Sometimes the best mental models are the simplest.
Take the challenge of starting a business, for example.
If you attend a startup conference or study for an MBA, you’ll be shown a process to follow.
At a startup conference, you’ll probably come across the Business Model Canvas and work through the various boxes on there, from your value proposition to the channels that you are going to use to get to your customer.
If you do an MBA, the modules that you study include accounting, finance, marketing, human resources, operations management. And a few others that, looking back, are more complex variants of these four.
So, do you need to do a business model to start a business? Or do an MBA to run one?
Having participated in the first approach and gone through the second – I’d say they are valuable experiences.
The theory you learn in an MBA can be applied during a startup experiment and it might actually help.
But the question I’m asking myself is – is it necessary?
To answer that, let’s turn to John D. Rockefeller.
His book, Random Reminiscences of Men and Events, has a few gems in it. Nuggets that you should put in your pocket.
Starting with accounting – from the time he was a boy he kept a book keeping receipts and expenditures.
He called it Ledger A, and he writes that he was taught to give away a small amount of money regularly.
And that’s all you really need to know about accounting. Cash in. Cash out. And one needs to be more than the other.
If a business works at that level, it will work. If it needs a complicated accounting approach to make it work, you’re probably going to lose your shirt.
Human resources. Perhaps Warren Buffett can help.
He says – work with people you like, admire and trust.
Recruit for character and values – train for skills. Hire slowly and fire quickly.
How about operations management? The principle to use is KISS. Keep it simple.
Marketing? Marketing is about having conversations with people that have the power to sign a contract – the power to authorise payment to you.
Everyone else is just in the way.
People aren’t going to buy from you just because you want them to. They’ll buy because they want to. And if you somehow get them to buy against their will – they’ll feel rubbish about it and avoid you.
And no one gets rich on the first sale. It’s the second and third and fourth – the lifetime value of the customer – that makes you rich.
So the point of marketing and sales is not to sell.
It’s to introduce yourself, make people aware that you exist, not push for anything straight away or interfere with their current plans. Just let them know that you are available to serve them.
A slight digression on finance – and back to Rockefeller.
He tells a story where one friend asked another for advice on whether he should invest in cash or in Standard Oil stock. The person being asked didn’t want to answer – to put himself in a position where he was held responsible for the decision.
But the other was having none of it – and pressed for an opinion.
Finally the first one said – put half in cash and half in stock and see what happens.
In there is the secret to asset management – to wisely managing a portfolio of any kind.
If you don’t know – then go 50:50. Change that ratio only when you do know something.
Another sneaky little lesson. Does the rate at which you borrow matter?
What matters is the return on how you invest your borrowed money.
Put it in projects that pay back in two years, and you can borrow money at 10% all day long.
All these little thoughts are mental models – models that can help you get from A to B in the quickest possible way.
In a straight line.
You can go to school to learn them. But you need to go to work to really learn them.
A lot of us spend a lot of time meandering about – zig zagging through C, D and E, before we realise that the straight route is the one to take.
The idea of going in a straight line is simple.
That doesn’t mean it’s easy.