The Crusade Against Efficiency - Part 3

Some businesses in Tech. get it! For example, take the travel sites (Kayak, Priceline, etc.) that compare multiple airlines and hotels. When you search for a hotel or flight, they display a progress bar and/or deliberately take more time to load the search results, even though they can make it much more faster at a lower operational cost.

That’s because they understand that the “website is working extra hard and getting me the most accurate and latest pricing & availability” psychological feeling of their customers is more important than blindly loading the search results (that are already cached) in the most efficient fashion.

Even in our personal lives, sometimes we have to do things inefficiently. Like taking a more longer but scenic route rather than the more fuel-efficient shorter one suggested by the maps app.

This week we continue the MMM (Mistakes of Mainstream Management) series and discuss the implications of blindly chasing efficiency as an entrepreneur and how to avoid the typical traps. But first, let me explore a couple of perspectives to think about what type of a business you’d like to start as an entrepreneur and what larger impact it might have on the society.

Table of Contents

• The inefficient shopkeeper

• What you eat eats!

• The Inefficient Entrepreneur

  • Before you start: Know Thyself

  • As you build: A Portfolio of Small Experiments

  • As you scale: Salar Kamangar

  • After you scale: Magic vs Logic

  • After you go public - Market Pressure

The inefficient shopkeeper

Some businesses rely on efficiencies in order to grow. For example, Sam Walton built Walmart as a very efficient business. Walmart mastered efficiency to such a degree that it was able to pass on the savings to the customer and consistently offered lower prices than its competitors. This prowess not only led to the bankruptcy of its larger rivals but also led to the decline of numerous mom-and-pop stores across USA.

This takes me back to my childhood days, growing up in a lower middle-class family during the pre-supermarket era of India. I can tell the difference in the shopping experience I had growing up in India vs. what my daughter experienced, growing up here in the USA.

Our local grocery store owner knew our family personally. He knew what we’d regularly buy and also home deliver our routine purchases every month. Forgot your wallet? No worries! Bring the money later.

He would extend people credit when they needed it - typically towards the end of the month, right before the next paycheck arrives on the 1st. The shopping experience was different - it was more, for the lack of a better word, human.

Not just as a customer but also as a shop owner - you truly knew the person on the other side of the transaction and were flexible in your interactions with them to keep them as your long-term customer.

There was deliberate inefficiency built into the dynamics (the shop keeper might see less profit in some months because someone didn’t/couldn’t pay back the interest-free loan on time) that kept the overall families in the neighborhood chugging along. How much a family can stretch itself in terms of its finances, is in a way determined by the finances of the shop, which in turn was dependent on the collective finances of the families that lived in that neighborhood.

No fancy “credit limit algorithm” was used. Nobody felt that the shop owner was over-charging them. He lived right with us in our neighborhood - working harder and longer than a typical 9-5 desk job. People didn’t stretch themselves too much in terms of debt, lived well below their means helping each other when financial emergencies happened.

Then came the supermarkets with their lower prices and wider collection! Some innovative mom-and-pop shop-owners remodeled their stores to mimic a supermarket and survived. But, many didn’t. In the meanwhile, the issuance of credit cards exploded in India and so has debt and the financial traps of spending money that you don’t have.

Instead of a small community of people managing their finances together, this credit card based interaction seems have a different impact on the society… The rich seem to use the credit card points from the banks to their advantage but the poor keep paying interest and late fees to the banks.

What you eat eats!

Factory farming of animals is another great example of us chasing efficiency. While it drove down the price (which certainly helped feed a lot of people), we still have a lot of questions to be answered in terms of overall negative impact on the animals, the environment and our health.

Animals in their natural environment - say cows raised on a pasture, roaming around freely, chewing on its natural food like grass and returning their dung & urine back to the soil, have a different type of (a) impact on the environment and (b) nutrient profile when they become our food (compared to a corn-fed cow that never leaves its cramped dark shed).

Another example of chasing efficiency is centralized large-scale meat processing plants. During the pandemic we realized how fragile they were. While they certainly improved efficiency and drove down prices, the shutdowns during the pandemic meant empty shelves in stores for several days. We certainly traded resilience for efficiency in this case.

I don’t have any special regard for businesses that copy an already successful business model when all they try to do is improve efficiency (across the board - R&D, Operations, Marketing, Sales, etc.) and thus offer lower prices just to improve their market share!

It would be much better for entrepreneurs to chase effectiveness. Don’t try to make the most, but instead make the best - create something unique that in turn solves the problems of your customers.

This newsletter is all about helping technologists create more variety so that we can co-create a more pluralistic world. Small is not only beautiful but also less fragile!

The Inefficient Entrepreneur

In my experience with entrepreneurs, I've noticed a couple of common patterns as to why they pursue efficiency… They themselves are chasing higher levels of wealth or are playing status games. The other big pattern is that they took outside money to fund the business and the lender wasn’t as passionate as they were in the product or service they were building. They were in it purely to make money. They had term sheets, targets and milestones.

Let’s now talk about how you can avoid the traps of chasing efficiency as an entrepreneur as you get started.

Before you start: Know Thyself

Listen to Peter Thiel’s words of warning to aspiring entrepreneurs in this video. Thiel argues that there are too many bad businesses getting started and not enough good ones. He believes that people shouldn't pursue entrepreneurship for the sake of making money - being “rich” or “famous”. Instead, he says that entrepreneurs should transcend those mimetic desires and instead be working on important problems.

Mark Zuckerberg’s decision to turn down Yahoo's billion-dollar offer during Facebook's early days can be viewed from this mimetic lens. He realized that he would have gone onto to build another social networking company anyways even if he were to take the money.

You must be very clear in what you seek as an entrepreneur. If money and profit is your only motive, then you might end up searching for ways to make more of it and thus drive you to blindly chase efficiency. Be passionate about your customers and the problem space instead.

If you’d like to dive-deep into this topic, checkout my old post about Mimesis.

For premium-tier subscribers, I’ll now discuss the typical pitfalls as you build and scale your business with real-world examples.

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