Shane Melaugh: Hello, and welcome to Active Growth Podcast, episode 36. I have got more bad
news for you. Maybe if you're listening to the podcast you're like, "Come on. So
much bad news all the time." So we have been emphasizing some problems,
some problems that you face as an entrepreneur and some problems in the way
the online space is developing recently, and this is another one of those.
The problem is, or the bad new is, that if you are trying to build your business
and you are trying to emulate successful start-ups, trying to emulate the world's
most successful businesses, most profitable businesses, the most successful,
richest founders, you're doing it wrong. In fact, you are unwittingly shooting
yourself in the foot and putting yourself at a huge disadvantage if you try to join
the Silicon Valley-style startup game.
So basically what we're saying is, "Don't be a startup." That's a strange thing to
say, isn't it, because usually that's where all the hype is. That's where all the
growth is. That's where all the exciting tech companies are. That's where all
money is being made. And in general, when you seek advice on how to be an
effective entrepreneur and how to make this thing happen on how to grow and
build your business, we'll very often see reference to the most successful, most
disruptive, most amazing online businesses, right? We're trying to learn our
lessons from there, and it is the wrong place to try and learn our lessons. And
we'll get into the reasons for this, why.
So today we will talk about, first of all, why this is a problem in general. I call this
the expert fallacy. We'll talk about why this entire business model that drives
most of the growth and most of the hype that we read about is fundamentally
broken and why you as an entrepreneur should not follow this advice and
should not try to play this game. I will give you the information that will
hopefully convince you during this episode that if you join this game, if you
follow this advice, that you're actually stacking the cards against yourself and in
someone else's favor.
And of course, as always, we'll also talk about, well, what should you do. I don't
want to just present you with problems and do some doom-and-gloom stuff. I
also want to tell you, okay, what to do, what should you do as an entrepreneur
to avoid these traps and to make the right decisions.
So all that and more is coming up right now. You can, as always, get more
information on this, as well as links to resources, by going to the show notes,
which are at activegrowth.com/36. So that is activegrowth.com/36, where you
can also go to leave a comment, ask us a question, or just tap on a button to
leave a voice message. And when you do, when you leave a question or a voice
message, then we sometimes answer those on the episode. So all that and more
is at activegrowth.com/36. And with that, let's get started.
All right. Let's get into it. My name is Shane Melaugh.
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Matt Totten: And I'm Matt Totten.
Shane Melaugh: And we are talking about why you should not be a startup. So this episode is
inspired by a book that you recommended to me, Matt, which is Throwing Rocks
at the Google Bus, by Douglas Rushkoff. It's a great read, very, very interesting
read, so thank you for that recommendation.
Matt Totten: No problem.
Shane Melaugh: Yeah. We will also link to that, of course, in the show notes, along with some
other book recommendations, and we'll reference this in just a bit.
First let me pay off what I just teased in the intro, which is the expert fallacy.
The idea that the best way to learn how to build a successful business is by
learning from the most successful businesses, from the most successful
founders. So this is what I call the expert fallacy, and let me give you two
examples of this, because both of them are wrong. If you're thinking, "Hey, if I
want to get fit, if I want to getter shape, I should get advice from the world's
most extreme super athletes, right, from the absolute fittest people on earth,
seems to make sense. They must have better advice for me than anyone who's
less fit than them, basically.
And similarly, we think, "Well, if I want to grow my business," would you rather
listen to an interview about entrepreneurship, for example, an interview with
someone like Larry Page or Jeff Bezos, or an interview with someone who only,
quote, unquote, runs a million dollar business, wouldn't it clearly be much
better to listen to Jeff Bezos, since he has made all of the money. He is the most
successful right now. I don't know if that's still true right this week, but anyway,
he's one of the most successful founders of all time. "He must have more
valuable things to say for me to grow my business than anyone who's basically
been less successful than him."
But there's a problem here, which is that we cannot kind of surgically remove
one aspect of someone's advice and scale it down to fit our needs. So the secret
to the ... if we take the fitness example again, the secret to the craziest, highestperforming,
most extreme super athlete in the world is that A, he's a genetic
freak or she's a genetic freak and has genetic makeup that I don't have, and B,
this person's entire life is about being the fittest person. Their entire life is about
training and eating to optimize their training and sleeping to optimize their
training and just doing absolutely everything to optimize their fitness.
And the truth is, I cannot take a scaled-down version of that. I can't just take like
10% of that and that's a better fitness program for me, because it's based off of
what the most extreme athlete does. Right? Actually, the best fitness program
for me is one that somehow fits into my life, because I'm not going to turn my
life into a fitness project, and also, I don't have that genetic makeup. Maybe I
just cannot take the training volume that this person takes. So the idea that I
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can take kind of that, scale it down, and then it's the best thing for my purpose,
is simply wrong.
And the same is true for the idea of a business, except that's even worse,
because if you look at the massively successful mega-company that has grown
over the last decade or so, again, you cannot just take that and kind of scale it
down to a solopreneur-sized business, and that's still the best advice for you.
But also, this entire model, the entire model that the most successful businesses
in the world are based on have baked in three massive problems that are very
rarely mentioned. The three problems are: this business model is destructive,
this business model is a gamble in which you sit at the losing end of the table,
and this business model is insane. So let's cover that.
So when I say that this kind of business model, the growth-at-all-costs business
model, this is what we could call it, right, these companies that just grow like an
explosion, basically, right, they have explosive growth, and that's what it's all
about, it's about growth, growth, growth, growth, and that's what we always
hear about. It's rapid growth, right, and that somehow then tumbles into insane
amounts of money at some point. But it's, as you note when you read about
startups, it's always about how incredibly fast they grow. So we call this the
growth-at-all-costs business model, which is basically how Silicon Valley runs
and how the most successful and most talked-about businesses run. This
business model, like I said, is destructive, it's a gamble, and it's insane. So let's
talk about why it's destructive.
And Matt, you have a personal experience with this that I'd really like you to tell
us about.
Matt Totten: Yeah. So I'm from the US, and my family's actually from the mid-continent, the
very center of the United States in a state called Kansas, which tends to be
pretty rural, like farm country, some factory, sort of like production
manufacturing, stuff like that, oil and gas. And I used to spend my summers as a
kid going to this little town, or basically these two little towns, to spend the
summer with my grandpa, called Coffeyville and Independence, Kansas, so it
doesn't get kind of more rural Kansas than that.
And I remember maybe around 2000 or something, Amazon rolled into
Coffeyville and built one of their initial book warehouses when they were still
just kind of taking over the book industry. And everybody talked about how
great it was and there were more jobs, but the thing is, those jobs aren't really
... they don't pay well and it's kind of like Walmart. I remember in the same
towns Walmart came in and built a new Walmart, and then five years later
there was a second Walmart built, and then 10 years after that there's a third
Walmart, and then in the wake of all these Walmarts getting built, you just have
an empty, massive building that's a [blide 00:09:50] on the community.
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And Walmart doesn't pay its employees ... first of all, it never employees them
full time, so they never get full-time benefits. And then they basically encourage
all their workers to go on social welfare programs, so food stamp programs and
also Medicaid programs. So where most employers, if they have full-time
employees, they're forced to give those benefits to employees in the United
States. But Walmart gets around this by only giving their employees part-time
work and then externalizing the cost to everyone on the public tax side of
things, 'cause those employees have to go on social programs.
So anyway, fast-forward to right now, the town of Coffeyville, Kansas, is
basically dying. All the young people are leaving. There's no more work left.
Amazon has left. The Walmart, all except for this one massive Walmart in the
region has stayed open, so people have to shop there, 'cause that's where the
cheap prices are, but the end effect is all the wealth or all the value of that
community was just sucked up by these massive corporations that didn't really
pump that value back into the community. It just got siphoned off somewhere
else in the world. So these companies grew, but at the expense of rural
communities.
And it's even to the point where in rural Kansas, a lot of hospitals are closing
because you had private sector healthcare come in and kind of do the same
thing and force the public hospitals out, and now you have private urgent care
units all over the place. And the Intercept actually do a great article on Kansas,
showing how the bankrupting of this happened, bankrupting the state, and even
very important community things like a hospital have suffered because it. So I
thought that was a good example of this growth-at-all-cost that I personally
saw.
Shane Melaugh: Yeah. So in this story, that seems much more tied to the real world than the
internet, but we'll get to that in a second. There is a first hint of the problem
with the growth-at-all-costs model, because the way the economics of this
works is that how can Walmart come in and make everything cheaper, is yeah,
because they basically exploit the value that's available in an area by doing the
things, like you said, right, they don't employ people full time, they externalize
their costs, and they can make sacrifices because they don't have to be
profitable.
In fact, they can afford to not be profitable for a long time, as long as they can
kind of hoover up all the value in it in a region leave a Walmart open for long
enough for all the smaller businesses to shut down. Then they can close the
close-by Walmart and basically force everyone to go to a slightly further away
Walmart. And they can basically bridge that gap, right? They can basically say,
"Okay, this Walmart here is not profitable, but we can keep it running until the
local businesses die. Then we can shut it down, and then everybody's forced to
just basically do whatever we want to," right?
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And a small-scale business cannot afford to do that. It's usually also run by
people who wouldn't want to do that, but we'll get to that later. But it's like
that's one of those problems where Walmart can basically say, "Look, it doesn't
matter, it just doesn't matter. These few branches here are not working out, but
we're growing. What matters that we're growing, right, and we have a plan,
basically we know how to hoover up the value here that's in this region." And
that's what they can do.
Now, online, the same thing happens, if anything to a greater degree, even.
Basically, every internet giant, every giant internet company is extractive and
destructive in one way or another. The whole point of the internet, basically, or
the whole advantage of internet businesses is that they have this network
effect, or most businesses try to create such a network effect for themselves,
right, where basically the value of the network grows with the number of users
connected to it.
Now, we often think of this as something that affects a social media website,
right? The more people are on a social media thing, the more valuable it is, the
more other people want to go there. But it's true for many, many things, right?
Every platform tries to be the one platform that is the one everyone uses, the
one everything else connects to, because it's the same kind of thing, right? It's in
a similar kind of network effect, where you end up using the most popular
solution for something, because that's the most integrated, the most used, and
it's the most supported solution.
And that way, everything kind of always runs towards a monopoly. There's a
unique opportunity on the internet to kind of get into a space and have it run
towards a monopoly with you at the top. The problem is that once investors
realize this, they can be like, "Okay, this is all that matters." It doesn't matter
how much it costs to become the sole monopoly solution in the end, because
that's where so much that we can lose billions on the way there and we'll still be
fine.
And one of the ways, by the way, in which all of this is massively destructive is
something we talked about in episode 26. You can find that by going to
activegrowth.com/26, or just activegrowth.com/attention.
We have talked about how these giant internet companies have gotten to the
point where they are battling for our attention. They are basically battling for
who can occupy the most of our waking time. One of the things we quoted
there is the Netflix CEO saying that one of their greatest competitors is sleep. So
for Netflix, it is better if you sleep less and spend more time on Netflix.
And it has come to this degree where it's like grotesque, where basically these
companies are trying to use any trick they can to essentially get you addicted to
the screen and get you addicted to their specific app, and this is one way in
which it's destructive. Not only are these companies trying to be the sole
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competitor, the monopoly in their space, they're also trying to essentially take
over your life, right, because it doesn't really matter whether you end up
miserable and with a poor posture because you stare at a phone screen all day.
What matters is can they win in this race, and the commodity happens to be
your attention.
There's a book called Zero to One, by Peter Theil, who is one of the founders of
PayPal. And this is a good read. Interestingly, this books is basically written as
advice for how to do a startup. But what's interesting about it is he lays out this
business model, he lays out essentially the truth of this growth-at-all-costs
business model, which is that the goal is to create a monopoly. And there's no
two ways about it, the goal is to create a monopoly. Now, it's illegal to have a
monopoly, so while you're creating a monopoly, you have to constantly pretend
like you're not a monopoly, right? But that's really a small problem to have if
you're one of the internet giants, right? And so the goal is very clearly to create
a network effect, to get users addicted, and to corner and dominate an entire
market. And the outcome here is basically zero or one. It is either total
domination or nothing.
Which gets us to the next very important point. Problem number two with this
business model is that it's a gamble, and you are at the losing end of the table.
You see, the growth-at-all-costs business model is not designed for
entrepreneurs and founders to win. Let me repeat that. This business model is
not made for you as an entrepreneur or a founder to be successful. It is
designed for venture capitalists and investors to win.
So the way this works is that the venture capitalist has a portfolio, or the
venture capital company has a portfolio which contains dozens or maybe
hundreds of early-stage startups. They buy a large enough share of each of
these startups to have influence, right, to be able to direct or to steer the
direction that the startup goes in, and then they push each of these startups to
go for exponential growth, right, to go for ... no matter what, just grow as much
as possible. Nothing else matters.
That means you are not trying to build a good product. You're not trying to build
a profitable product. You're not trying to build a sustainable product. You're not
trying to create a good experience. You're not trying to deliver quality. All you
want is exponential growth.
And if you've ever wondered why it is that you constantly read about growth
and you constantly read about companies that are growing like crazy but losing
money, why is that a thing, right? Why is a company that's growing like crazy
and bleeding millions of dollars every month or every week then being
evaluated for another billion-dollar investment round? Why does this happen?
It's exactly because of this, because profit doesn't matter. All that matters is,
"Can we get to this market-dominating position and then when all the
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competition has gone bust anyway, then maybe we can figure out how to make
money out of it, right? Because then we can extort all the users who have no
other choice."
But if that fails, if this goal for reaching this insane domination fails, which it
does in 99% of the cases or more, the company goes bust. Now, for the venture
capitalist, this doesn't matter, because all they need is one or two picks in their
portfolio that will just go a thousand X, right? The goal is that you have the next
Facebook or the next Google in your portfolio. And you have 100 other
companies in your portfolio that all go bust, it doesn't matter, because that one
huge win will more than make up for it.
So for the venture capitalist, this model works out, but for the entrepreneur and
the founder, it does not work out. You're basically a pawn and you're expected
to fail.
Now, most of the people listening to this podcast, you're probably not working
with venture capital, right? You probably don't have someone who's breathing
down your neck and telling you to grow at all costs, but this is one of the
reasons why I'm recording this episode. Most of the advice you read about it
based on these types of businesses. You know, the expert interviews are often
interviews with the founders of venture capitalists or whatever, who are
involved in this business model.
And it's this weird, you know, survivor-bias problem, where, it's like, you don't
hear about the hundred companies that go bust because this model is broken.
Right? You don't hear about that. You hear about the one guy who, you know,
built a little app and then got a ten million-dollar investment and then turned it
into two hundred million dollars, and oh my god, how did he do it, let's learn.
But this is nonsense. There's no valuable thing for you to learn there. That is the
point I'm trying to make. So that's one of the important things here, is like, be
aware of kind of what model is the advice that you are reading or the interview
that you are listening to or the book that you're reading. Like what model does
this come from? Because there's this entire massively popular business model
online from which I think there's very little value to extract for solopreneurs and
small business entrepreneurs like ourselves.
Another consequence of all this is that as a result of this whole system, many
companies that could have been good, you know, reasonable scale businesses,
it could've been many a couple million dollars a year business that provides
value to some people in a niche. All good, right? That could have happened, but
they die instead, because it's not acceptable to have a million-dollar business.
It's only acceptable to go all in, win completely, become a billion-dollar business,
or to go bust. The middle ground does not work, or is just not what the VC is
looking for. And so, in a sense, instead of doing that, instead of playing that
game, you might as well go to the casino and try your luck there.
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Now, this is where I want to get back to the book we mentioned. I think ... So
the book is called Throwing Rocks at the Google Bus by Douglas Rushkoff. And I
think this is a great read. He really lays out what this looks like from the inside,
what a lot of this strategy looks like, and why this is so problematic in greater
detail that we can cover here.
Matt Totten: One of the things that I really took away ... not just like the companies that go
bust, but even those few companies that are successful, they always have to
compromise their values. Their initial starting values, the things that they
believed in and like had really honest desire to like save the world or whatever,
it's like those values always go compromised whenever they took VC capital or
overvalued their business.
Or if they IPO'd and the market overvalued their business and they got all that
funding, it's like, "Now we have to change our business model to meet that
valuation and grow at all costs," whereas if they would have just kept
bootstrapping it, they could have stayed very true to their value, which I think is
really important in this day and age.
Shane Melaugh: Which brings us to problem number three. The growth-at-all-costs model is
insane. What I mean by that is that if you kind of apply this ... if you had a
person, if you personified that business model, that person would be a clinically
insane person. So this is especially true if you consider that with growth-at-allcosts,
even profitability is removed from the equation, even profitability goes
out of the picture. So in a way it's insane by even extremely capitalist standards.
But let me elaborate more on why I think that's insane. Like you just said Matt,
one of the things is, in order to make this work, you have to compromise your
standards. And I would go further and say that basically you have to be evil to
do this. And whatever justification you find for doing this, right, for having a
growth-at-all-costs business for essentially ... You know, for example, Uber was
in the news a lot because of this, right? Because they're basically bullying their
competitors, they're doing all kinds of unethical stuff to grow. Well, but the
truth is, you have to ... if you want to be the sole dominator of a market and if
you want to grow at all costs, you must be evil, you must leave ethics by the
wayside, because ethics will cost you growth.
And really, the thing here that I think is ... from my perspective as an
entrepreneur is important is, I think about, you know, what does ... basically,
what are the ethical implications of what I'm doing. The growth-at-all-costs
business model creates a world in which everyone is worse off. That's the real
insanity of this, is that everybody's pursuing this business model, but we are all
... you know, everybody participating in this race is racing towards an end point
in which everyone is worse off. Because of course, yes, if you're the VC and you
make your investments, and you have this massive return, you get rich. Okay,
great, so you've got a bunch of money.
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But see, even the winners, the more of the world becomes subject to this kind
of growth and to this kind of value extraction and so on that we've talked about,
the more the world becomes a worse place even for the winners, even for the
super-rich founders and investors of the winning monopolies Because they will
live in a shell of a world of which all value has been distracted and will be
inhabited by miserable people who hate them, and who outnumber them.
Right?
I mean, this is one of the problems that we see with wealth inequality. I mean,
we are getting into a more and more extreme situation where eventually five
rich people will own 99% of everything, and everybody else is living in squalor
and hates them. So it's not great for the five rich people who are left, either.
And so this whole business model, this way of kind of running a business, this
way of building things up and scaling as far as possible, it perpetuates the
problems that none of us really want in the world, such as wealth and equality
and pollution, and so on.
Now, yeah, Matt, you also had a note here about the problem of even what
happens afterwards, even if you do win, and now, okay, you have this
domination, you can extract all this value, but then what?
Matt Totten: Yeah, well, I guess that leads to a couple points, first like a recent article I read
by Daniel Rushkoff. He got invited to give a sort of future of technology talk, and
it turned out it wasn't really a talk so much as a discussion with five really rich
super entrepreneurs. They really didn't care what he had brought to talk about.
They were trying to ask, "So when the world ends and I'm in my safety bunker
and money's no longer useful, how do I get my security guards not to turn on
me? Do I hold the food somewhere?" It's like, "You're missing the point, man.
Why not use your wealth to try and make it so the world doesn't go that way in
the first place?"
So yeah, and he also makes a point about, "If you've made so much money over
the course of your entrepreneurship, if you've extracted all this wealth and built
all this capital to the point where you have to donate this massive amount back
before you die," I think there's something called The Giving Pledge that Warren
Buffet and Bill Gates did, it's like, "You messed up. That money should be in the
markets creating value and innovating, but instead, it's sitting on the sidelines."
There's this massive pool of global savings in private equity. And not by normal,
everyday Janes and Joes. It's just really a fraction of the world population that
has access to it.
And that money's just sitting on the sidelines, and it's not really creating much
value for the world and being invested in ways that would bring about green
innovations or advance education or healthcare. It's just sitting there, and we
need to find ways to encourage that money back into investments for the
future. And sadly, the way the system works right now, this growth-at-all-costs,
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all that capital's getting sucked up, but it's not getting reinvested, so that's
another big issue with the growth-at-all-cost models, it appears.
Shane Melaugh: So this is something that I think everybody can relate to, because essentially
everybody wants to be rich, right? Everybody would rather be rich than poor.
But it's one of those things where, okay, how far are you going to take this?
Because at some point, if you're just sitting on billions and billions of dollars,
and like you say, they're just sitting there, they're not doing anything, well, the
more that happens, the worse everyone is off, right, because essentially you're
better off in an economy where money is moving around. You're better off in an
economy where there's a lot of people who have spending power and they
spend it. And you're better off in a world where money is being spent on things
that make the world a better place. But if all the money is just being spent to
accumulate more money, you just end up with this static, continually growing
pile of money that does absolutely nothing.
And funnily enough, if you think about it, it also does nothing for the people
who own that money. What are you doing, if it's just sitting there? The money
just simply sitting there is not doing anything for you, right? It's only the
moment you spend it that it does anything useful for you.
So that's another way in which this is just insane and where the moment you
have so much money that you can never spend it, and like you say, then what
you got to do is like, "Okay, I'm going to make a pledge to give this money away
to some charitable purpose or something," which is great. I think it's great that
the billionaires are doing this, but like you say, it will be even better if it didn't
get to that. It will be even better if that money was in motion somehow, and
yeah, if it wasn't just all a race to accumulate an even larger pile of this stuff at
the cost of everything else.
Matt Totten: Well, and I think there's just another point about when all that money's in, say,
a billionaire's hands and they do something very philanthropic, like donate to a
worthy cause, there's also a dark side to that, as well, because they get to make
the decision of how that money would best suit the world. I just recently
listened to a Malcolm Gladwell revisionist history podcast about this, where the
Nike founder, was it Phil Knight? He donated $400 million to Stanford University
for some very well-meaning leadership scholarship fund that was going to serve
100 Stanford students every year. But it's like, $400 million? And I think they
were trying to get to $800 million for 100 people. And Stanford's foundation is
30 billion plus, so the point Malcolm Gladwell was making was, "How much
money's enough?"
And the Stanford president actually invited Malcolm Gladwell for an interview,
and he was trying to convince him that this was a good use of a donation. And
so Malcolm Gladwell said, "So if that money went to, say, the University of
California education system, that they couldn't use that money better to serve
more students in a positive way?" And the Stanford president literally sat there
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and he's like, "No, no, no way. We're way better at investing this money and
making it do good for the world than the UC California, or UC education system
would do." And it's the top public education system in the United States.
So anyway, it just seems like there's a real strong arrogance, and there's no
thinking about, "When is enough enough? When is my business big enough
where I can just be steady state and maintain and create value?"
Shane Melaugh: With that, let's get into the question of okay, what does all this mean for you as
an entrepreneur? What are the takeaways here, and what should you do
differently knowing this, right? Because as much as I like ranting about the state
of the world, I do want to talk about things here in terms of what does it mean
for you and what's the practical implication of this? And there are many, so let's
talk about that.
So first of all, like I mentioned before, for me, this kind of thing is important
simply to have the awareness, right? You are better off having the awareness of
this than not, because I bet that for many people listening right now, there's
kind of of a before this podcast and after this podcast point. Before this podcast,
you were reading advice about to grow your business, you were reading books
and interviews and so on, and you were just like, "Okay, yeah, sure. If the advice
comes from someone who was successful, if the interview is with someone
who's super successful, that's good. That's definitely good," right?
But after, if I've done my job well, you will always question that. You'll be like,
"Hold on. Should I listen to what Jeff Bezos says about building a business?
Should I listen to what Mark Zuckerberg says about entrepreneurship? Is this
what I want to do?" Because even if you simply divide the world of
entrepreneurship into two groups, one is the growth-at-all-costs business, and
the other group is everything else, and you become critical about where you get
your information from and what you aim for based on those two categories:
growth-at-all-costs, everything else.
Even just that will help you avoid some problems, will help you avoid the
problem of maybe following advice that sounds like good advice and spending a
lot of time and energy going in a direction that you later find out, "Hold on, this
was actually a terrible idea." And like I said in the beginning, I'm basically
shooting myself in the foot, because I am setting up my business according to
ideas and models and advice that comes from businesses that are not made for
entrepreneurs and founders to succeed, right? So that's the first thing. That's
just the awareness itself I believe is useful.
But another thing is, let's talk about, "Well, what's the alternative," right?
Basically how do you build a business that avoids the growth-at-all-cost
mindset? This is a topic that is dear to me, because I have done this, and I did
this from day one. So in none of my businesses I would have ever taken up any
kind of investment or any kind of debt. I would struct everything. And in all of
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my businesses, there has always been an aspect ... basically I've never built a
business purely to extract as much profit as possible. I've never built a business
with the goal of just, "Let's make as much money as possible."
And many times in my career so far, I had opportunities to make more money,
right? I had clear and sometimes very easy opportunities to make more money,
but I didn't do that, because my business is not simply about growing or about
making as much money or about extracting as much value as possible. Now, this
is one of the things, when I talk about building a value-based business,
[inaudible 00:36:33] to a reference for that in the show notes, as well, right?
The idea is that the basis of your business is that you create something of value
and you exchange it with people for money. It's a simple exchange. "I have
something you want. You have some money. We make a simple exchange."
Right?
The way you build such a value-based business is fundamentally different than
the way you build a growth-at-all-cost business. And I'm not going to go into a
lot of detail on this, because if you want to know that, you simply go to the first
episode of this podcast, right? If you listen to our first four or five episodes
about basically how to start from zero, you will notice that the way we suggest
you start a business is very different from what you usually read about. And one
of our things is basically, "Get your customer first," right? "Go straight to getting
a customer. Don't build an audience first and then try to monetize that
audience. Get paid right away."
And if you follow this system, then you can get ... you know, you can go from
zero to having a couple of people pay you for something, literally within weeks.
And while that is not ... you know, it's not going to be ... you're not going to be a
millionaire in weeks. It's kind of a slow growth, but it is profitable from very
early on, and it is scalable and growable in a healthy way. So if you don't know
what I'm talking about yet, listen to the episodes about the customer-first
approach, which is basically episode 125 or so of this podcast.
Beyond that, there's another important thing, which is that your business, you
should have a business goal that goes beyond growth and beyond profitability.
So there should be something that you want your business to do that isn't just,
"Make me rich." So what you can ask yourself is, "What do you want your
business to create in the world that doesn't exist yet right now? In what way do
you want your business to make the world a slightly better place?" And any
value-based business has an answer to this question, right? Because it's like,
"What value to do I bring to people?"
And we've talked about this before, this doesn't have to be grandiose "I'm going
to save the world" kind of value. Writing an entertained book and people buy it
and they are entertained, that is value. It doesn't necessarily make the world a
dramatically better place, but that is real value. So that's what I mean when I
say, "In what way does your business make the world a slightly better place?"
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Even if it's a small amount of value, and even if it's not life-changing value, the
world's a better place with one more good book in it. That's the kind of thing I
mean. Having this extra reason for your business ... and you should be very clear
about what that reason is, or what those reasons are.
It's great in many ways. It keeps you motivated, first of all. It will keep you
motivated in a way that just trying to make money doesn't. But it also helps you
create a clear and strong message, a manifesto that says, look, this is what our
business is about. This is what we stand for. And this is something that helps you
with your business. It helps you kind of connect with people. It helps you kind of
connect with the right people and build your little tribe. And it just helps you
create a clear and strong and unique message for your brand. This is something
that you definitely do. And you can listen to episode 20 of this podcast to learn
how to do it. So episode 20, that is activegrowth.com/20, is about how to create
your business manifesto.
And another piece of advice I have here, which is also something that I've
experienced, let's say, various sides of, is to get of the hedonic treadmill. The
hedonic treadmill is the thing where you go, "Okay, I need to buy something in
order to feel better." And then you buy it, and about five minutes later you feel
just like you did before, and then you go, "I need to buy another thing to make
me feel happy."
Now, it's not only with purchases, but it's basically always chasing the next
thing. "Once I have a better car, I'll feel better, once I have a better relationship,
I'll feel better. Once I have a thing, once I have more recognition, more
validation, more Instagram followers," whatever. You have some goalposts that
are ahead of you where you're like, "Once I get there, then it's good," but once
you get there, inevitably the goalposts move.
And entrepreneurship, building a business, just pursuing more money, it's a
perfect hedonic treadmill. Because the amount of money you want and the
amount of money you think you need to be happy is always whatever you have
now times five or so. Right? It doesn't matter how much money you have, it's
always ... you always need definitely more than you have right now to actually
be happy. And this is something, just basically get off of that treadmill. Train
yourself to get off that treadmill.
Because ... And one way to do that is to think about not just ... not just think
about, okay, I'm starting a business and I want to make as much money as
possible. Instead, think about what kind of a life do I want. Right? What do I
want my life to look like? And make that part of your goal. Instead of just, I'm
working and I'm hustling and I'm trying to just make, you know, the breakout
millions, maybe what's important to you is that you can pursue, I don't know ...
you know, a former version of me.
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When I started my business, I really got into entrepreneurship as a thing, and I
become obsessed with it and so on. So that's fine, right? For me, that was like
my main thing. But also, in a slightly alternate history, I can imagine myself
starting with entrepreneurship and going, "You know what? What I really want
to do is work on my martial arts. I want to study martial arts. I want to be able
to travel around Asia and train martial arts people and I want a business that
supports that, so how much money do I need for that?" I don't know, like
$2,000 a month or something, right? Let's say 3,000 a month so I can save a
chunk of money and so I that I would build a business that has its success
criteria, "Okay, I want to make about $3,000 a month, plus I want to have
location freedom and I want to have this much free time every day to practice
my martial arts."
And that's a completely different approach than just blindly trying to create a
breakout success. And spoiler alert, it's way easier. It's way easier to do
something clearly defined like that.
Matt Totten: This reminds me of the scene from the original Wall Street movie with Charlie
Sheen. I think he's talking to his girlfriend at the time, and he's like, "I just need
to make like 20 million, and then I'm going leave all this craziness and buy a
motorcycle and ride across China." And it's like, "You don't need $20 million to
do that, man. Get a little perspective. Might make your life nicer and easier." So
...
Shane Melaugh: So, okay, with that, we'll link to a post by Douglas Rushkoff about 12 Steps to
Create a Steady-State Business, and I just want to go into some of those and
basically just talk about whatever else comes to mind. So actually, we haven't
really mentioned that yet. So the idea of a steady-state business is another
important thing, right, because essentially, any talk about business that you find
anywhere in the news or online or whatever, is always about growth, right?
And if a business is not growing fast enough, it's a disaster. But if you think
about it like, "Why does every business have to grow?" If you think about more
like a local business, right, what's wrong with opening a restaurant? And people
come to the restaurant and you make more money than it costs to run the
restaurant, and that's it. It stays like that. What's wrong with that? Why is this
not acceptable, right? Why does next month you have to make twice as much
money? It's like, "Why?"
So the idea of a steady-state business is that kind of business where you're just
like, "You know what? This business does not need to grow beyond this point,
right? I have this amount of revenue, I have a decent gap between cost and
revenue, so I have a good amount of profit. I can live off of this. I can save
something and I can just keep that. I can just maintain that."
This might not seem as sexy as the billion-dollar business, but the thing is, the
more businesses like that exist in the world, the better off everyone is. So it's
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one of those things that maybe if you think about, like I personally would rather
have a billion-dollar business than a slightly successful restaurant, right, but I
would rather live in a world where I have a small-scale, steady-state business,
and everybody else has a small-scale, steady-state business, too, because that's
a better place to live in.
But Douglas has written out these 12 steps to creating such a steady-state
business, I'm going to highlight a couple of those. The first one is, "In all
decisions, optimize for the the velocity of money over the accumulation of
capital." That's a pretty interesting one.
Velocity of money, what does that mean? Can you give us some info about that,
Matt?
Matt Totten: Yeah. I think more or less it's earning a dollar ten times, rather than earning ten
dollars one time. Because if you're earning one dollar ten times, that money is
getting spent over and over again, which means it's not getting concentrated in
one person's hands, but that value is getting used around in the community. So
instead of the Wal-marts and the Amazons coming into Kansas like before, and
15 years later, 20 years later, the town's dead, because those big companies
sucked up all the money and moved on to other pastures. That money's ...
you're getting more and more transactions.
And it's kind of like you were saying about you have more steady-state small
businesses all supporting each other, because everybody has spending power,
instead of one entity that only has the spending power and everybody else has
very little ability to support multiple businesses. So it's better for the
community, and essentially it's better for all the individuals if the money's
moving faster in transactions.
Shane Melaugh: We basically have to be slightly less selfish, right, and create circumstances that
are good for everyone instead of just maximizing our own advantage. And I
think as an entrepreneur, you have a bit more power to do this kind of thing
than you have as a non-entrepreneur, as an employee, for example, right?
And some other points here that I think tie in really well with just the idea of a
value-based business, one of them is make your customers, suppliers, partners,
and even your competitors, rich. I think that's a great idea to think not just,
"How do I make myself rich, but how do I make everyone who's involved,
including my suppliers and even my competitors, how do I create circumstances
that are good for everyone?" I think this is great. For me, this is also very much
the value-based business, but taken even further, right, where you're trying to
not only enrich your own life, but enrich the lives of the people that you touch
with your business in some way.
And very similar to that is the idea of running your company like a family
business, right? Like if this was a family business, you wouldn't exploit your own
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family members who are working for you and you wouldn't just hire and fire
them to maximize profit and stuff. It's like, "First, this is a family, and secondly,
we also have a business." And that's also kind of just a more sane way to think
about a business and to run a business, for sure.
Matt Totten: And I'd also add, family business isn't trying to just sell to the next round of
investors. They're thinking for the long-term. And they live in the area where
they're running their business. So they're going to make decisions that are
beneficial for the business, but also for the community. Because if you make a
short-term decision that basically impoverishes people or maybe pollutes the
local river, I mean, that's not good for you either, so I think that's another piece
of that family business idea.
Shane Melaugh: He also has a point where he says, "Your goods and services are your product,
not your stock." So you don't build the company to sell out to someone else, but
you build it to run it yourself. And that's another thing that I think is just totally
insane, the growth-at-all-costs model, where the entire goal of many businesses
is to basically get saved by Google or Facebook. Where it's like we build up this
business, and it's growing super fast, and the larger it grows, the quicker we're
losing money. And we're building this thing that is just absolutely losing money
like crazy.
And what is the business goal here? The goal is that either Google or Facebook
usually look at it and say, we need that, and they buy you. Right? That's the
goal. Google basically looks at it and says, look, we have so much money, we can
take the hit, but we want these users, so here, here's a billion dollars. Boom,
you're out. I mean, that's insane. And again, just ...
Matt Totten: Then what do you do? Then what do you do? You've got a billion dollars, andShane
Melaugh: Now you can become a venture capital investor, of course.
Matt Totten: Right, right. That system grows.
Shane Melaugh: Which I'm joking about this, but that's what actually happens. That is what
actually happens. That's where then the next round of venture capital money
comes from. So yeah, the whole thing is absolutely crazy.
And I do think that another example of this, by the way, is that, so at [inaudible
00:50:38] for example, we have a set of external goals and a set of internal
goals. And so we have external goals, which is about how we want to provide
value to our users, and how we want to stand out in the marketplace.
And we have internal goals, which is, "What we want to do in the lives of our
own employees? What do we want it to be like to work for Thrive Themes?
What do we want it to mean for your career if you work for Thrive Themes?"
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and stuff like that. And that's an example of having goals that go beyond just
growth and profit. So that's another thing that I recommend.
And what you should do for sure is you should write this stuff out. You should
be clear about these goals. And we've talked before about clear about your
monetary goals, and have a clear idea of how much you want to earn by when
and so on, instead of just like, "Oh, just as much as possible as soon as possible,"
Right?
And similarly, you should be clear about what are my other goals. "What value
do I want to create?" Sit down and write this stuff down. It makes a huge
difference to get it out of your head and get it clear in front of you. And this is
also a document that you should revisit every once in a while. "Do I still agree
with these goals? Am I on line, or on course to reaching these goals?" and so on.
I think it makes a huge, huge difference to just be clear about that.
Because the problem is that we default into, well, the point of a business is to
make as much money as possible, right? We don't really question that. We
default into following the advice that is based on the growth-at-all-costs
business model, because it's just the most ubiquitous, it's the thing you're most
likely to come across. So that's why it's important to be very deliberate about
kind of changing your mind about this and changing course.
Matt Totten: Sure. So coming back to the growth-at-all-costs business, I think Douglas
Rushkoff kind of calls it Scorched Earth. It leaves a wake of scorched earth
behind it. I mean, it just seems to me it's a really important point, especially
going into the future with a lot of ... there's a lot of challenges we face in terms
of what the future will look like, but we need to really understand what the total
cost of any business is.
So for example, with these big business, Amazon comes to mind, they often hire
... so you can get cheap prices and same-day shipping. They'll be a whole army
of temp workers that Amazon hires. Basically they put a contract out, and a
temp agency contractor comes in and bids for that contract, and the lowest
wins contract wins, so then that means there's less money to pay the temp
workers with, and then essentially you're externalizing those cheap prices and
maybe harsh working conditions for the temp workers elsewhere. So now these
people don't have less money to spend, and eventually it gets to the point
where if everybody's making less, who buys Amazon stuff at some point?
I think this is the whole issue of externalized costs and then kind of creating
abstractions, where it's harder and harder to see the direct connections of those
costs. It's a short-term gain for growth-based businesses, but in the long-term, it
brings them down, because eventually nobody has that ability to spend on their
product, so ...
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Shane Melaugh: Yeah. I think the main thing for me here is that whenever you see something
like this, whenever you see super cheap prices, you see even stuff that you can
use for free, and rapid growth, all this kind of stuff, someone's paying for that.
The cost of this is still out in the world, but it's being externalized to temp
workers or to the government and tax payments or to the environment or
whatever. The cost is somewhere, right? It didn't just magically get cheaper to
do this, and that's something that is easy to lose sight of.
And again, I think as a small business, especially as a bootstrap and small-scale
business, the great thing about this is that we can circumvent most of this stuff,
right? Because as a bootstrapped, self-owned business, you don't have this
pressure from shareholders and whatnot to have a more profitable quarter and
all this nonsense, and you can basically avoid many of these problems. You
shouldn't have to do many of these things. And also, I think you can take it a
step further and be more ethical in your behavior and be more of a value-add to
the world where it's not some kind of a compromise, where it's like, "Okay, my
customer gets extra value. They get it for cheaper. They get it faster." But at the
other end, there's something horrible happening somewhere else in the world
to make this work, right?
I think small-scale, online entrepreneurship is a beautiful opportunity to create
things that don't have this compromise. I can create something for you. Like if
you buy Thrive Themes products and you enjoy Thrive Themes' products, no
one's suffering for that, right? There's no dark side that we don't want you to
know about, where we're somehow externalizing the costs of giving you this
positive experience. And that's one of the reasons why I hope that we can see
more small-scale business and we can see more of the bootstrapping happen.
And we've mentioned this many times before, but for sure Kevin Kelly's 1000
True Fans I think is still very true, and it's more important than ever to have a
culture that goes more in that direction, more towards small-scale bootstrap,
privately owned companies, instead of just the giants going around and basically
wreaking havoc on everything.
Matt Totten: Can I ask you a question, Shane? Has there ever been a time where you felt like
you needed to switch from bootstrapping to maybe taking on some debt to
continue or faced a challenge like that and were able to go around it?
Shane Melaugh: Well, for sure ... Well, being able to go around it, we've just always opted for
slower growth. It's very clear to me, I mean, I can see opportunities where I
wouldn't know what to do if someone came in and said, "Okay, here's $50
million to dominate the work-press space," let's say. I have a pretty good idea of
how I would do that. I have a pretty good idea of how I'd spend this money.
And of course, don't mistake this for arrogance. Like any such venture, the
chances that I would actually succeed at cornering the market and completely
dominating and making a return on that investment, would be slim. But they're
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always slim, right? So I'm not saying I could definitely do this. I'm saying if that
was the goal, I have an idea of how to do that.
And similarly, for sure, if I could just pump more money into this and say, "Okay,
let's just pump more money into this, get over the hump, and if we can get to
this far side, if we just have a much larger team, we can build all this stuff much
faster, then we can kind of accumulate this competitive advantage and then
we'll make that money back somehow," I mean, I would immediately know how
to do that, but I'm just not doing it.
Matt Totten: So and that kind of keeps you to the core values of not only creating value for
the customer, but also amongst the Thrive team?
Shane Melaugh: Yeah, absolutely. And I mean, yeah, I don't want to take out any debt. I don't
want anyone else to be able to make decisions, right, about ... yeah, because I
have very specific values and things that are important to me. I always think
that as an entrepreneur my job is to create a business that can sustain itself and
create a good life for the people working for the business, right? Otherwise, it's
just not a good business. Your economic model sucks if you cannot build a
business that pays people reasonably well, that treats people well, and that
creates something useful in the world.
Matt Totten: Do you ... kind of in the entrepreneurship space, are you seeing this shift or is it
still few and far between with more steady-state businesses, instead of growthfocused?
Shane Melaugh: For sure I see that the ... I think the influence of people like Tim Ferris and the
whole digital nomad movement is good because the focus is much more often
on smaller-scale lifestyle businesses. I do think that ethics are often not in the
picture. Nobody really asks, okay, is this really all right?
Basically a lot of lifestyle business people and a lot of digital nomads will jump
on an opportunity to, you know, let do, let's say, Amazon FBA shipping, which is
something that doesn't add value and that does externalize costs and is,
whatever the cooking spatula that you're white labeling and selling on Amazon
is probably made in some sweatshop type environment. And it's not good for
the world in any way. But a lot of people in this space will jump on an
opportunity like that if they feel like it can make them good money. Which is
unfortunate.
But for sure, I see more there where it's just like, yeah, more people are just
like, listen I just want to build something to support myself and my family, and I
want to go surfing. And even that alone is better, is healthier and saner than the
growth-at-all-costs model. So I think that is a bit of a, let's say, a counter-stream,
although it's not entirely on the let's do good for the world side of things.
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Matt Totten: I know your focus is more digital products, but say if somebody wanted to
create a physical product, but maybe they're afraid of the impact something like
a plastic spatula made in a sweatshop, you're like I don't want any part of that.
Is there a path for people with like physical products that would be more
sustainable and not like ... ?
Shane Melaugh: Yeah, for sure. For sure. You have to ... I mean, there are usually suppliers that
will do whatever, environmentally-friendly or organic, and so on and so forth.
For most things, you will find suppliers or manufacturers who can do that kind
of thing. The problem is usually just cost. So the real problem is that you usually
have to have a brand that is somehow about being ethical or organic or
whatever. Where people then are willing to pay how much more it costs,
because it does usually cost a lot more. But I would certainly not discourage
someone from trying that, as long as you keep to the same principals of, you
know, keeping things slow, testing out the market first, not going into crazy
debt, and so on. I would not discourage anyone from trying to do that and
saying, listen, I'm going to create a physical product, and I'm going to try and do
it right.
I also think that there's a lot to be said for doing basically doing less evil. So I
think your business doesn't have to be squeaky clean from start to finish. If you
can say, listen, I'm going to create this thing, and I'm going to treat my
employees well, and I'm going to this, that and the other, but it's still
manufactured under circumstances that are not ideal, that's still fine. It's better
than doing none of those things. So I always think that a little bit of ethics is
better than none. So don't let that get in your way, basically.
All right, so with that said, let's wrap up this episode. Thank you very much for
joining, Matt, and thanks again for the [crosstalk 01:02:51] book
recommendation.
So that was episode 36 of the Active Growth Podcast. Thank you very much for
listening. Let us know what you think by either tweeting @actigrow, so tweet
your questions or comments at @actigrow, or go to activegrowth.com/36 and
leave a comment. There's also a little audio widget there. You can basically just
tap a button and record an audio message on your phone or with your
computer's microphone. And we sometimes play those questions and answer
them on the show.
All right. That is all from me. Thank you for listening, and I'll catch you on the
next one.
Did you guys send out an email for this and the previous episode? Because I haven’t received anything, I just saw that there are new episodes of the podcast.
Well this podcast came in at a perfect time for me, thank you so much for talking about the growth issue.
I’m at a point where I’m considering getting some money from a bank or from investors to grow the business faster (from 3 to 10 employees). I now think that I should fully boostrap it, even if it takes a few more months.
I think that’s an awesome idea, Robin! What’s your business? Just curious…
I have listened to every single podcast episode. I can certainly see the difference in how Thrive Themes operates compared to “grow at all cost” businesses, and the difference for the customer both in terms of value and perception of the business is dramatic. Thanks for a fantastic discussion about this topic. Fascinating. I like the action-based and philosophical episodes. Sincere gratitude!