My Business Heuristics

Varya came to me with a question: how do you pick a market for a business? We talked for 40 minutes, and she wrote up a summary of what I said. Then I went into ChatGPT and asked: “Based on everything you remember from what I’ve told you, what other business-management heuristics have I formulated?” In the end I rewrote it all and put together this list.

This is a list of the heuristics I go by. I derived them from the mistakes I stepped into myself. I try to follow them when making decisions in my own business. When I break them, I always regret it afterwards. I use them when consulting, too. These heuristics help me not to repeat my old mistakes. Maybe they’ll be useful to someone else.

Without the entrepreneur’s desire, nothing will happen

• Ideas come out of the environment you operate in. The brain learns from what it interacts with every day. Your choice of environment determines which problems you’ll notice and be able to solve. Want to change your ideas — change the “feed” for your neural net.
• Your values are what you actually enact in your activity. They show up in your actions and reactions. Not in what you declare.
• Do a business for the sake of solving a problem that genuinely matters to you personally. Otherwise you won’t have the strength. The mission (the way you act), the choice of problem, and the vision of how the world will change once it’s solved all grow out of your values, not out of market analysis. Honestly working out what you actually care about will be hard. But that’s the source of your faith, and faith is the source of energy.
• Don’t build a business off a feature idea. That foundation is too fragile — it won’t survive the collision with reality.
• Be where your friends, partners, clients and investors are. If you can’t live nearby — communicate actively online (but that’s worse, the connections will be weaker).
• Intuition speeds up decision-making. It improves the quality of decisions if you’ve seen a lot, and degrades it if you have no experience. The only way to improve your intuition is to work with full immersion and not be afraid of risk.
• Don’t strike the expert pose. Enjoy not knowing — it’s a chance to develop your intuition. “I’m an expert and I know in advance” = “I won’t be able to learn anything.” Get used to saying “I don’t know that.” Never pretend to know something you don’t — that way you steal your own chance to learn.
• The quest will take longer than it looks. You think you’ll manage in three years? Multiply by two.
• When you model the options, compare not just failure and victory but the intermediate outcomes too. “Neither one thing nor the other” is worse than failure, because it lasts longer.

Business is a positive-feedback system through which society changes itself

• Society needs business in order to change itself for the better. It’s the instrument society uses to develop. The business owner merely steers those changes in the direction that matters to them personally. Profit is the signal that they picked the right direction.
• A business is a positive-feedback system. A healthy business grows.
• Growth in cash flow is a symptom of the business’s health, not the purpose of its existence. If cash flow isn’t growing, something is going wrong. That doesn’t mean money is the main goal.

Segment markets and niches by how good they are for your business

• Use the “Princess Method”. Describe the properties of a candidate that make it good for your business → turn the list into scales → find the ones that look more like the good ones → identify and group the patterns → assess the size and dynamics of the market.
• Invest only in growing markets. A market’s dynamics matter more than its size.

Lean on a shared goal between the owners and the team

• If there’s no entrepreneur for whom this project is the main thing from the start through to confirmed growth — you may as well not get out of bed.
• You can’t hire an entrepreneur. You can enter into a partnership with one.
• The goals of the business owner(s) and the goals of the system are not the same thing. The goal of any system is to survive despite external and internal changes. A business is a system of contract between society, the owners of the business, and the collective of the business. If the goals of those three groups diverge, the business will have problems.

Lean on a shared goal between the owners and the team

• Test the idea on your own money. Investment is for scaling sales. The MVP is better built on your own money. The product is better developed on investment.
• First choose the goal of the business, then whose money you take. Not the other way round.
• Want to sell the business? Look for venture money or a strategic buyer. Venture invests in the growth of the business’s value, with a view to selling your business. A strategic invests in solving the problems of its parent business, with a view to absorbing yours. A strategic will value the business lower, but that money is available during a venture winter.
• Want income from dividends? Build it on your own money or look for dividend investors.
• Want to draw a decent salary? That’s not entrepreneurship, you want a different life.
• Tossing money into a bottomless barrel of ideas is not investment. Investment is given against a hypothesis. To qualify for the next portion of investment, the hypothesis the previous portion was given against must be either disproven or proven. Failing to prove it ≠ disproving it.
• The object of investment is a team that has played together, found a growing niche, and shown it can adapt the business to that niche fast. A team takes a long time to rebuild. And IF you manage to rebuild it, you’ll get a different team, with a different mission.
• Don’t throw good money after bad. The sunk-cost trap will VERY strongly bend the decision to shut a business down when that decision is made from inside the business. So set up a body that will make it from outside.

A business is owned by whoever can destroy it

• Muad’Dib’s axiom: a system is owned by whoever can destroy it. Without leverage you’re simply servicing someone else’s business.
• The earlier people who don’t work in the business get the right to make decisions for it, the worse. Until the business has found its model and reached sustainable growth — keep the right to make all decisions with the people who work in it. Otherwise you get a conflict between ownership and management.
• The earlier the business gets the chance to receive advice from strong experts who don’t work in it, the better.

Build a Chinese wall between the old business and the new one

• Comprehensible short money will always eat incomprehensible long money, unless you build a Chinese wall between them.
• A good way to build that wall is to take investment, give the entrepreneur a budget, and give them freedom to hire.

Subordinate the layers of the business to one another

• All the layers of the system must be subordinated to one another. If some level isn’t subordinated — problems begin.
  • How the client’s main scenario works and what the main drivers of revenue growth are.
  • How the client-servicing process works and what the main drivers of scalable costs are.
  • How the business logic and software architecture work.
  • How the company’s structure of responsibility and authority works.
  • How ownership and decision-making about the system’s goal work.
• The integration has to happen bottom-up and top-down.
• The hardest things to change are the ownership structure and an already-formed pattern of client behaviour.

Concentrate inside the raid, reflect between raids. Go on raids more often

• No reflection inside the raid. You picked a target — run at it. Once you’ve got there, think and revise the plan. At any given moment, work on whatever limits the business the most.
• Many small raids beat one giant one. Make lots of small bets instead of one big one. Don’t work for the drawer — show the market results. A fast TTM on testing a hypothesis lets you be flexible and focused. Between experiments — analyse the knowledge you found.
• Tempo matters more than predictability. Better to test hypotheses fast than to try to plan everything perfectly. Descriptive strategies beat prescriptive ones for new businesses.

Don’t turn the HADI loop into a HAHA loop

• Hypothesis → Action → Measurement → Insights — that works. Hypothesis → Action, Hypothesis → Action — that burns resources.

Make decisions by criteria chosen in advance.

• Kahneman’s mediating assessments protocol works: formulate the alternatives → choose the evaluation criteria → assess each option separately → compare the assessments without emotion.
• Don’t work with a single version and no alternatives. Don’t think a spreadsheet can make the decision for you.
• Don’t pray to frameworks. You control the model, it doesn’t control you. Check more often whether the model reflects reality.
• Tell luck apart from decision quality. A one-off good outcome doesn’t make a decision good, and a one-off bad outcome doesn’t make it bad.
• Mistakes are the price of speed and a symptom that you’ve found something important. Be glad of mistakes. But stepping on the same rake a second time is stupidity. And a third time is idiocy.
• A model speeds up the TTM of a hypothesis and improves the quality of your conclusions.
• Formulate hypotheses in the terms of the model, test them in reality. Making a decision on the model is cheaper and faster than in reality. “Whoever can’t get rich in a spreadsheet won’t get rich in real life.” A target model at the stage where you don’t yet know the values of the variables still improves the quality of decisions a great deal.
• Don’t think the model reflects the world — the model reflects your notions about reality.
• Don’t run an experiment on a best practice that already exists in the market. Find the source of the competence and implement it. And Cynefin is generally useful.
• Search with AI first, then check yourself against the market. If a person formulates worse than AI — what the hell do you need that person on the team for? (oof, this is going to look painful a year from now).

1 entrepreneur → 1 team → 1 focus

• At any given moment, concentrate on whatever limits the business the most right now. Refresh the sequence of limiting factors between sprints.
• Prioritisation is the entrepreneur’s main instrument. Whoever controls priorities controls the business.
• Start with a premortem analysis (aka RAT). The first thing to test is whatever will have the greatest impact on the business’s goal and its existence.
• Find the limiting not-knowing — the thing that separates you from the next step towards the goal. Test that one first. Be glad of the knowledge of not-knowing you’ve found. New problems are knowledge of not-knowing.
• The best way to screw it all up is to lose the connection to the goal. Here’s the cascade: values → goals of the system → (limiting not-knowing → hypothesis → test → conclusions) → implementing changes. The part in brackets is a loop.