Think better Pareto principle or 80/20 rule for startups

Think better: Pareto principle or 80/20 rule for startups

Tl;dr: The Pareto Principle or the 80/20 rule states that 80% of effects come from 20% of causes. Identify the causes and focus on those. 20% work is about doing the right things, as opposed to doing a lot of things. Working more hours does not necessarily increase the likelihood that you will succeed.

Work is overrated. Working hard with little results is just plain dumb, right?

We have so many opportunities, but what should you focus on?

Everyone wears several hats in a startup, with overloaded schedules and too much to do. We think ‘I’m busy and therefore being productive’, but getting stuff done does not have a linear relationship to doing the stuff that makes a difference.

As a startup you are ‘default dead.’ This means you are the walking dead as you spend more money then you are making. Knowing you are dying should compel you to focus on what matters.

On your startup death bed, you lament in your autopsy that you should have focused on what had really mattered- that would be about closing deals, not reordering pencils. So if only you didn’t have to go through the regret and could do the right things now?

If you were looking for a magic hack to get more done with the least effort, there isn’t really a magic bullet. But there sure as hell are some good signals if you know how to look for them.

If you were to get more done with least effort, what would you do?

You would focus on the things that make the biggest results and ignore everything that is a lot of work that doesn’t yield good returns, right? So you could invent a catchy tag line that meant focusing on the right things and not the wrong ones. Like maybe 80% of the big stuff and not the 20% stuff that spins tires? Well, someone already did.

What is the Pareto principle

The Pareto principle is known by a few names the 80/20 rule, the power law distribution, the Law of the Vital Few and the Principle of Factor Sparsity (Pareto didn’t coin them all actually- he died before the principal was popularised. That was Joseph Juran).

In short, it states that a very small number of key variables have a greater impact on the result than all of the rest of the variables combined.

Vilfredo Pareto was a philosopher, economist and academic, fascinated by social and political statistics and trends. Legend has it that one day he noticed that 20% of the pea plants in his garden generated 80% of the healthy peapods.

He took this observation and applied it to wealth and income, uncovering that 80% of the land in Italy was owned by 20% of the population. He investigated different industries and found that 80% of production typically came from just 20% of the companies, publishing a paper, Cours d’économie politique.

The 80/20 rule isn’t totally simple. It can be observed in many ways:

  • Focus on the 20% of things that yield 80% of results.
  • You spend 80% of your time with 20% of friends that matter the most
  • 20 percent of the salespeople make 80 percent of the sales.
  • 20 percent of the people in any given company earn 80 percent of the profits.
  • 20 percent of your time can produce 80 percent of your results.
  • 20 percent of your customers represent 80 percent of your sales.
  • 20% of customers will piss you off the most.

For your purposes, you want to allocate your time to the 20% of actions that will deliver the meaty, 80% of results.

Why is the Pareto principle useful?

You are dying, so what will keep you alive? What will give you a shot?

You may be struggling with your fundraising as investors say that you don’t have enough traction. You do, however, have two deals pending that, if closed would not only illustrate the traction you need but enable you to be profitable at your current burn rate (not hiring any new folk). You focus on those deals as they move the needle in keeping you alive to hustle another day.

That’s the emergency example.

The Pareto Principle generally enables you as a founder to work ‘on’ your startup, not just ‘in’ it, providing a perch upon which to gain perspective in deciding what to focus on as priorities, working with your team on what fricking matters.

The reality is most of what we do doesn’t matter, so we need to change this and focus on the 20% that moves the needle.

You keep getting thrown a lot of work your way in the form of emails and slack messages. You need to apply Pareto to determine what is of vital import to keep you alive and you need to do, what to delegate and simply delete.

Emails and other forms of messages are other people deciding work for you. You need to decide what to work on, not be dictated to.

There is always a temptation to do the new and exciting. There’s nothing inherently wrong with that, but a Pareto analysis and an 80/20 mindset helps you to stay focused on your strategic plan and execution, and spend less time chasing endless new opportunities.

A lot of the time these things are pointless. You engage with a big company you hope will be a large distribution channel for you, but you are too naive to realize they want any traffic you have, they don’t’ want to give you theirs. If you spent a little time evaluating that opportunity, talking to mentors and the like, you might know that before you go telling investors this huge growth op, assigning staff and the like… only to see anemic growth by not focusing on what will actually yield results.

How do you apply the Pareto principle?

It is time to set some priorities, a focused intensity on work that matters. Ignore the numbers for a moment and understand the concept: a minority of efforts lead to a majority of good results. The 80/20 rule supplants the long-established ‘work more’ mindset mantra of a startup. We should stop the wasted effort and focus on investing in the paths yielding the most sizable returns.

Results should be viewed both in a short-term and long-term perspective. In this way, startups should work to first applying the 80/20 rule by initially focusing the majority of work towards accomplishing short-term immediate goals. Correspondingly, minimal work output should initially be allocated to long-term goals.

In a startup the rate of decision-making is high, and staying on a plan may not be the right thing to do. Some structure helps, but it is easy for it to become stifling, so 20% of work becomes about doing the right things, as opposed to doing a lot of things. Working more hours does not necessarily increase the likelihood that your startup will succeed.

Take the example of making investment decisions, Charlie Munger and Warren Buffett doesn’t just buy any stock. They look at a lot of deals, and whilst they read a LOT they need a heuristic to figure out where to focus their time. They are value investors so their goal is to invest in companies that are undervalued relative to the market. So, do you look at every company in the world? No. You want to have a filter and know the right variables that are indicative of generating results and ignore all the other false flags. Warren and Charlie have figured out which variables are the most promising and are worth chasing.

The Eisenhower box or matrix is one tool to frame what actions you should and should not take. You want to focus on what is important and urgent. The examples in this box aren’t the best for our purposes, but I’m sure you get the point.

eisenhower box

You need to do both 80 and 20% work

All work and no play makes Jack a dull boy, but all play and no work makes Jack a stupid boy.

80 and 20 add up to 100%. Whilst we are segregating results, some results are simply enabling, such that the 80% will not be capable of reaching fruition without the money work being done.

Paying the bill to keep the lights on is certainly 20% work, but try getting 80% results without electricity. Paying taxes are 20% work, but you can’t do 80% work if you get sent to jail. You need to do 20% work too, though you can delegate that so you get the 80% results (though that will hopefully mean 100% electricity and fiber connection).

For really hard stuff, you need to stop working

Though it seems logical to spend hours upon hours working on a task in order to complete it, you seem to form better thoughts when you give yourself a break for a period of time. Having this balance and knowing when you can be “productively lazy” can be a huge benefit to the effectiveness of your work.

I do a lot of hard things like building financial models. I’m building a marketplace one presently. I’ve built so many models that I know it’s cool to take breaks and forget about what I am doing, rather than trying to force myself to just get it done. Yes, there are many tedious things that just need to get done, and you need to suck it you nancy boy and just finish them, but there are cerebral things where working more can harm the outcome. There is only so long that I can stare at a screen and be able to think smartly. I might start coding garbage and then when I am more lucid, realize I made an error somewhere and end up spending 3x the time figuring out where the hell I made that stupid logic error.

Andrew Wiles said in an interview, possibly after receiving the Abel Prize

“Once I’m stuck on a problem I just can’t think about anything else. It’s more difficult. So I just take a little time off and then come back to it.”

And how does he take “time off”?

“I like to go and visit aesthetically beautiful places near Oxford.”

I also chunk different kinds of work. The hardest thing for me (and anyone) is figuring out exactly what needs to be done and how at a high level. Once you know how all the parts fit together it is mainly monkey work to execute on that hard, thinking work. I’ll do this with a bit model. What are the key parts? Then for each part, how does it work? Then I’ll execute the parts till I need to sleep. Next day I do thinking work and then back to beast mode. If I need to do thinking work and I’m in execution mode, I’ll do something else instead like reading all of your fricking emails. I know how my mind works now, and I use it to do different kinds of work.

In the 1980s, at the height of his intellectual productivity, Stephen Hawking used to head home from his office between five and six. He rarely worked later.

Here’s how he explained his behavior to his Ph.D. student Bruce Allen (now a professor at the Max Planck Institute for Gravitational Physics):

“Bruce, here’s some advice: The problem with physics is that most of the days we don’t make any major headway (on our projects). That’s why you should do other stuff: listen to music, meet good friends. There’s one exception to this rule: If you find a solution for a given problem, you work 24 hours a day and forget everything else. Until the problem is solved in its entirety.”

This clearly doesn’t map to start 1 to 1, but there is truth in it when it comes to sprinting. You should generally be working 9 to 10 during the week (Fridays do team drinking at about 7) and about 7 hours work on the weekend, making time for fun. Startup is a marathon. When the heat is on though, everyone drops non-work and head down like beasts to get important things shipped. Understand these need to be sprints, not prolonged periods. I can tell you, as a workaholic, that you rack up debt when you work too hard that needs to be repaid, and if you defer the debt too long you hit burn out and shut down completely. Consistency is key.

Nassim Taleb talks about barbell strategies like this, alternating between two extremes to produce better results than constantly operating at an average pace. He provides examples across domains including exercise (push your body to the max then rest), reading (classics not reading average books) and his own writing (pairing accessible essays with complex technical papers).

Conclusion on Pareto 80 20

Do the right things that move the needle. Once you know what to do, work productively to accomplish your goals. How you work will vary if you understand how your body and mind work .

When you read about companies that had genius business models or distribution channels, that’s 20% work at it’s finest. 20% work is subtle and it might seem at times as if you aren’t doing real work, but as a CEO, the hard stuff is what people are depending on you for. How exactly you come up with the genius ideas at your startup might not be clear, you are going to draw on multiple stimuli, which you won’t get staring at your screen. Even Einstein did not understand how he came up with the theory of relativity. But it is argued it came from different stimuli. In 1907, while still at the patent office, he started to think about extending the principle of relativity from uniform to arbitrary motion through a new theory of gravity.

Do what it takes to make your startup a success. What works for others might not work for you, but focus on what works.

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