EP11: Prevent Business Failure

“We assume that regular functioning at regular times is enough to scale. But it’s not.”

Nic Peterson (5:40-5:46)

When it comes to failure, entrepreneurs need to understand the complexities involved in growing and scaling their businesses. Your business can achieve a 5X return on investment (ROI) and still be running out of money. This keeps business owners running on a hamster wheel that never gets them where they want to be.

Businesses are complex systems, and thinking the results you achieve are linear is one of the biggest mistakes you can make. If you double the stimulus, you won’t necessarily double the response. Think of a busy highway. Increasing the number of cars by 10 percent might increase the time it takes to get to your destination by 60 percent or more.

“A non-linear response means if you double the stimulus...you’re not necessarily going to get double the response.” - Nic Peterson (1:38-1:47)

You can’t rely on a linear model when scaling your business. Things happen in business that make linear growth nearly impossible. Your marketing costs may go up or your market might become saturated. So doubling your marketing spending won’t mean that your profit doubles, too. Responses aren’t linear, and averages don’t matter as much as you think they do.

Use Science of Hindsight to Prevent Business Failure

Any errors in your business will only increase the time it takes to achieve a result. It will never cause you to get there faster. So entrepreneurs need to pay attention to what actually happens instead of relying on their assumptions. This is where the science of hindsight comes in. You need to measure, manage, and adjust when scaling your business. Hindsight lets you understand the responses more clearly.

One of the biggest mistakes entrepreneurs make is assuming that normal function is enough to scale. But it only takes one error to show you how wrong that assumption can be. You can build a larger movie theater that fits more and more people. But if the size of the exit door stays the same, all it takes is for one person to yell, “Fire!” for you to see that it’s not equipped to serve all those people. So, as your business grows, you need to grow its “doors” before you encounter any of the endless issues that can catch you by surprise.

“Errors can only increase a length in time. Errors will never cause you to arrive early.” - Nic Peterson (3:21-3:38)

Don’t Just Optimize for the Good Times

It’s easy to optimize based on the good times when everything is efficient and working smoothly. But when Facebook goes down or YouTube bans your ad account, you have to look at what happened so you can take the right steps to protect your revenue, scale your business for the long term, and achieve a positive ROI.

Today’s entrepreneurs need to make business decisions that account for the asymmetry of errors and non-linear responses. When you understand this hard truth, you develop a profitable growth model that helps you get the returns you need to achieve lasting success.

How to get involved
If you would like more information about Timothy Dick, and the success businesses have gained through work with him, please visit his website.

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