David Heinemeier Hansson, the creator of Ruby on Rails and partner at 37signals in Chicago, says that planning is guessing, and for a start-up, the focus must be on today and not on tomorrow. He argues that constraints–fiscal, temporal, or otherwise–drive innovation and effective problem-solving.
The most important thing, Hansson believes, is to make a dent in the universe with your company.
In other words, “You Have to Unlearn Your MBA.” After spending 3 years at business school, Hansson estimates that 96.7% of what he learned at the Copenhagen Business School has no impact on what he does today as a partner at 37signals. MBA students need to readjust and recalibrate their thinking away from heavy management theories towards building a product and pleasing a customer.
Here are a few of my key takeaways.
Planning is Educated Guessing
Long-term planning, strategic planning, tactical planning — all of these types of planning are really funny for a start-up. The punch line, is that a start-up doesn’t even know if it will be doing business in five years, let alone five months.
This type of planning reminds me of when I took the LSAT my junior year of college. I remember coming across the logic games section of the LSAT and wondering how in the world you actually solved these problems. It was a trick question, you really don’t solve any of them. You simply do your best to make an educated guess at the highest probability answer.
More predictable planning suits a stable business, like McDonald’s in Northern Illinois. But a new business in a new industry has no clue what it will need long-term. In fact, he adds, most decisions for a start-up are incredibly temporary. What does matter more than planning? Simply starting.
Venture Capital is Not the Answer
Venture Capital is one of the most harmful things for a new business. A sudden windfall of money provides start-ups with a false sense of security. VC-injected companies often lose the urgency to create a sustainable, profitable product. These companies often become addicted to venture capital funding, requiring round after round of financing.
Don’t Play with Other People’s Money
The key problem with venture capital remains simple: You’re playing with other people’s money. Using venture capital removes the accountability that’s inherent when an entrepreneurs use their own money.
When it’s your own money, he continues, you want to make more of it faster, so you don’t just put out a product without a price. The urgency you get from spending and making your own money is the most powerful driving force for an entrepreneur.
Playing it Small Doesn’t Mean not Making Money
Skewed expectations present a major risk when accepting venture capital. Most venture capitalists expect to make a lot of money, and they expect the company they help to become billion-dollar ventures. This type of risk is comparable to putting all of your money on red five in a game of roulette.
When you build a business that earns a million dollars per year, you’re taking a more calculated risk, analogous to that of a skilled poker player who steadily builds up his winnings. “The fact of the matter is that a million dollars is a lot of money when it goes straight into your bank account,” asserts Hansson.
Great Ideas Derive from Well-Rested Minds
Being a workaholic is no guarantee of success. When you’re overworked, you can’t think creatively. A great idea comes from a well-rested mind. You’ll never outdo Microsoft or Google; they will always have more resources than start-ups. But an entrepreneur must realize that constraints are your friend. Having some limitations will force you to think differently than your competition.
Overnight Success Does Not Exist
“Nobody is an overnight success,” claims David. When some product or company suddenly appears out of nowhere, it usually arrives out of 10 years worth of work. Accelerated growth is a charade, it takes time to develop a sustainable, profitable company.
A Small Business Can Be a Highly Profitable Company
Asked to clarify the difference between a small business and a scalable business that hopes to earn a billion dollars, David says they are the same thing. Scalable means there isn’t a direct correlation between profit and employee count: “I can earn 5 million dollars and not hire five people.”
Many large companies give the impressions that that there is a connection — i.e., for every $500,000 earned, a company must hire two people — so smaller companies wrongly focus on organizational charts and meetings.
Out-Teach Your Competition
A startup will never have the resources to outspend a Google or a Microsoft in promoting itself. “We’re trying to build an audience; we’re not just trying to have customers.” Through blogs, lectures, seminars and other teachable moments, you create a following of the company that may not use the product today. But at some point, these people will either buy our product or recommend it to someone who will. In the end, all sustainable businesses are built by word of mouth.
You can view the entire video here: Unlearn Your MBA