of practice meditating to be able to go for more than a few seconds without thought. In many ways, a big part of meditation’s ability to help people is that it trains them to think less.

To be clear, I’m not disparaging the value of thinking. Our cognitive ability is what distinguishes us as a species, and sometimes thinking deeply about something is absolutely recommended. But too much of anything can be problematic. When we’re so lost in thought we’re not really present with our loved ones. When we’re so stressed thinking about work or money we can’t sleep. When we’re so focused on thinking about all the things we want instead of enjoying what we have that we live our lives in a perpetual state of dissatisfaction. Those are all symptoms of too much thought.

I don’t think meditation’s ability to decrease the production of thought and increase the frequency and duration of flow in one’s life is a coincidence. Rather, one’s psychology is related to the the structure of one’s brain, which in turns obeys the same physical laws as a manufacturing or sales process.

So if you want more flow in your life, consider a few suggestions:

  1. Get your to-do list organized.
  2. Reduce the difficulty of a difficult task, whether by breaking it into smaller pieces, getting help, or delegating.
  3. Meditate.

And try, if you can, to think less.

Ranked Choice Voting

We’re all familiar with how a traditional election works: each person votes for their favorite candidate. The votes are then added up and whoever has the most votes wins. Simple enough.

But there are also obvious problems with this. Consider a race with with five candidates. Two of the candidates get 15% of the vote each, two others get 20% each, with the final candidate receiving 30%. Under the traditional system (called First Past the Post, or FPTP) the last candidate would win with only 30% of the vote. That doesn’t feel right. Voters who are concerned that voting for their favorite candidate may ‘steal’ votes from the ‘electable’ candidate are familiar with another problem with this system (also known as the ‘spoiler effect’).

Ranked Choice Voting

But there are other methods of voting besides FPTP. One method, known as Ranked Choice Voting (RCV), continues to gain traction. RCV is a method of voting where – instead of simply voting for your top candidate and electing the person who receive the most votes – each voter ranks their choice of candidates. If one candidate receives more than 50% of everyone’s top choice, they win. If not, however, the candidate who got the fewest top-choice votes is eliminated, and the election is re-run.

For example, say Jill, Tom, and Alice are running under RCV. Of people’s top-choice pick, Jill got 40% of the votes, Tom 36%, and Alice 24%. Under traditional voting – what’s known as “First Past the Post” (FPTP), Jill got the most votes so she would win. Under RCV, however, since no one got more than 50%, Alice (the one with the least votes) would be eliminated from consideration and the top choice votes would then be counted again.

To be clear, it’s not the case that Alice’s 25% would be given to Tom or Jill. Instead, you take every ballot that had listed Alice as their top choice, look at who they ranked as their second choice, and count that person as their vote. For example, say two-thirds of the people who ranked Alice first (i.e. 2/3rd of 24%, or 16%) had Jill as their second choice, and one-third (1/3rd of 24%, or 8%) had Tom second. In this case, Jill would have 40% of the vote (from the first time around), plus an additional 16% (from the second time), for a total of 56%. Because Jill now has over 50% of the vote, she wins.

There are many benefits of RCV over the traditional First Past the Post (FPTF) methods. It avoids the spoiler effect and gets closer to ensuring that the candidate that’s chose maximizes the satisfaction of the electorate. Several places (like NYC) already use RCV, and non-partisan groups like Fair Vote are advocating for it. For those looking for social proof, it has been endorsed by many Nobel Prize winners, political thought leaders, political scientists, and, yes, politicians from both parties, including John McCain and Barack Obama.

Benefits and Tradeoffs

I certainly think that Ranked Choice Voting is a better system than First Past the Post. But that doesn’t mean there aren’t downsides. There is a great article that runs through the different voting systems and their pros and cons, and the Fair Vote site makes additional arguments for why RCV is better than the other systems. (I’m personally a fan of what’s called score voting, where each candidate is rated on a scale – similar to Amazon ratings – and the candidate with the highest rating wins. That said, RCV is the alternative system with both the most popular support in the U.S. and the most “real world” use, as its the primary form of voting in Australia, Ireland, New Zealand, and many others.).

If you have a choice to support or petition for Ranked Choice Voting over FPTP, I’d recommend it. No voting system is perfect, yet few procedural changes (perhaps along with moving to open primaries and bipartisan redistricting) have more downstream consequences for our form of government. Choose wisely.

Thoughts on Inflation

I am far from a macroeconomics expert. But I do think that macroeconomics provides a valuable perspective on the world, so occasionally I like to take a step back and try understand some of the macroeconomic dynamics at play.

One topic that’s top of mind for many folks today is inflation. There are two common comments I hear about inflation these days. One is that – prior to the past few months – inflation has been surprisingly low for an extended period of time. Between the government bailouts, the quantitative easing of the Fed, and the increasing amounts of debt in the economy, many folks expected the rate of inflation to be much higher than what has actually occurred.

The second comment is that now things are finally going to change. With the further massive stimulus during COVID, the beginning of the recovery therefrom, and potentially two additional massive infrastructure bills, the risk of runaway inflation is at an all time high.

Past…

Let’s start with the first comment. Up until very recently, why haven’t we seen much inflation?

Inflation occurs when prices go up. So let’s look at prices. Below is an old chart from the American Enterprise Institute from 2020:

The first thing to notice is that the amount of inflation strongly depends upon what you’re looking at. Generally speaking, things that have benefited significantly from technology – either because they can be manufactured more efficiently (i.e. TVs) or can scale at near marginal cost (i.e. software, Netflix, etc.) – or from globalization have actually gone down in price, while things that are still require local human labor continue to increase in price. (An interesting exception on the chart is college textbooks). The second thing to notice is that, in aggregate, there still has been inflation of around 2.2% annually on average. So not only has there been inflation, but it varies widely by category. Measures like the Consumer Price Index can mask this.

To a first order approximation, prices are related to the ratio of supply and demand. As I mentioned above, the marginal cost to supply an additional digital good is virtually zero. I don’t have the data, but I’d also assume that there has also been a significant shift by both consumers and businesses to spend more money on software and digital services.

This could partially explain the relatively low rate of inflation. One the one hand, a product or service with nearly infinite supply (software, streaming video, videogames, etc.) can accommodate nearly any increase in demand without triggering a price increase. On the other hand, any money spent on these things is money not spent on things that do have a marginal cost to supply; this controls demand (and thus prices) for those items.

...is Prologue

This explains why we haven’t seen that much inflation over the past two decades. What about moving forward? We’ve recently seen a significant uptick in inflation – surely all of the public and private debt-fueled spending and quantitative easing is catching up with us, right? Isn’t this just the beginning of massive hyperinflation?

I’m not so sure. It is true that we’ve seen a recent spike in inflation. But this seems to me like it may be short lived.

Here’s my reasoning: when COVID hit, there were a few effects that conspired to increase prices. On the demand side, because people were locked down, demand for services decreased while demand for durable goods (TVs, housing, etc.) increased.

At the exact same time, due both to some people not working and significant changes in demand for some items (like masks and other PPE), supply chains faced significant disruptions. This limited the supply of these exact same durable goods. Higher demand and lower supply equals higher prices. So we see inflation.

However, it seems to me that these same dynamics could soon lead to the opposite effect. Because people “pulled forward” their demand for things like TVs, exercise equipment, and home renovations, there is likely to be weakened demand for those things in the mid-term. Simultaneously, as supply chains get unjammed, foreign goods are likely to flood the market with additional supply. More supply and less demand? Leads to lower prices (or at least stagnating ones).

And there’s more. During Covid, employers also “pulled forward” investments in technology to support remote work. These investments are improving productivity. It is true that labor shortages in some areas are creating wage increases. However, if productivity increases faster than wages and other costs remain steady, then the the per-unit cost of production goes down. (e.g. if I have to pay you $60/hr instead of $50/hr but the number of TVs I can produce an hour goes from 100 to 500, my cost-per-TV has still gone down).

As foreign goods comes back into the market, domestic producers will want to try to keep the market share they obtained during the pandemic. Whereas prior to the pandemic they might have been beat out on cost, because of the reduction in their unit cost of production described above, they will have more ability to compete on cost than before, further driving down the price of goods.

Blue: Inflationary Dynamics. Brown: 2nd-Order Deflationary Ones.

Conclusion

I thus think it’s reasonable to expect that we see a significant reduction in inflation – or perhaps even mild deflation after this transitory inflation spike. We have a situation where technology is reducing the unit cost of production of goods while likely reducing the demand for labor (thus lowering wages and thus consumer spending), all set against a backdrop of significant debt. Unless that debt is invested in such a way as to produce cashflows adequate to service that debt and reinvest (which, in aggregate, I doubt), then it simply pulls forward demand to the present, thus limiting demand in the future. Lower demand and cheaper, more abundant supply leads to lower prices and disinflation.

While there are scenarios that could potentially lead to hyperinflation (e.g. the Fed being given authority to spend or a decision to intentionally debase the currency to reduce debts), I think the more likely scenario is transitory inflation followed by disinflation or even deflation. From a portfolio perspective, this would suggest positioning oneself for an expectation of mid-term (dis/de)flation (e.g. cash, defensive equities, long-duration treasuries) with a hedge to try to protect against extreme hyper inflation (gold, real estate, crypto, equity puts, etc.)

As I mentioned at the outset, I’m no expert in this space. But this is my current thinking. Let me know where I may be wrong.

What Causal Inference Can Tell Us About Hiring

One area I’ve gotten interested in lately is causal inference. For those of you not familiar, it’s a methodology that attempts to find and validate cause-effect relationships between variables. The key is that it attempts to do so using data without having to rely on controlled experiments. (For an introduction for the casual reader, I highly recommend Judea Pearl’s book The Book of Why.)

One concept I found interesting was the implications of something called a collider. A collider is a variable that is the effect of two or more variables. As a simple example, consider the following:

The way to read this diagram is that fame is a function (or effect) of money, talent, and looks. In other words, fame = f(money, talent, looks). In this example, fame is a collider relative to money, looks, and talent because they all have arrows pointing into fame.

The interesting implication from the book is the following: given that you hold the level of a collider constant, the other variables become dependent upon each other even though there is no causal influence on them.

To understand this better, let’s use an even simpler example: X + Y = Z. In this case, Z is a function of X and Y (i.e. Z = f(X,Y)), so Z is a collider with respect to X and Y:

Here’s the key point: if we fix the value of Z at some specific value (say 10, so we’re left with the relationship X + Y = 10), then X and Y become correlated. In other words, if I know the value of X (say 8), then I can infer Y (i.e. 2).

The interesting finding from causal inference is that this dynamic generalizes. Said another way, for a given level of Z, information about X automatically gives me some information about Y, even if I can’t observe Y directly.

Almost Famous

Why is this interesting? Let’s go back to our fame example. Assuming our causal model is valid, then we can say that for a given level level of fame, if we know something about their level of wealth, we can infer something about their level of looks and talent. If we simplified it down for a minute to say just include looks and talent, then we could say – for a given level of fame – we’d expect that a person who is more attractive is likely to be less talented. (Another way to think about this is if they were both attractive and talented, they’d be even more famous).

I haven’t done an analysis to verify this yet, but it’d be interesting to run an experiment. For example, look on social media for actors who have a similar level of followers (as a proxy for fame). Within that cohort, if the model is valid then you would see a spectrum ranging from the good-looking-but-hacky to the talented-but-ugly.

Counterintuitive Hiring

This finding has interesting implications in many places. Take hiring, for example. Consider, for example, a hypothesis that seniority_level = f(skill, likability). If you think both skill and likability are positively correlated to seniority level, then – for a given level of seniority – consider that the most skilled person is likely to be the one you personally like the least.

These are of course toy examples; the causal structure of real life is likely to be much more complex. But they illustrate both the power of causal analysis and the sometimes counterintuitive truths behind the way the world works.

Questions to Make Decisions by (Part I)

Most decisions can be ranked along two dimensions: importance and difficulty to reverse. For easy-to-reverse decisions, make them quickly or delegate. Same for difficult-to-reverse but unimportant ones. But for important and difficult to reverse decisions, you need to think carefully. Here are some questions I ask myself when making these kinds of decisions:

Outcome Clarity

  1. What is the ideal outcome?
  2. What outcome(s) do I definitely want to avoid? How can I do that?

Scenario Planning

  1. If this is going to fail (or end in a bad outcome), what are the most likely reasons why?
  2. For each reason, are there likely to be any ‘early warning’ signs?
  3. Are there any actions I can take that can mitigate those risks?
  4. If the risk does manifest, what’s my “Plan B”?
  5. If this ends up going extremely well, what are the most likely reasons why?
  6. Are there likely to be any ‘early momentum’ signs?
  7. Say things go really well. Then what? What risks / problems can success cause?
  8. What steps could I take that might mitigate those?
  9. How is this likely to affect other stakeholders? What incentives / reasons might they have to support or oppose?

Hypothesis Testing

  1. Why do I think that ideal outcome isn’t possible (if I think it isn’t)?
  2. For each reason listed in #2, state the opposite. How can I make that true?
  3. I currently believe X. What evidence would change my mind?
  4. Is there a way for me to obtain that evidence?

External Inputs

  1. Who can I talk to/ask that has some expertise in this area (where expertise ideally = has done something very similar with success at least three times)?
  2. Who is most likely to disagree with my decision? What is their reasoning? Are they wrong?
  3. Is there historical evidence or statistics that can help inform how similar decisions have turned out in the past? Why?
  4. Is there a relevant comparison class? What is the base rate?
  5. Who are three people that I admire in this domain (dead or alive)? If I can’t talk to them, what do I imagine they would tell me?

Prioritizing

  1. When I’m old, what path/scenario am I most likely to regret?
  2. What are the three most important criteria by which to evaluate this decision?
  3. Logic aside, how do I feel about each option. Why?
  4. What are the three pieces of information that would be the most helpful to know?

Meta Questions

  1. Take a step back and think creatively. Is there another option I’m not considering?
  2. This there a way to ‘test’ one or more options in a low-risk/cost way that gets me more information?
  3. Is there a decision that provides me more or less optionality in the future?
  4. What’s the opportunity cost?
  5. What my real problem here?

Timing

  1. Do I need to make this decision now?
  2. Am I likely to benefit from delaying making this decision?
  3. What is the risk of delaying this decision?
  4. Once I’ve made up my mind, is there any reason I can’t wait 24 hours before acting on it (just in case?)

Investment Dissection: Homebase.ai

[Note: My posts on this blog vary in length. The last one was long. So is this one. The next few will be shorter.]

I recently made an investment in Homebase.ai, a “smart apartment” platform. In this post I’ll walk through how I thought through that decision. I’m doing this for two reasons. First, I think it’s good practice to keep a ‘decision journal’ that one can review and learn from. Second, I’m hoping that others can point out things I missed or where I could be wrong. For confidentiality reasons there are many data points that I can’t share. But that’s okay because I want the focus here to be on the process.

Here are roughly the steps I went through, along with how my thinking on how the opportunity evolved over time.

Step 01: Intro

What Happened
I heard about the opportunity from a friend who had invested at an earlier stage. The company was now raising money at a significant increase in valuation (roughly a 5x increase in ~18 mo) and had seemingly good traction. There were also two other similar companies that had recently gone public via a SPAC: Latch at a ~$1.5 billion valuation and Smart Rent at $2.2 billion. Homebase was much smaller and earlier stage.

My Thought Process
(First, an aside: when evaluating investments I think of them in terms of probability distributions. The shape of that probability distribution adjusts as I get more information. As I talk through my thought process here, I’ll reference this payoff distribution frequently. OK, let’s get back to it.)

At this time the SPAC market was still quite hot. While my general view was that the SPAC market was overheated and valuations were getting inflated, I have learned to both develop my own independent opinion of a company’s worth and to understand that – when actually seeking liquidity – the price of an asset is what the highest bidder is willing to pay. I was also aware that while the hot SPAC market could disappear at any time – it hadn’t yet.

Moreover, while this company was still early stage, the fact that two competitors had recently gone public told me a few things. First, at a minimum there were clear, public comps available. This would allow me see how Homebase compared from a metric-to-valuation perspective. Second, given the general SPAC frenzy, I thought that this might make it easier for Homebase to go public via a SPAC in the future since the approach had been ‘proven’. Third, I figured that even if Homebase didn’t go public that way, there were now at least two competitors in the field with a lot of cash that could potentially acquire them down the line. Finally, I thought that the fact the fact that two companies in this space had gone public might indicate that there was something fundamentally successful about the business-model / timing interaction (i.e. it was a sign of a fundamentally good business model at the right time in the market and not just some rockstar team or fluke of luck). Given how hot the SPAC market was, however, it was also possible that this was just another company being sold on hype (I’m looking at you, WeWork).

For all the reasons above, this deal immediately caught my attention enough that I decided to investigate further. Given that the company was already beyond a typical “seed” or “pre-seed” valuation, in my view a ‘spray and pray’ 1/N approach wasn’t appropriate. Therefore, I knew that to even invest at all I needed to feel comfortable that there was a real business there at a reasonable valuation. However, I also thought that the SPAC route might provide a potential far right tail on the distribution, which might effect how much I would invest. I’ll talk more about this later.

So I started digging.

Step 02: High Level Market and Competitor Analysis

What I Did
Though I wouldn’t always do this step first, because of the two recent SPACs, there was a treasure trove of relevant data that I could find just by looking at the public documents that each competitor had provided to investors during the process (which were available on their websites), but it was also relatively easy to find other people’s analysis of those companies. I could then triangulate at least some of those data points with other sources just to make sure the numbers seemed reasonable.

I first started with the general market and my knowledge about it. Homebase’s general market was the “rental home / apartment space” since they are (mostly) selling to contractors building new buildings and landlords. I knew that real estate generally was the largest asset class in the world so that part was fine, and intuitively I felt comfortable that the size of the rental market was pretty large. A quick search told me that there are about 47M rental homes in the US and 93M apartments in Europe. Without nitpicking, that seemed ‘big enough’ to me. Now I didn’t yet have a feel for what ‘end’ of the market (i.e. luxury, mid-market, low-income, etc.) Homebase was really targeting so I didn’t do a deeper analysis yet on that, but I did make a note to come back to that later. I also knew that real estate was likely undergoing a significant transition, which had only been accelerated by COVID: more remote work, at least a temporary flight from large cities, and likely a more permanent reduction in demand for much commercial space. That said, people still needed a place to live, so in aggregate residential real estate would likely continue to be needed. I also knew that, at least prior to the pandemic, Millennials were renting longer and many said they preferred renting over owning. (I didn’t evaluate whether or not that had shifted due to the pandemic, which I probably should have). However, I did think quantitative easing coupled with the pandemic was likely to continue to push property prices higher (at least temporarily), which would make it more difficult for folks to afford to buy even if they wanted to.

I also believed in the general trend of digitization of the home/apartment. Products like the Nest smart thermostat, Amazon Echo, Google Home, etc. continue to grow in penetration, and it seemed reasonable to me that landlords were a next segment.

In short, the general trends seemed favorable.

Next I took at look at the financials. While I can’t talk about Homebase’s financials because they are confidential, I can talk about Latch’s. Take a look at just a few (these are from their SPAC presentation and so were accurate as of that date):

If you compare those metrics to other public SaaS companies, those are near the top of the list. Importantly to me, Smart Rent had similar metrics so this said something about the general sector/model and not just about one company.

My Thought Process
There were a couple of things I took away from the above exercise. The first was that, given unit economics, unless I was missing something (which I was very aware I could be), the fundamentals of the business seemed pretty good. The second was that, while there were some network effects at play, this didn’t feel like a “winner take all” market, though because of the high switching costs (is a competitor’s electronic lock going to be so much better that you’re going to want to switch out all the locks in your building again?), I figured there would be a bit of a “land grab” dynamic, where part of the game was simply getting to scale quickly and “grabbing” as much territory as you could. In this scenario I figured the most likely outcome is an oligopoly situation.

From my research above I figured that the market was large enough that Homebase still had a chance to become one of the large players. This extended the right tail. However, I also figured that even in the situation where they become only a “medium size” player, that positioned them reasonably well to be fought over by any other bigger players with large balance sheets. Not a bad place to be. This shifted the ‘mass’ of the distribution right. The main risk then (from this perspective, anyway) was that they would grow so slowly that they wouldn’t be able to capture a footprint large enough to be valuable.

Step 03: Zoom in on the Company

What I Did
The first thing I did was speak to the team. While what I look for in teams is beyond the scope of this post, generally speaking what I’m looking for falls into two buckets: individual level things (e.g. intelligence, drive, self-awareness of a particular kind, relevant experience, etc.) and team level dynamics (is the team truly aligned on the mission, strategy, risks, their respective roles, etc.).

I again won’t go into a lot of detail here for confidentiality reasons, but I did speak to folks on the team and tried to understand their backgrounds, roles, and outlook. The reality – by their own admission – was that the management bench wasn’t that deep and, at least on paper, wouldn’t be what you’d consider a ‘dream team’ compared to their competitors. It was also true that (some) of their metrics were not quite as far along as their competitors had been at the same age. Finally, they were dependent on one particular relationship that was tremendously powerful for them but also could be problematic if that relationship went bad.

On the flip side, there were many positives. First, the reason some of the metrics were not quite as far along had to do with some specific strategy choices they made early on which would cause them to move a bit slower at the beginning but then – if you believe their thesis – would allow them to scale more quickly from then on. To me, this thesis was the crux of the differentiation and so the question became “do I believe it?” More on this later. Lastly, partially because of this strategy choice (among others), Homebase had gotten nearly as far as competitors had in the same amount of time, but with substantially less capital required.

My Thought Process
Now here’s where I might start to get a little controversial. See, I didn’t necessarily take the lack of an existing rockstar management team as a negative. In fact, this actually only reinforced the fact that this was likely a good business to be in. Why?

Warren Buffet has a famous say that goes something like this: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” I think this is a wise statement. But then I would also argue that a version of the contrapositive is also true: if you see a business with good economics with only a “good” (as opposed to great) management team, it’s probably an indication that the underlying business is a good one to be in. Think of it like a movie star. If someone is a movie star, they are usually talented, good looking, or both. In aggregate, looks + talent needs to cross some threshold. The less good looking they are, the more talented you can probably infer they are (or the son/daughter of the producer). In my view this actually decreased the weight given to the left tail of the outcome distribution.

Beyond this fact, the team readily admitted their weaknesses. Self-awareness and humility (at least of a certain kind) can be very helpful to a team if it means they will do what is necessary to supplement or replace that team to shore up gaps. This slightly shifted the probability mass to the right.

The obvious other part of this is understanding the relative valuation of Homebase vs other competitors (and other deals generally). Based upon the metrics and comps, the valuation cap and discount on the SAFE appeared to value Homebase at a reasonable discount given its earlier stage and less mature management team.

Step 03: Contraindications & Deeper Dive

What I Did
By this point in the process I was leaning towards making an investment so I flipped to the risk side. I asked myself a few questions:

  • (1) Assume things didn’t work out well – what are the most likely reasons why?
    • What evidence do I have today to suggest how (un)likely these are to occur?
    • How aware is the team of these these things and what plans to they have to reduce their probability, impact, or both?
  • (2) What are the core assumptions that must hold true for this to be a major success?
    • Do I believe they’re true?
    • Do others I consider credible in the relevant area believe they are true? If not, what is their rationale and do I agree with that?
  • (3) What evidence, if I found it, would cause me to change my mind?
    • Does that evidence exist?
    • How can I find it?

Using this as my guide, I came up with a specific list of questions for the team and asked them to provide answers and relevant information where possible.

Going through all of this in complete detail would make this post even longer than it’s already going to be, so I won’t do that here. For now I’ll focus on one of the core assumptions I spoke about previously, which had to do with a particular part of their strategy that was different from their competitors. For this particular point, I tried to drill in to understand why they thought their approach was better. I saw the logic and merits of their approach. But I could also see the risks and downsides. Ultimately, I felt I couldn’t determine which approach was better. More on this later.

My Thought Process
My goal in this process is two-fold: first, to maximize the amount of information (in the information theoretic sense) that I get while keeping the burden on the management team in check. Second, by hearing (or reading, which I personally prefer) their responses, I get a deeper insight into how the management team thinks about these issues and how deeply they’ve thought about their business.

I didn’t get all the answers I asked for, but I did get many of them. I would say that the answers I got in return were about what I expected: there were several of the questions that the team couldn’t answer well, simply because they were difficult questions and the future is uncertain. A few of their answers allayed my fears in certain areas, and a few were not as well thought through as I would have liked.

The overall picture their responses painted was mixed: on the one hand it reinforced the lack of depth on the management bench and the amount of thinking they had put into certain aspects of their business. On the other hand, part of the reason they likely hadn’t put much time into thinking through these things was that the business was growing so rapidly that they were understaffed. Net, I would say this exercise shifted my perceived probability distribution to the left slightly.

Step 05: Act Like a Customer

If you’re talking to the management team of a company, it’s probably likely that you’re going to get a relatively favorable view of the organization. Not only are their incentives aligned, but many executives are executives in part because they are good sales people. Thus, when it makes sense, I like to put myself in the position of a buyer.

What I Did
If I actually was thinking about buying Homebase’s products and services, what would I do? I’d browse the website, I’d search the web for reviews, I’d contact and talk to their salespeople…and then I’d do the same for their competitors. So that’s what I did. I found that all three companies were responsive. Latch was the most polished and professional experience of the three and Homebase the least, but Homebase made up for that with some ‘Midwestern hospitality’ (they are based in Kansas City), and the salesperson I talked to was very genuine and friendly. One thing I didn’t do, but should have, was ask each group more directly about the other to get their take; I think that would have been very helpful. I also did the mandatory Googling around to find reviews of the companies, their products, and their app. (Note that my wife and I do own real estate investments so we could evaluate as actual potential customers, I would do something similar even if I weren’t in a position to be a customer.)

In terms of Homebase’s product offering and pricing, there were actually some limitations I was saddened to hear about (namely, they just couldn’t unlock your door if you got locked out), but those limitations were imposed for legal and security reasons, which affected all competitors. The smart lock offering didn’t seem compelling enough to us alone at the moment, but when combined with their wifi solution it seemed interesting. Unfortunately, their wifi solution is much more applicable to larger buildings and/or new construction. Thus, while not a good fit for us at the moment, it was clear to me under which situations it would make sense for us to purchase, and that situation seemed reasonably likely to occur in the medium term.

My Thought Process
From this exercise, it was clear that both Latch and SmartRent were more mature, polished businesses and that Homebase was still acting more like a scrappy, lean startup. It also became clear that there was a time-tracking app that was also called Homebase, which confused some reviewers. On the flip side, my actual experience with Homebase sales and customer service was prompt, friendly, proactive, and helpful. I thought they could do more to further simplify their product and service offering, but as a customer I would easily have considered buying from them.

Some of the limitations on the product and services surprised me, which did shift my distribution to the left, but did so for all competitors not just Homebase. However, it did help me understand further that their solution was really more appropriate for larger buildings, which made me revisit the distribution channels that each competitor was building to make sure that they accounted for this reality. Latch, for example, had gone public partnering with Tishman Speyer, a very large, high-end real estate developer and owner. This was a perfect match for what Latch was trying to do. Homebase had developed a few key distribution partnerships as well; while they might also be good, the uncertainty (to me) was higher than with the Latch / Tishman partnership. To me, this both spread out the mass of the Homebase distribution a bit and shifted it slightly to the left.

Based upon the information provided, however, I now felt I had enough information to move into position sizing. Let’s turn to that now.

Step 04: Position Sizing

The thing about money – at least for the purposes of this discussion – is that it’s a continuous quantity. Therefore, I think a much better question than whether or not to invest is how much to invest. If the amount you invest is zero, that’s fine too. But zero is a quantity just like any other.

Now in many situations it may not make sense to invest $10. Perhaps there’s a minimum investment. You have limited time and attention so you may decide to limit yourself to a fixed number of investments you can track. My point is only that, in general terms, the amount you invest should be a reflection on the confidence you have in the bet, how much it’s worth if you’re right, and how much money you have to be betting with in the first place.

Investing is both a quantitative and qualitative process. Doing the initial assessment of the unit economics, market and company growth rates, and relative valuation were quantitative. Assessing the general market dynamics, consumer psychology, competitive landscape, risk and opportunities were most qualitative. When thinking about position sizing, we move back to the quantitative side. What I like to do here is based upon the information I’ve collected so far, come up with a ‘gut level’ estimate of the right amount of money to invest. In this case let’s call that $X. I then like to use quantitiative methods to calculate an answer and see how far apart they are. If they’re pretty close, I feel good. If they’re way apart, it means I need to reevaluate my assumptions (or my math). I had come up with an initial $X, so now it was time to dive into the numbers.

To assess the amount to invest, I use a modified version of the Kelly Formula. I’ll write a separate post on that at some point, but for those of you who aren’t familiar with it, given the appropriate inputs, it tells you what percentage of your portfolio you should invest in a given bet if you want to maximize your geometric rate of return over time. While a full explanation is beyond the scope of this post, what’s important for now is that it requires you to make estimates of two key parameters:

  1. The probability of success
  2. If you win, how much you’d get for every dollar you invested

Let’s start with the probability of success. Using the odds form of Bayes’ Rule and making a judgement based upon everything I had learned up until now, I made the following estimate:

So I assume a 25% chance of success. Not great odds, but for a startup that’s not bad.

Next I needed to estimate how much I would receive if the company was successful. Using some data on the distribution of returns for similarly staged companies (which I’m sorry I don’t have the link for any more) and defining ‘success’ as any company that returned greater than 5 times my money), I took the expected value of the remaining part of the distribution. This left me with roughly 14x invested capital. In other words, assuming I only looked at companies that had made their investors at least 5 times their money, if I had invested in all of those, I would have made about 14x the money I invested.

Plugging that into to my modified version of Kelly’s Formula:

According to this formula, I should take 6.5% of whatever money I have to invest and invest it in Homebase. Now there are a few caveats here. The first is the ‘whatever money I have to invest’ part. I typically think of this instead as “whatever money I’ve allocated to invest in risky, early stage companies. As you can see from my general investment portfolio, this is actually relatively small.

[The second point is more technical for those who are already familiar with Kelly: though many practitioners use half-Kelly as a general rule, in a 1997 paper Thorpe himself described how to adjust the Kelly approach when multiple opportunities are offered. Beyond this diversification adjustment, there is also the degree of confidence you have in your assessment of the probabilities and payoff involved. You also have a time value of money when investing for an extended period. Finally, when investing in an illiquid asset you lose liquidity and hence optionality. Given this, in my view a 50-66% reduction in the amount allocated seems reasonable. More to come on this in a future post.]

Step 05: Adjust as New Information Comes In

One should always be open to changing their mind as new information comes in. The beauty of Bayes’ Rule is that it formalizes this approach.

In the previous step I had estimated the probability of success (which I defined as a return of 5x my money or greater) to be 25%. However, recall from the very beginning of this post that the shape of the right side of the probability distribution was influenced by the chance that Homebase might be able to go public via SPAC. Since first starting to investigate the company, however, the SPAC market had since cooled off due to some comments from the SEC. In my mind, this definitely reduced the probability of a ‘quick, big win’ scenario. In my estimation, I thought that given the company failed, the probability that this had happened was about 25% higher than if the company had ended up being successful. Therefore, I adjusted in the following way (note that the posterior probability from round 1 becomes the prior in round 2 – this is how Bayesian updating works):

As can be seen, the net effect of this was that my estimate of the probability of success dropped by 4%.

The other thing I did to collect additional information was to ask other people I respect their opinions and concerns. While many folks were very bullish, a few folks were skeptical and provided their reasoning. In general most of the differences were due to higher or lower weighting on different factors, but at least one person did provide me with a perspective that I hadn’t considered before. Net, I adjusted as follows:

This further dropped the probability of success to 17%. Let’s stick that number back into my modified Kelly formula:

The recommended allocation has dropped to 3.7%. This may seem small, but if applied to each position in a portfolio, that means the entire portfolio is only 27 positions; many people would still call that a fairly concentrated portfolio.

How did this compare to my initial “gut level” investment amount? It was lower by a reasonable-but-not-crazy margin, which told me it was probably just protecting me from some of my risk-seeking tendencies.

Step 06: Position Shaping

This step isn’t always possible (or appropriate) in the way I’m going to talk about here, but I wanted to include it because it illustrates how I think about investing more broadly.

Your investments are really just an expression of your beliefs about the world. As I mentioned earlier, your position sizing is part of this expression. In many cases then, I find it helpful to first express my general belief about the world in words and then figure out how to express that in terms of positions.

While a full synthesis of my beliefs at this point would make this post even longer, for my purposes here, there were a few key points:

  1. I fundamentally believed in the continued growth of the smart apartment market
  2. I also believed that all these players – Latch, SmartRent, and Homebase – had tapped into a model with fundamentally good characteristics, strong unit economics, high switching costs, and land-grab/oligopoly dynamics, some network effects, and recurring, SaaS-type revenues.
  3. Each had slightly different strategies, however, on how they thought best to create and capture value. None of them were obviously wrong to me and – despite my efforts – I couldn’t get a lot of conviction about which strategy was the best.
  4. From a valuation standpoint Homebase was the most attractively valued but I could also understand why. And, unlike the public companies, an investment there was illiquid.

Given this, I did what made the most sense to me: I bought all three. This helped mitigate the risk that I would pick the wrong one, but allowed me to make a bet on the sector. Homebase was still the largest position for several reasons (valuation, deal terms, and acquisition potential), but in aggregate I collectively bet on the space with a weighting towards a particular investment.

Conclusion

So there you have it. While long, it hopefully gave you some idea about how I approach investments. Questions and constructive criticism welcome.

Advice to a Recent High School Grad

My Godson just graduated from high school and is getting ready to attend college in the fall. I couldn’t attend his graduation party, but I did want to give him a gift. In addition to some noise-cancelling headphones, I wrote him a letter with some advice that I wish I had received when I went to college.

Below is the letter. Now this letter was a tailored to him so this is not necessarily the advice I’d give everyone. And I’m certain not everyone will agree with all I’ve written. But here it is.

Hi [Redacted],

Congratulations! Graduating high school is a big life milestone. I’m sorry I won’t be able to attend your graduation party, but I wanted to send along this note and a gift in my absence.

I asked several people about a few different gift ideas, and we all agreed that this would likely be something you would find useful for both fun and work. I actually got some a couple years ago and definitely wish I had had them in college. I hope you enjoy them!

I also wanted to give you a few pieces of advice that I wish someone had told me when I was going off to college. If you search the internet for “advice for college students” (which you should!) you can find lots of great information, so here I’ll focus on a few things that either I didn’t see elsewhere or that I felt would have been particularly useful if someone had told me.

Begin with the End in Mind

First, begin with the end in mind. What do you want to get out of the college experience? A job? To expand your horizons? To make new, lifelong friends? To learn more about yourself? College is different from high school in many ways. But one of the biggest is how many more options you have and how much more freedom you have in choosing between them. Because your time is limited, it’s helpful to at least spend a little of it thinking about what you hope to get out of your college and what steps are most likely to get you there. This doesn’t mean you can’t or shouldn’t change what your goals are as you learn and grow. In fact, that’s probably likely. But having at least some tentative idea about what you think your goals might be can help you be more conscious about how you spend your time.

Figuring out a Career Path

A career path should lie at the intersection of three things: what makes money, what you’re good at, and what you enjoy (in that order of importance). The people who get paid a lot typically are pretty good at at least one of four things: selling/marketing, managing people, managing money, or creating something that can be reproduced over and over (e.g. writing software, designing a microchip, discovering a new drug, etc.). You can also make pretty good money if you have certain professional certifications (e.g. a corporate attorney, a surgeon, etc.) You should therefore ask yourself and others who know you well which of those areas you are most skilled and which you enjoy.

Even if you think you’re pretty sure, one of the things I’d recommend early in your college career is to try to take a few classes in each of those areas that might give you a better sense of those things. I don’t know that there are many classes that focus on selling, but there might be some classes in negotiation or you could even start a small business on campus. For marketing you can obviously take marketing classes, but if you do that I’d really focus heavily on courses that are very quantitative (e.g. database marketing, digital analytics, etc.). For managing people, the best way to do that is to get a job where you are trying to coordinate a lot of people or try to get into a leadership position on campus at some point and gain some experience. There’s a lot to being a good leader/manager but a desire to coach and mentor people along with excellent communication and organizational skills are key. For managing money, I’d recommend taking accounting and finances classes, or even economics. Finally, in terms of actually making stuff, I’d say computer science and/or industrial design classes (like actually designing products) are good areas to focus. The other types of classes I’d recommend are those focused on statistics. Unless you’re going to be an engineer, statistics will be way more useful in the real world. And of course, if you have any interest in the law or medicine, taking classes in law or biology/chemistry is a good idea.

The main point I’m trying to make here is that early on you should cast your net semi broadly and get some sense of what areas are of practical interest to you. I have nothing against taking classes like poetry, art history, or psychology, but I’d recommend that you wait to take those until you’ve chosen your major and need some other classes to balance out your workload. When in doubt, finance classes are always useful – money touches most things.

Beyond the classes, I’d say that if there’s something you’re interested in that you think might want to pursue in a career, see if there’s some way to get involved with it while you’re in school early on. Maybe there’s a group on campus. Maybe you start a business or a blog. Maybe you start coding on your own on the side. It’s important that you try to actually do the thing you think you want to do. Yes it may help you get a job down the road (more on that later), but – even more importantly – it can help you understand what doing that kind of work is actually like – sometimes, the reality can surprise you. 

You may also want to consider visiting the career center at school. Most students don’t even think about visiting until senior year, but in actuality the resources there are a lot more valuable when you have four years to learn and plan than when you’re two months from graduation and scrambling to find a job.

The next things are internships and interviews. They can help you figure out which types of jobs you might enjoy. If you think you are interested in X, see if you can find professors in that field and just ask them about it. They probably know former students in that space. If there’s an alumni directory, search on there for people in those fields. (You can also used LinkedIn.) There’s a phrase that goes “ask for money, get advice; ask for advice get money twice”. By reaching out early before you’re actually looking for an internship or job and just asking if they’d be willing to talk on the phone or meet for coffee, not only can you learn a lot about various industries but – if you do decide that you want to intern or get a job with them later – you will have already built a relationship with them.

Finally, though I would still recommend that you go to college, you should be aware that the job market is shifting in big ways. Google, for example recently announced a program called “Google Career Certificates”:  they are online courses that – if you take them and pass – Google will consider them equivalent to a four year degree. There are also programs that are called “coding bootcamps”, which aim to give you the practical skills necessary to get a job as a software developer in the course of a few months. The reason I mention this is not to dissuade you from going to college but to make you aware that there are many forms of education available. You shouldn’t assume that just getting a college degree is all you need to do to be successful (or, conversely, that not getting a college means that you’re stuck.) While it’s not the majority view yet, more and more employers are starting to realize that what matters is not having a piece of paper, but that you can do the job they need you to do and can learn and adapt as needed. 

Now if you really want to be a professional athlete, movie star, or famous musician, I’m not saying don’t try. Do try, and try hard. But statistically speaking it’s probably not going to happen. So be smart about having a plan B.

Position Yourself to Get a Job

The good news is that two of the most important ways to figure out what you might want to do – doing actual work in the space and informational interviews/internships – are also two of the most important in helping you get a job by the time you graduate.

Here is the absolute #1 most important thing you need to know about getting a job: it’s almost always about relationships. For companies hiring a new college grad, they’re often going to get hundreds (if not thousands) of applications. The single best way to differentiate yourself is through a referral. That means building relationships: relationships with folks at potential employers, with professors or staff, even with other students – sometimes a friend of yours might get hired before you at a place you want to work and they can refer you; sometimes they might have a parent or older sibling that works somewhere. You never know.

When you combine the relationship with demonstrated interest in the area (through thoughful questions, joining relevant clubs, doing relevant work on the side, etc.) and decent grades, you’re in great shape. And while grades are very important, if I had to choose between a 3.1 and amazing relationships and a 3.8 and no relationships, I’d take the former in most cases. Keep in mind, however, that some scholarships, clubs, etc. have their own GPA requirements. This isn’t advice to skimp on the academics.

Don’t be afraid to reach out to folks. A lot of times people will respond to students. Create a profile on LinkedIn and search for folks in your field. Or look in your alumni directory. The best note is short and goes something like this: 

Dear Mr/Mrs X, I am currently a [freshman/sophomore, etc.] at [school]. I am very interested in learning more about the [field]. [Some explanation of how you found them] and was wondering if you’d be willing to speak for 30 mins and tell me more about the industry and your role. 

Not everyone will respond but some will. Take them up on it. Be prompt and prepared. And then follow up with a thank you note. Then – and particularly if it’s a thing you think you might actually want to do in the future – send them an update note every semester or so: how things are going, what you’ve been doing, and express your continued interest in the field (or ask about possible internships). 

If you start doing these things early on, you will be light years ahead of most other students come graduation time.

Develop Relationships

I talked a little bit about this already, but really take the time to meet new people and develop new relationships. There are two reasons to do this. First, it will help your career. Second, it’s rewarding in its own right.

First, money. Generally speaking, we live in a capitalist society. This means that the people who control the capital are basically in control. For the purposes of this letter, there are two types of capital. The first is financial capital. This is money. All else being equal, having more money is better. The second is human capital. This refers to people’s skills, talents, time, and attention. If you invest those types of capital effectively, you create more of them. If you invest ineffectively, you destroy them. You have your own talents, abilities, time, and attention, but those are inherently limited. You can’t be good at everything. But other people are good at other things. By getting good at developing and maintaining relationships, you get access to other people’s talents, abilities, time, attention, money, and relationships.  More practically, whether you’re looking for a job, someone to hire, a new client, an investor, or even just some advice, having a wide set of relationships makes all of these so much easier. This is somewhat true when you’re graduating. By the time you’re 30 it will be pretty important. And it only gets more important the older you get.

Second, meaning. In 1932, a Harvard doctor named Arlen Bock tried to conduct a definitive study of what leads to a life of satisfaction and happiness – what he called “human flourishing”. Between 1939 and 1946, Dr. Bock and his team selected about 250 sophomores from the Harvard undergraduate class, which ended up including four members who ran for U.S. Senate, one who served in a presidential cabinet, and even a young JFK. The men were evaluated at least every two years by questionnaires, evaluations from physicians, and in many cases by personal interviews. Information was gathered on every imaginable dimension: mental and physical health, career enjoyment, retirement experience, and marital quality…all from the time they enrolled in the study for the rest of their lives – it was to become known as the Grant Study, one of the foremost longitudinal studies of 20th century social science. In 2012, George Vallant, who directed the study for more than three decades, published a book called Triumph of Experience, a summation of the insights from the study. There are many interesting findings, but in my mind the most important finding is the following in Vallant’s own words: “The 75-years and $20 million expended on the Grant Study points to a straightforward conclusion: the only thing that really matters in life are your relationships to other people.”

So how to do this? If you’re naturally extroverted then you’ll do it automatically. If you’re introverted, it may take a bit more work. But make the effort. Join that club. Ask that girl out. You don’t need to be someone you’re not but put in the effort to at least be in situations where you have the opportunity to develop relationships with others. The reality is that you probably won’t remember most of what you learn in your classes. But many of the relationships you forge could last a lifetime. 

Do Well Enough in School

The first thing I need to say here is that “well enough” is really defined by your goals. If you want to go to med, law, or grad school –  then having top grades (~4.0) really matters. If you want to try to get a highly competitive job at a top company (Amazon, Goldman Sachs, etc.) then slightly lower grades (3.75+) are probably fine if you have built the relationships and have demonstrated real interest by doing work in the field. For most other things, a 3.0 is probably good enough and a 3.5+ is quite solid. If you’re getting below a 3.0 you need to do some combination of working harder, getting some help, or considering changing your major.

I won’t go into a ton of detail since you can find a lot about doing well in school online, but here are some quick tips on how to do well:

  • Use the resources the school has. Go to office hours. Go to writing clinics. Ask your (smart) friends. Ask the teaching assistants. Youtube and Google are your friends. DO NOT BE AFRAID TO ASK FOR HELP. You are the customer (and the product) – the professors, teaching assistants and everyone else are there to help you. 
  • Figure out your own schedule. Some people are morning people. Some are night folks. Some people work best in uninterrupted blocks. Some people like to work for 90 mins then take a while to recover. Figure out when you are best able to focus and plan accordingly. Plan for about 3 hours of work outside the classroom for every 1 hour in it.
  • Figure how you study best. I personally found it was best for me to skim through the textbook before lectures as well as after.
  • If you’re in classes with problem sets, find others in the class to work with. It will be a lot easier working with a group.
  • Did I mention not being afraid to use the school’s resources? 

Working While in School

First of all, I recognize that some people have to work during school in order to afford it. But if you’re not in that situation, I’d generally recommend against it unless it’s really aligned with what you think you may want to do in the future. If you think you need more money, I’d first try to talk with the school – sometimes they have additional grants that they can provide. Next, assuming you haven’t taken out crazy amounts of debt to go to school already, I’d consider taking out an additional loan amount to cover the extra cost. You can also search for something called an “income share agreement” – this is a new way of paying for school where you only pay once you have a job and can afford it.

My reasoning here is that every hour you spend working (say in Starbucks) is an hour you could have spent studying, or writing your blog, or programming, or networking with potential employers. If you spend those hours doing those things, I can virtually guarantee you that’s a better investment. Now if take out a bigger loan, don’t get a job and then spend those hours watching TV or drinking (when you’re over 21, of course), that’s a different story.

Expand Your Horizons

Once you have some idea of what kind of path you think you might want to be on, are developing relationships, and are doing well enough in school, the next thing I’d suggest is to intentionally and proactively expand your horizons. Here are a few experiences that might be interesting to try – even if just once – while in college: write for the college newspaper; study abroad for a semester; volunteer for a political campaign; play an intramural sport; volunteer at a soup kitchen or other non-profit; learn Brazilian jiu jitsu; join a choir; play an instrument; do yoga; take a cooking class; learn to meditate. Always do some mix of spending time on the thing you think you care about (as doing so will tell you how much) and trying new things you’re curious about or even know nothing about just to learn. When you start working full time you’ll have plenty of time to focus. Now is still a time to explore.

Try to Enjoy the Journey

I found this paragraph online and though it captured the sentiment well:

“College can be a very exciting time of your life, but it can also be a very stressful one. Universities advertise themselves as places full of fun-loving, amazing students enjoying every day by hiking on the local trails, dressing up in school colors, cheering at football or basketball games, discovering their true passions, and having ‘the best four years of their life’. But college is also a place where you spend a lot of money taking classes that are likely considerably more difficult than anything you’ve taken in the past, with the hope that the effort will land you a better career someday, but only if you spend a lot of time networking and finding other opportunities to grow your resume, all while trying to figure out what it means to be an adult now and not a kid anymore. It can be so overwhelming that it’s very easy to just curl up in a ball and accept that the students around you will be better off than you, and that’s just the way it is.”

Particularly at times during the first couple of years, you may find that college can be overwhelming, stressful, and many other things. If that’s the case, don’t be afraid to reach out for help. Talk to your parents. Or your sister. Or your friends. Or people at school. Or me. Whatever helps. When things get really stressful, take a few deep breaths and remember that, in the grand scheme of things, whatever it is isn’t that big of a deal. The data I’ve seen suggests that the first two years are often the hardest from an adjustment perspective. If you can persevere through the first two years, things usually get better.

With that said college can also be a fun and exciting time. Though it may not always feel like it, in many ways it’s the time (perhaps until retirement) when you will have the maximum amount of freedom with the minimum amount of responsibility. You’ll learn a ton, make great friends, have fun, and make memories that last a lifetime. Four years may sound like a long time, but it’ll go by quickly. So enjoy it. I’m rooting for you.

Love,

Brendan

What did I get wrong here? What important thing did I miss? What advice do you wish you’d received before going to college that you don’t think is commonly given?

Interaction Effects

We often talk about the world being made up of discrete entities or concepts. This is a helpful construct, but it’s also the case that interesting happens at the interfaces between them. Some examples that come to mind:

  • Nature vs Nurture (I). Epigenetics shows how the environment can change which genes are expressed.
  • Personality and Income. Some great research by Dr. Rong Su at Purdue University provides evidence that being a highly extroverted man hurts income potential when he comes from a low socioeconomic background but helpswhen he comes from a high socioeconomic background.
  • Nature vs Nurture (II) The latest evidence I’ve seen suggests that intelligence and personality show a high degree of heritability. Not at surprise to me. However, even much of what would we would call “environmental” factors are often themselves influenced by genetics. For example, the parents inclination to have books in the house or read to the child – or the child’s interest hanging out with certain kinds of people – is itself highly heritable.
  • The Myth of A-Players. There is often a belief that a person who has been successful in one environment will be an A-player in all. But the data and anecdotes don’t support that. Context matters. (Another reason why I think a lot about how to assemble teams and establish a culture.)

Most of this comes down to the fact that, in any complex system, everything is connected. We think of bees and flowers as separate things. But how long would either last without the other? My view? There is no bee or flower. There is only the bee-flower system. And so on.

We as humans are not particularly good at understanding the relationships between things that are separated by time and space. But just because we can’t intuit them easily doesn’t mean they don’t exist. Breaking down the system into parts may help us organize our thinking, but sometimes those conceptual distinctions can bias or limit our understanding.

Process Over Outcome

Consider a group that is attempting to create organizational or political change. I typically see the leaders of these groups take one of two approaches.

The first is to get a bunch of like minded people together in an attempt to “make things happen”. These types of groups mostly agree on what needs to be done. But this approach often suffers from two problems.

First, there are other groups of stakeholders who may not agree that the proposed solution is the right one. Since most situations like this require buy-in from many different stakeholders, this lack of buy-in dooms the solution to failure. Second, even when the group does have the ability to “ram through” their solution without securing broad support, their solution is often missing key perspectives or makes invalid assumptions, which render their solution ineffective.

The second approach is to bring a diverse set of stakeholders together and attempt to get alignment. This approach addresses the problems above but often runs into its own challenges. In many cases each faction has their own favored solution that they “know” is the right one; each group is just waiting to take the floor so they can explain why their solution is the one that will work. Groups may question the motives of the other groups and trust can often be strained.

The Power of Process

The power of the scientific method is that – at least nominally – scientists are not wedded to a specific “answer” but instead are aligned by their agreement on a fundamental process: they agree on a set of methods and processes for determining what is true.

It seems like this would be a better approach to change management as well. Rather than starting by trying to agree on a solution, start by getting agreement on the process by which we will arrive at a solution.

Note that in some cases this approach might mean using a different set of criteria for who is invited into the group. Perhaps it might mean splitting folks into two different groups: a content group who are experts in a given area or representatives of a given constituency, and a process group whose job it is to take the information provided by the content group and use it to inform their process.

Getting key stakeholders in each group to agree to a process achieves two things. It negates any specific emotions or biases that the group might have for or against a given outcome. And it creates psychological commitment to a process, making it more likely that they will agree to the results of the process, regardless of outcome.

This approach does have downsides. First, it requires that each party is willing to give up its “known” solution. It would be naive to think think that ego and self-interest aren’t often at play in these situations. But through a combination of reasonableness and peer-pressure (who wouldn’t want to follow a logical process to get to an answer? *wink*), perhaps these dynamics can be mitigated. Second, because the parties must first agree on a process rather than jumping straight into the content, this approach can seemingly take longer. Of course the only time measure that matters is the time to achieve the desired outcome. And I’d argue that this approach will lead to better outcomes more quickly.

Getting alignment is never easy. Nor is designing solutions that work. But it seems like focusing on process over outcome might help.