Contents:
A business is an activity we control with an expectation of a profit.
The payoff is often uncertain; if we do consultancy work, it's easier to predict the boundaries.
Success is when payoff meets expectations; in other words, our bet meets the expectations.
What's necessary for a business to become successful? Many things, but these often are not sufficient, because we're dealing with human behavior, which is random / unpredictable.
If there is a variable which is off, the business will fail. But we don't know why! The fact is that nobody understands this world in reality.
How can we detect unpredictability (after Taleb, The Black Swan)?
- The predictable world: success is almost guaranteed if you do the correct things and put the effort. Example: learn medicine and become a doctor.
- The stochastic world: success is randomly determined. Examples: writing a book, starting a company, etc.
The most familiar one: we study, start a job, follow the career leader, etc.
Degree of success is within a narrow range.
We have a predictable path and payoff.
It's not necessarily easy, but it's predictable and accessible.
Freelancing consultants belong to this world, because they are coupled to the physical time they invest.
It is unfamiliar to us.
Daniel tells the first thing he did when he quit his job was in line with the predictable world: as a SW engineer, he thought he needed to create a SW product, polish it, work hard.
However, there are wild differences in degrees of success. It is extremely competitive and unpredictable. The vast majority will fail, but there is a large upside for the winners.
Success tends to bring more success: The Matthew Principle
How can be learn to operate in this world? We should look at organizations or individuals that operate in it:
- Venture capitals
- Book publishers
- Movie studios
- etc.
How do they tame uncertainty? They bet:
- They look for authors with ideas
- They generate opportunities
- They manage parallel bets: they build a portfolio
A book on the topic: Hollywood Economics. The thesis is that it's not possible to predict whether a movie will be a success. And the root of the unpredictability is human behavior. However, movie studios are very profitable: they are not on a single movie, but they build a portfolio, which is!
VCs do something similar; they know that
- Start-ups which seem like they are going to be successful can end up as a failure.
- Businesses that seem that they are not going to make it become a success.
They know they're going to have failures; the goal is to succeed at the portfolio level. Example from Statista: Penguin revenue.
They idea is to generate randomness and opportunities and define a filter of what opportunities take or avoid.
Y Combinator is an example.
Daniel thinks that ideas don't come out of the blue in the shower. They rather appear in the random interaction with the world.
- Must avoid tying all time and energy to one thing.
- Must resist believing that something will certainly work.
- Must resist the idea that you've found your best idea.
- Must treat ideas little cattle, not pets.
A full-time job comes with implicit expectations and you can't/don't have time for side hustles. In contrast, a freelancing job gives more flexibility; it's understood that you have other clients.
Daniel talks about the MVP validation approach; he thinks that it's incompatible with the stochastic world. The issue is that when we validate an idea, we think we've found the product-market fit, so we go all in, i.e., we don't have a portfolio anymore!
As an example he gives the first product he launched: Userbase. It seemed to be a success at launch day, even Paul Graham liked it -- i.e., a complete validation. But then, it didn't work. The reason is another company with similar features that seemed to work better. The worst part is he invested a lot of personal money on it.
His lesson is: we should have several projects going on, a portfolio! This also gives you more peace of mind.
Great blogpost by Sahil Lavingia, founder of Gumroad, on the topic.
Daniel thinks AWS is actually a portfolio of around 200 products. Not all of them are successful. Amazon works like an umbrella company which has many products.
The take: we should have a portfolio of clients and jobs going on in parallel. That is a dent in the income in the short run, but an upside in the long run.
Some tricks:
- Try to have low expectations.
- Start projects as if they were small.
- Avoid big bets: don't work long on the project to ship! Long is 3 months? Daniel tries to bring something to market in a week. A month is too much!
- Avoid tying to identities related to businesses or projects; we're more than that and should have the freedom to choose what to be.
- Must have abundant spare time.
- Must be flexible to pounce on opportunities.
- Must have continuous sources of inspiration.
- Must have various capabilities.
Daniel's idea generator is Twitter, consuming his feed. He sees people doing their own thing and he comes up with ideas for his own domain. He acknowledges that most of the days nothing comes up, but there are days on which a strong signal emerges.
We should try to find something similar: something we do every day that can bring us ideas.
- Asymmetric bets are not enough.
- Can't take 1 in 1000 odds if you can only try 5 times.
- Go for the smallest things.
- Trade upside for higher odds of success.
- Then, success will bring with it other success.
Asymmetric bets are the ones in which we invest few, compared to what we can get.
Very important slide:
Examples of income sources:
- SaaS. Expected to have exponential increase.
- Freelancing. Constant income.
- Info products (courses, etc.). Peaks that decay.
Daniel explains how the Small Bets community evolved as something successful even though it had not the current from in the beginning. He did one cohort and it worked, so he organized 4 more and started to invite guest talkers and paid them.
We should avoid things that have high running costs: energy, frustration, time, etc. We should rather have things that we do either happily or generate almost a passive income.
Daniel has become good at ignoring opportunities that would take longer than 1 month to bring to market. He tries to create things that can be published in one week.
Daniel shows two examples of how people miss-understand the random or stochastic world:
- John O'Nolan (Ghost): he said that the key secret was to appear at the office every day even when things were going wrong. That is more an advice for a predictable world, but not for a stochastic world!
- ConvertKit Founder: he said that one should focus on one thing. But he admitted to having tried many businesses before. Thus, it turns out having a portfolio is fundamental.
The problem is not the advice: the problem is that focusing and persevering is valid for the predictable world!
Similar biased advice:
- Focus on one problem.
- Just build something useful.
- Just follow your passion.
- Just make your product 1% better every day.
- Just obsess on your customers.
- Just execute the best idea.
- Just keep showing up.
- Ignore the role of randomness.
- Cherry picking success from the stochastic world.
- Believing that what worked, will always work.
- Believing that what didn't work, will not work. There's a quote over there: "Only fools try the same thing expecting different results"; that quote is not that valid for the stochastic world.
- Ignoring the Pareto distribution of success. Success is usually distributed following power laws. Daniel shows the creator earnings distribution: less than 1% make the vast majority of the earnings.
Daniel has several products and explains how randomness has affected in their success or failure. The takeaway is that when something fails, we shouldn't waste much time thinking on why this has happened. Examples:
- AWS book: random endorsement by Sahil, the founder of Gumroad.
- Twitter course: great success, but no endorsement.
Daniel thinks now more self-published books are sold, for instance at Gumroad. It's important to sense what's going on and what's going to happen. However, we should not trust so much ourselves, instead have a small bets portfolio!
Important paper by Taleb: Understanding is a Poor Substitute for Convexity (Antifragility). At the end, he says we don't need to understand why things work/don't work, but instead have a small bets strategy.
Interesting: Daniel estimates company market size by looking at twitter account followers.
- Predictable world
- Look at what works for others.
- It will almost certainly work for you too.
- Stochastic world
- Hard to separate signal from noise.
- Requires probabilistic knowledge.
- No understanding necessary.
Probabilistic knowledge: if we want to increase the odds of survival of a plant from another environment, we should try to replicate the environment. Similarly, if we want to succeed with a project, we should try to copy the format of similar projects that succeeded. It could be that it fails, but it's better to try things that worked.
Daniel explains several decisions he took, which might not be the best, but he really doesn't know:
- Gumroad landing page for all his products, nothing more, not even a webpage.
- Everything on Gumroad.
- ...
Takeaway: The world is complex.
- We recognize the role of chance.
- We don't ignore randomness, but embrace it.
- Our portfolio strategy is tried and tested for the stochastic world.
- We encourage predictable activities in the portfolio.
- In the stochastic world, we acquire knowledge probabilistically.
When Daniel moved to Seattle 10 years ago, he understood the reasonable approach that the preppers take.
He thinks that the prepper mindset is very powerful:
- Negative visualization.
- Seek peace of mind.
- Scope of robustness.
- Down-side first attitude.
The idea is that we predict what could go very wrong and then plan how to recover from it, or prepare for it - even before it happens. For example: we think we might loose our job, or we have a family and we think we might die.
This way, we prepare and then focus on the upside.
- Be a prepper. Prepare for the bad to have peace of mind.
- Beware of the fallback. Daniel tells how he could go back to his 9-5 job when he quit; however, that's risky: he started thinking big with Userbase, risking too much. It's better to think we don't have a fallback: that way our mindset is like: "this needs to work"; thus, we try more bets, smaller.
- A sense of urgency. Stop playing around and start making money immediately. Daniel tells how he clicked away from the fallback illusion when he realized he didn't want to go back to his job.
- We are wired to earn every day.
- Stay with the low-hanging fruit. Don't start with big things, but with easy smaller things.
Daniel tries to continue with his lifestyle; he manages to not go back to the 9-5 worklife.
Having a small win is very useful, because it gives us information and changes our mindset: we have a funnel (views, buys, sales).
Daniel mentions usually he sees something that works and then he has the idea he could do something similar that works.
Image of the Survivorship Bias story from the WW2: shot airplanes, etc.
- Not much to learn from failures.
- Potential for negative knowledge.
- Small wins bring much ore information.
- Small wins add capabilities.
- Success brings with it other success.
- A string of failures is demotivating.
Luck is favorable randomness. To benefit from luck, we must:
- attract luck
- recognize luck
What knowledge and skills do I possess?
Take stock of your assets:
- Skills
- Interests, hobbies
- Knowledge
- Experience
- Credentials
- Connections
- Capital
- Reputation
- Location (place can be an advantage)
Scott Adams talks about talent stock; he says he's a mediocre cartoonist, a mediocre programmer, etc. But the combination of the talents make him uniquely advantageous and he's got a very nice market-product fit.
We should do something similar: we should analyze our assets and see which is the unique combination we offer; then, we try to go that unique way.
Also, when we start analyzing the combinations, we see which skills are missing: we spot knowledge that would give us the needed advantage for that project we have in mind. Daniel gives as an example that he realized he lacked marketing knowledge and reputation.
So:
- Take stock of our assets.
- Assemble assets stacks.
- Find what's missing.
- Acquire missing assets with small bets.
- Repeat the process periodically. Ideally daily.
Daniel tells how he started answering questions he knew the answer to in Stackoverflow, etc. The first year he tried many different things, like long-form blogging, etc. Now, he basically narrowed down to Twitter.
An inspiration generator is:
- A catalyst for preparation.
- An opportunity for serendipity.
- Find a cocktail party equivalent. For Daniel, that's Twitter. Other people think it's awful and addictive, but he finds many ideas there.
- Makes randomness your friend.
Daniel tells how he decided to write the short AWS because he saw a tweet of a similar book.
He also shows how some Gumroad courses are just first-view iPhone recorded videos with high information density, often niche topics, and without high-tech gear. That catalyzed his creativity: he thought he could start doing the same! That's when he decided to do his Twitter course: he did it in 16h and ended up being more successful than the AWS book.
Lesson: things are very random and sometimes the information quality & density is more important than the formatting.
Sometimes people sell books that are composed of available blog posts, and the books sell! There is an advantage to having everything in a place, a people seem to value it.
Daniel admits he's a perfectionist, OCD type. He's been working on it in the last years in order to have time-boxed small bets.
Question: are there any assets we should acquire before any small bets? Daniel thinks that reputation and marketing are essential; without them we cannot get attention and trust towards our product. However, you don't necessarily need a Twitter audience to ship products; we can use other ways like SEO, etc.
Daniel is selective with possible small bets; he chooses things that have a low maintenance effort.
Some sources:
- Twitter: Peter Askew, levelsio, etc.
- Podcasts: Indie Hackers, Writers on the Side
- Look for expiring domain names on GoDaddy.com
Seneca: Luck is when preparation meets opportunity.
- An opportunity is someone wanting something you can do.
- How do you find these people?
- And how do you make them choose you?
- And how do you get many of these opportunities?
- It boils down to credibility and attention.
There are many ways to get attention, you don't need a media followership.
Attention sources:
- SEO: appear one of the first; it's tough.
- Ads: pay Google to rank high.
- Platforms: Youtube, Amazon, Udemy, etc.
- Website referrals.
- Followers.
- Attending conferences.
- Personal network.
- Public forums: reddit, etc.
- Private communities: Discord.
- Freebies: give something away for free.
- Word of mouth.
Credibility sources:
- Testimonials.
- Reputation.
- Success stories.
- Skin in the game: the pilot is trusted because he's on the plane, too.
- Credentials.
- A good domain name. Good domains matter because when we look for items in Google, we automatically choose the ones that seem more trustworthy -- and in the case of domains, the most credible domain makes it.
- Selection by a publisher.
- Selection by an investor.
- Selection by an employer.
- Selection by well-known customers.
- Marketing. Sometimes marketing is a credibility game: seeing a brand on a billboard makes it more credible.
- Study the people you listen to.
- Study the people you buy from.
- How did they get your attention? Why do we interact with them?
- Why do you trust them?
- Examine your own behavior.
- Not knowing your assets.
- Not having enough assets stacks.
- Asset stacks not commercially viable.
- No inspiration generator.
- No assets that generate attention.
- No assets that help build credibility.
- Narrow goals.
- Too selective; we should have a sense of ethics, but we shouldn't throw away opportunities. Thus, marketing, social media publicizing, etc., maybe deserve a try.
- Busy schedule. Have some slack in the system, be a little bit unemployed to avoid a busy schedule.
- Lack of freedom.
Daniel says he's very ruthless when it comes to time-boxing.
Book recommendation: Alchemy
We are most productive when we're in harmony with how we're wired. That's a mental model, it's not a scientific fact.
Consider the fact that our species has lived 97% of its 300k years of existence as nomadic hunter-gatherers. Thus, one can understand that we're probably wired in a manner which is aligned with that.
If we take a palm and plant it in Alaska, it's going to be hard for it to grow there; we'll need a lot of work, technology, etc. The palm would have to be grown in a greenhouse, etc. That's also more fragile: if there's a power shortage, it will be cold, etc.
Not that we want to go back! But let's analyze how life was back then:
- Most of the time spent doing varied low intensity tasks.
- Interruptions of bursts of effort; e.g., hunting an animal.
- High ROI, high leverage work: they probably leveraged nature, i.e., the humans did the smallest amount of effort necessary and let the nature create the resources. Now things have changed: we don't let plants and vegetables grow, we cultivate them; we don't let nature grow animals, we cattle them.
- No freezers, so impossible to accumulate reserves. Now, we can accumulate.+. Almost no concept of wealth.
- Conserve energy for big opportunities.
- Driven by intrinsic motivation.
- Extremely prudent risks. A minor injury could be catastrophic.
- Vulnerable to extreme events: weeklong blizzards, infectious diseases, etc. A minor injury could be very catastrophic. Imposter syndrome is probably related to that: we want to keep our reputation and not harm it.
Modern life is probably better. But we are wired in the hunter-gatherer world!
- Delivers food on-demand, but requires hard work to make the system work.
- Farming was the first hard work: many things needed to be done now! Wake up early, clean the animal stand, etc.
- All the stuff that happened on its own, now needed to be handled by the farmer.
- Farming allowed unbounded reserves.
- Wealth emerged.
- Lifestyle changes.
- No energy conservation; laziness is bad now, even though we're wired to be lazy.
- Extrinsic motivation was now the most important driver, not the intrinsic one.
- Little variation: most days looked similar.
- Brought down protection: less vulnerable to negative events. Thus, sophistication started to emerge, until we put a man in the moon and invent the iPhone.
So farming changed the world.
Nowadays, we have modern companies instead of small farms. We work for the companies, which build the system. So we work to keep the system running.
- We have embraced the farming lifestyle.
- All randomness has been squeezed out in favor of stability and predictability.
- All high intensity and high ROI activities are smoothed out.
- Consistent hard work with linear and highly predictable results are the norm
- We're operating in a world we're not fit for.
- Ailments:
- Procrastination
- Motivation
- Focus
- Chronic anxiety
- Consistency
It seems that it's bad and e should fight it.
Is it so? Or is it useful information?
Daniel suspects that when we start projects that have a randomness component, the subconscious alerts us, it makes us de-motivated; it makes us avoid unpleasant things.
Instead of directly fighting it, we should pause and ask ourselves:
- Is this a signal that the task is not worth doing?
- Or maybe we are premature?
- Or maybe we're doing more than what's necessary?
So, Daniel's suggestions:
- Find what de-motivates us, and do less of it.
- Find what's important to us in the 80/20 rule. How do we find out the 20%? Maybe procrastination is the key to that: if things are not as important, we tend to ignore them.
We should try to find things that are intrinsically motivating for us.
How can we differentiate procrastination from fear of failure?
The best antidote for that, according to Daniel, is to keep things small.
Hunter-gatherers were driven by intrinsic motivation. Stuff needed to be done, and it was done.
The modern world induces motivation with external rewards or punishments.
Book: Punished by Rewards, by Alfie Kohn.
- Rewards and punishments are two sides of the same coin.
- We want to find ways to convince people to do things.
- But: we don't like being controlled.
- Incentives, bribes, all these are means of control.
- If we reward kids, too, they end up rebelling.
- Setting synthetic goals to ourselves doesn't work in the long run, because we identify the synthetic goal.
- When we are being rewarded, it doesn't work in the long run, because we know it's a mean of control. At some point, we ask ourselves: What's the point?
Similar book: Drive, by Daniel Pink.
Going back to motivation:
- Energy from extrinsic motivation runs out.
- Variable income is a good stressor. We think that steady paychecks seem to be better than variable income; however, Daniel realized that variation in his income makes him smarter, it motivates him! When his revenues decreases, there's often a jump. Like hunter-gatherers, when food decreases, they are motivated to go hunting. Similarly, he feels more creative and does something. Now, he thinks he's the most creative when his income goes down! Variable income makes me smarter
- Alternate between different things.
- Intrinsic motivation is free energy.
Hunter-gatherers had hyper focus. They abandoned useless pursuits quickly.
Modern life requires persevering through boring stuff for long periods.
Thus, our natural wiring is a problem.
Loosing attention and focus is natural; when we loose focus, we should ask ourselves if it is worth pursuing the task.
There is a hunter-gatherer vs. farmer hypothesis in the explanation of ADHD. The hypothesis says that people with ADHD are maybe people who could not adapt to the farmer world: Hunter versus farmer hypothesis.
Hunter-gatherers exercised risk taking every day.
Risk taking is a muscle that atrophies when life is too predictable.
The modern world encourages a sure path towards success; as long as you follow a very narrow path.
However:
- We're not wired to feel comfortable on a path with small margins of error.
- We're not wired to feel comfortable putting all eggs in one basket.
- We're not wired to feel comfortable taking irreversible one-way paths.
Daniel thinks that our ancestors got used to probabilistic thinking. But modern world takes it away.
We're not built for a perfectly predictable environment. We need stressors, randomness, variation, pleasant surprises.
Anxiety can be a good stressor that guides us. Daniel tells how his journey with anxiety has been: when Userbase didn't seem to work he started worrying that he'd loose all his savings. That's when he started freelancing, diversifying, the AWS course, etc. And things changed. So the worries were a trigger.
Thus, Daniels suggestion is to do things that might have an unpredictable result: blog posts, small projects, etc. We should introduce risk in our lives. Too much of it is not good, but a nice dose is necessary!
Be prudent, though: don't risk important things.
We are taught to persevere. But hunter-gatherers didn't just blindly persevere... If you keep, it's not guaranteed to succeed!
Hunter-gatherers, instead, went for the low-hanging fruits. They did more ambitious things when the odds of success made sense. But perseverance at all costs doesn't make sense.
Consistency for consistency's sake is against our nature.
A productive environment should resemble the one we're wired for.
When something feels wrong with us, chances are it's in our environment.
trying to fight our wiring is like trying to make a palm tree grow in Alaska.
We want to improve our lives and the ones of our family.
Dose and Frequency are important factors in the impact of effects a medicine can have. In fact, they are part of the medicine, they're what makes them useful.
When we say we like something, we mean it with a dose and frequency. If I say I like coffee, probably I don't take it before going to bed.
If we like something, consuming it twice doesn't mean we're going to enjoy it twice. In fact, enjoyment can become negative if we increase dose and frequency.
Daniel tells how he enjoyed computers and tinkering when he was a teenager. But when he started working as a developer, he stopped enjoying it that much; he thinks that was because of a miss-adjustment in the dose and frequency. He's now aware of the fact he can't program for long periods of time very intensely.
Daniel thinks that the 40h/week was an ideal arrangement in factories, but he doubts it makes sense for modern jobs.
Identifying what we like is not enough: we need to experiment with dose and frequency!
Also, be rigorous with the declaration of our preferences: do we really like something? Why do we hate something? Maybe it's not the work what we dislike, but something involved by it, like the commute?
- Dose-response helps identify what is enough.
- The curve also applies to success.
- Once you hit certain level, it becomes hard to find satisfaction at lower levels:
- No success = bad.
- Some success = good.
- Extreme success = bad again.
- Same thing applies to wealth.
- Passive income is likely against our nature.
Too much of a good thing starts hurting us.
We need to be aware of the hedonic treadmill: when we achieve something, we might want to have the next thing, and it's harder every time. Daniel uses the example of twitter followers.
Daniel thinks we should probably shoot for the middle: aim for some success, not extreme success. He thinks we're attracted to the extremes, but the extremes are sometimes bad. Aim for strategic mediocrity. This applies to wealth, too.
He thinks that passive income is against our nature because there was no such thing in the hunter-gatherer world: we're not wired to live with a passive income.
He thinks that investing systematically to live from the interest rates is something our subconscious mistrusts, because past events don't necessarily predict the future. Additionally, he thinks that people that live like that are always worried of the market.
Daniel thinks it's nice to have an extra passive income, but we should rely on it: if it happens, it's a bonus, but don't expect it to happen!
Daniel is also skeptical from the movement of financial freedom by reducing our consume; he thinks there much to learn from the movement, but it's probably a difficult life.
His point: we have something in our DNA that makes us want to be useful! The 40h/weeks are probably anti-natural, but we want to be useful! We need the right dose and frequency!
Therefore, passive income is not bad, but treat it as a bonus, not as a goal. Use active income to validate our actions.
This case applies when we make more than we spend; the saving doesn't need to be huge, but having a saving is a surplus.
What should we do then? Save it?
- Wealth hoarders want to save everything. They want to have the largest optionality possible.
- Wealth preppers save for specific things; for instance, save to be able to live for 6 months, in case they loose their job.
Daniel thinks we should be more like the prepper, because that way we remove our anxiety and live the life. Life doesn't need to be full of options.
Saving for the sake of saving is not meaningful.
Should we try to eliminate something we don't like or add something we think we'll like.
Nassim Taleb thinks the via negativa is better: it often is better to remove something we don't like. Elimination is more reliable. There's more reliable information in something we tried.
Example: if I smoke and I want to improve my health, it's better to eliminate smoking than going to the gym.
- People define work differently:
- Make a living
- Changing the world
- Turning an idea into reality
- Accumulation wealth
- Gaining status
- Create jobs
- Bare minimum: put food on the table
- Beyond that, we work to support and improve our lifestyle.
- We start to believe we have an obligation to work more.
People approach work in the following ways:
- Idea first: they seek big ideals and goals; quite naive.
- Income first: they seek more money; less naive.
- Lifestyle first: that's the best way according to Daniel. We try to find work arrangements that fit in our lifestyle.
The 4-Hour workweek by Tim Ferriss is a book on the lifestyle-first approach.
We should work gradually towards our preferred lifestyle.
The only reason to start a business is to improve our life.
Concepts that were discussed:
- Time-boxing is essential to make small bets.
- People that have started with small bets but get nice contracts.
- She got a contract in a startup that might IPO in some years.
- She would be employee number 2 or 3.
- She arranged a contract as a freelancer; so it's implied she can do other things, too.
- Content consumption: Daniel thinks we should get exposed to more randomness to generate more ideas. Until recently Daniel's life was very predictable, but he changed that. It's difficult to filter out the noise, but he thinks he became better at that.
- 40h/week contracts make difficult to have time for tinkering and exposure to randomness.
- In SW it seems it's difficult to find projects that can be done in less than 3 months; but Daniel thinks we should try to find the minimum viable concept and grow it if it works. For instance NomadList started as a Google spreadsheet.
- Community and reputation building. Daniel started with software topics in Stackoverflow & Co., but he gravitated to Twitter. That shouldn't be necessarily the way to go for everyone; the point is: we should try different things and find our niche.