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One particular morning, Seth was commenting on a recent news story: Harvard was rescinding the admission of 119 previously soon-to-be Harvard MBA students. 1 These prospective students had discovered an ethically dubious way to hack into the Harvard admissions Web site to view their application status before the official acceptance letters went out. The story quickly became a media frenzy, devolving into a debate about whether MBA students were naturally inclined to lie, cheat, and steal, or if business schools made them that way. Instead of being outraged at the bad behavior of the applicants, Seth (unsurprisingly) had a different perspective: Harvard was giving these students a gift. By rescinding their applications, Harvard was giving these students a significant opportunity: the university was returning $150,000 and two years of their lives, which would otherwise have been spent chasing a mostly worthless piece of paper. “It’s hard for me to understand,” he wrote, “why [getting an MBA] is a better use of time and money than actual experience combined with a dedicated reading of 30 or 40 books.”



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I think it’s undeniably true that the human brain works in models. The trick is to have your brain work better than the other person’s brain because it understands the most fundamental models—the ones that do the most work. —CHARLES T. MUNGER,



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I’ve long believed that a certain system—which almost any intelligent person can learn—works way better than the systems most people use [to understand the world]. What you need is a latticework of mental models in your head. And, with that system, things gradually fit together in a way that enhances cognition. Just as multiple factors shape every system, multiple mental models from a variety of disciplines are necessary to understand that system… You have to realize the truth of biologist Julian Huxley’s idea that, “Life is just one damn relatedness after another.” So you must have all the models, and you must see the relatedness and the effects from the relatedness… 4 It’s kind of fun to sit here and outthink people who are way smarter than you are because you’ve trained yourself to be more objective and more multidisciplinary. Furthermore, there is a lot of money in it, as I can testify from my own personal experience. 5



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Fortunately, there’s no need to reinvent the wheel: great books on finance and accounting already exist. If you’re interested in exploring these topics in more detail after completing chapter 5, I recommend the following books:   Financial Intelligence for Entrepreneurs by Karen Berman and Joe Knight   Simple Numbers, Straight Talk, Big Profits! by Greg Crabtree   Accounting Made Simple by Mike Piper   How to Read a Financial Report by John A. Tracy In addition, online courses like MBA Math (http://mbamath.com) and Bionic Turtle (http://bionicturtle.com) are available if you want to explore these topics in even greater depth. (Many business schools and corporate finance training programs recommend or require these courses prior to enrollment.) Quantitative Analysis and Modeling. We’ll discuss the fundamentals of measurement and analysis in chapter 10, but this book won’t turn you into a Wall Street “quant” or a high-flying spreadsheet jockey. Statistics and quantitative analysis are very useful skills when used appropriately, but the actual techniques are very situational and beyond the scope of this book. If you’re interested in learning more about statistical analysis after reading chapter 10, I recommend:   Thinking Statistically by Uri Bram   How to Lie with Statistics by Darrell Huff   Turning Numbers into Knowledge by Jonathan G. Koomey, PhD For an examination of more advanced methods of analysis, Principles of Statistics by M. G. Bulmer is a useful reference.



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all human beings have four Core Human Drives that have a profound influence on our decisions and actions: 1. The Drive to Acquire. The desire to obtain or collect physical objects, as well as immaterial qualities like status, power, and influence. Businesses built on the drive to acquire include retailers, investment brokerages, and political consulting companies. Companies that promise to make us wealthy, famous, influential, or powerful connect to this drive. 2. The Drive to Bond. The desire to feel valued and loved by forming relationships with others, either platonic or romantic. Businesses built on the drive to bond include restaurants, conferences, and dating services. Companies that promise to make us attractive, well liked, or highly regarded connect to this drive. 3. The Drive to Learn. The desire to satisfy our curiosity. Businesses built on the drive to learn include academic programs, book publishers, and training workshops. Companies that promise to make us more knowledgeable or competent connect to this drive. 4. The Drive to Defend. The desire to protect ourselves, our loved ones, and our property. Businesses built on the drive to defend include home alarm systems, insurance products, martial arts training, and legal services. Companies that promise to keep us safe, eliminate a problem, or prevent bad things from happening connect to this drive. There’s a fifth core drive that Lawrence and Nohria missed: 5. The Drive to Feel. The desire for new sensory stimulus, intense emotional experiences, pleasure, excitement, entertainment, and anticipation. Businesses built on the drive to feel include restaurants, movies, games, concerts, and sporting events. Offers that promise to give us pleasure, thrill us, or give us something to look forward to connect with this drive. Whenever a group of people have an unmet need in one or more of these areas, a market will form to satisfy that need. As a result, the more drives your offer connects with, the more attractive it will be to your potential market. At the core, all successful businesses sell some combination of money, status, power, love, knowledge, protection, pleasure, and excitement. The more clearly you articulate how your product satisfies one or more of these drives, the more attractive your offer will become.



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Status Seeking is a universal phenomenon: neurotypical human beings care intensely about what other people think of them, and they spend a significant amount of energy tracking their relative status compared to other members of their group. When opportunities to increase status appear, most people will seize them. When given a choice between different Alternatives (discussed later), people will typically choose the option with the highest perceived status. In general, we like to be associated with people and organizations that we think are powerful, important, or exclusive or that exhibit other high-status qualities or behaviors. We also like to ensure other people are aware of our status: for proof, examine what people post on their Facebook profiles. Status Seeking is a fact of human life: it’s not necessarily bad or something to be avoided. On the contrary: Status Seeking can motivate people to accomplish amazing things. In the words of Alain de Botton, a philosopher and social critic, “If one felt successful, there’d be so little incentive to be successful.”



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One of the most common experiences of a first-time entrepreneur is discovering that your brilliant business idea isn’t as original as you’d thought: other businesses are already offering similar products or services. This would shake anyone’s confidence—after all, why bother when someone else is doing what you want to do? Cheer up: there are Hidden Benefits of Competition. When any two markets are equally attractive in other respects, you’re better off choosing to enter the one with competition. Here’s why: it means you know from the start there’s a market of paying customers for this idea, eliminating your biggest risk. The existence of a market means you’re already on the right side of the Iron Law of the Market, so you can spend more time developing your offer instead of proving a market exists. If there are several successful businesses serving a market, you don’t have to worry so much about investing in a dead end, since you already know that people are buying.



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Even if you identify a business that will largely run itself, setting up the Systems (discussed later) necessary to run the business requires persistence and dedication. If the only thing that interests you about an opportunity is the money, you’ll probably quit well before you find the pot of gold at the bottom of the landfill.



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Options are often an overlooked form of value—flexibility is one of the Three Universal Currencies (discussed later). Find a way to give people more flexibility, and you may discover a viable business model.



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People are almost always willing to pay for things that they believe are too much of a pain to take care of themselves. Where there’s a hassle, there’s a business opportunity. Hassles come in many forms. The project or task in question may:   Take too much time to complete.   Require too much effort to ensure a good result.   Distract from other, more important priorities.   Involve too much confusion, uncertainty, or complexity.   Require costly or intimidating prior experience.   Require specialized resources or equipment that’s difficult to obtain. The more hassle a project or task involves, the more people are generally willing to pay for an easy solution or for someone to complete the job on their behalf. Here’s an example: a homeowner may be willing to pay a one-time fee of $50 for a pool cleaning kit, but they may be willing to pay a cleaning service $100 per month to have someone clean their pool for them.



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I can’t give you a surefire formula for success, but I can give you a formula for failure: try to please everybody all the time. —HERBERT BAYARD SWOPE,



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Relative Importance Testing—a set of analysis techniques pioneered by statistician Jordan Louviere in the 1980s 3—gives you a way to determine what people actually want by asking them a series of simple questions designed to simulate real-life Trade-offs. Here’s how it works. Let’s assume we’re conducting a Relative Importance Test for the diner previously mentioned. Instead of asking the participant to rank each benefit from 0 to 10, we show the participant something like the following: A. Orders delivered to table in five minutes or less. B. Most entrée prices under $20. C. Appealing restaurant décor. D. Large variety of menu options. After this set is shown, the participant is asked the following questions: 1. Which of these items is most important? 2. Which of these items is least important? Once the participant answers the questions, another set is shown: E. Unique entrées I can’t get anywhere else. F. Knowing I can always order my favorite dishes. G. People are impressed that I dine here. H. Large portions. Random question sets containing four or five criteria are provided until there are no more possible combinations or the participant’s attention wanders, which will typically occur around the five- to ten-minute mark. It won’t take the participant long to provide a response to each of these simple questions, but the results are quite revealing. By asking the participant to make an actual choice, you’re collecting more accurate information about how the participant would respond when faced with a similar choice in the real world. When the results are aggregated and statistically analyzed, the relative importance of each benefit becomes very clear.



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If you’re not embarrassed by the first version of your product, you’ve launched too late. —REID HOFFMAN, FOUNDER OF LINKEDIN



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Pick three key attributes or features, get those things very, very right, and then forget about everything else… By focusing on only a few core features in the first version, you are forced to find the true essence and value of the product. —PAUL BUCHHEIT, CREATOR OF GMAIL AND GOOGLE ADSENSE



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A hundred and fifty days a year, Patrick Smith lives in the Colorado wilderness, just as he has for the past fifty years. Smith is the founder of the Colorado School of Outdoor Living and two successful hunting/backpacking companies: Mountainsmith, which he sold in 1995, and Kifaru International, which he created in 1997. Becoming a Kifaru customer is a quick way to overheat your credit card. Kifaru makes arguably the best hiking and hunting packs and shelters in the world—extremely rugged, lightweight, and well designed. Kifaru packs can carry two hundred pounds comfortably, will last for decades, and sell for hundreds of dollars. It’s not uncommon for avid sportsmen and soldiers to shell out thousands of dollars for custom-made Kifaru gear, then wait eagerly for six to eight weeks while the company makes it. Try as you might, it’s extremely difficult to find a Kifaru customer who’s disappointed in the quality of their gear. More often than not, a new Kifaru customer is a customer for life. The secret behind Kifaru’s quality is Field Testing. Smith personally creates, uses, and Iterates every single product Kifaru makes for years before offering it to customers. By the time the finished product is available, even the most demanding customers have a difficult time finding flaws. Here’s what Smith says about his personal approach to Field Testing: The backcountry is definitely both my inspiration and my laboratory. I’ve figured out how to create designs out there [in the field]. I trust this technique. I get instant feedback about designs because I’m in the backcountry doing the things the design is for, and testing it right then, in the real world arena it’s intended for… I really do think this is a better design process than sitting in front of a computer in an office in town. I think it’s a win/win situation.



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Using what you make every day is the best way to improve the quality of what you’re offering. Nothing will help you find ways to make your offer better than being its most avid and demanding customer.