Let me know if this sounds like you:
Some days you feel like what you’re working on is going to turn into the biggest company, like, ever. You feel like you’re on top of the world. Like all you really have to worry about now is how you should style your hair on magazine covers, and whether Ben Mezrich is going to write a totally unauthorized account of your meteoric rise to fame and fortune. “No comment,” you’ll say, when you’re asked if everything he says about you is true.
But on other days you feel like everything sucks. Like all of this was a total waste of time. Like your prospects are slimmer than a candle in a hurricane. Like you’re surprised that you could ever think that your idea could ever go anywhere.
And the funniest thing is that rationally you know that there is very little difference between the days when you feel great and the days when you feel terrible. In other words, even though you feel different, nothing meaningful about your company has really changed.
In short: Running your company is an emotional roller coaster.
Why do we feel this way? What is it in our genetic makeup that makes running a startup so difficult — that makes keeping an even internal keel so hard?
Basically I think it boils down to this:
- We’re highly emotionally invested in our startups.
- Every day things happen to our companies. Some of them carry meaning for our long term prospects, but many of them are just random.
- Because we’re invested, our brain reacts emotionally to everything that happens — whether or not those things are meaningful.
Got a new customer today? “Great,” your brain says. “It’s time to start shopping for that private jet!”
One journalist not responding to your email about your launch? “Bad news,” says your brain. “This product is horrible. No one thinks this is a good idea. What am I going to say to my family and friends when that thing I was working on for six months never even launches? People are going to laugh at me.”
The thing about startups is that you’re forced to deal with a massive amount of uncertainty and randomness every day. There’s a lot of noise to wade through, and not much signal.
The fact that you got a customer today probably doesn’t mean much for your long-term prospects. It could be a purely random coincidence, indicative of exactly nothing about product/market fit or the size of the opportunity you’re pursuing. Even Color got a customer or two, didn’t they?
But it sure doesn’t feel that way. It feels like that customer is proof that you’re doing the right thing. That you’re on the right track. That you’re unstoppable. That you’re about to take over the world.
And it feels that way because your brain isn’t equipped to deal with randomness. Your brain likes to take facts, and tell stories with them. Your brain likes to find causation: “The fact that the journalist never responded means X, Y, and Z about the product.”
Those stories may or may not actually be real. But they certainly feel real.
And as a 21st century entrepreneur who’s supposed to be keeping close tabs on her business, tracking everything with metrics, and always plugged in to the latest information, the ironic part is that all that information is actually what’s causing your crazy ups and downs.
In his book “Fooled By Randomness,” Nassim Taleb explains why more information can be bad in vocations that are subject to highly random events. Consider an example he presents about a Wall Street trader, another field highly subject to random events. (NOTE: I’m paraphrasing Taleb here for convenience.)
Consider a trader named Bob. Assume for argument’s sake that Bob is an excellent investor. His strategy is expected to earn a return of 15 percent, with a 10 percent error rate per year.
The error rate is what’s called volatility. It means there’s a 68 percent chance that in a given year his portfolio will return between 5 percent and 25 percent. It also means that there’s a 95 percent chance that it will return between -5 percent and 35 percent in the same time period.
Clearly Bob has a good strategy trading strategy that’s going to make him money. But let’s look at how randomness can make a someone trading a winning strategy, feel like he’s a loser.
A 15 % return with a 10% volatility (or uncertainty) per annum translates into a 93% probability of success in a given year. But seen at a narrow time scale, this translates into a mere 50.02% probability of success over any given second as shown in the table below.
Basically what this table is saying is that even though the trader will win in the long run, if he checks his portfolio every second he’ll feel like his strategy isn’t working. Because at least half the time he’ll be down, not up.
Over the very narrow time increment, the observation [of what his portfolio is doing] will reveal close to nothing. Yet [the trader's] heart will not tell him that. Being emotional, he feels a pang with every loss, as it shows in red on his screen. He feels some pleasure when the performance is positive, but not in equivalent amount as the pain experienced when the performance is negative.
At the end of every day the [trader] will be emotionally drained. A minute-by-minute examination of his performance means that each day (assuming eight hours per day) he will have 241 pleasurable minutes against 239 unpleasurable ones.
But what’s most interesting is that the trader only feels he is performing badly if he checks his portfolio every second. If instead he starts to check his portfolio every month or every year, things change:
Consider the situation where the [trader] examines his portfolio only upon receiving the monthly account from the brokerage house. As 67% of his months will be positive, he incurs only four pangs of pain per annum and eight uplifting experiences. This is the same [trader] following the same strategy. Now consider the [trader] looking at his performance only every year. Over the next 20 years that he is expected to live, he will experience 19 pleasant surprises for unpleasant one!
A few conclusions:
Over a short time increment, one observes the variability of the portfolio, not the returns. In other words, one sees the variance, little else.
Our emotions are not designed to understand the point. The [trader] did better when he dealt with monthly statements rather than more frequent ones. Perhaps it would be even better for him if he limited himself to yearly statements.
When I see an investor monitoring his portfolio with live prices on his cellular phone or his handheld, I smile and smile.
The bottom line: what happens day to day at your startup is subject to randomness. Randomness means that on a short time increment it’s very difficult to tell whether what’s happening is noise, or signal.
But because we’re so engaged with our startups, we assume that everything that happens is signal. We assume everything that happens carries meaning. And that affects our emotional state accordingly.
Certainly it’s good to be in tune to everything that’s happening in the early stages of your company. But whenever you feel yourself getting too down, or too up it’s worth asking yourself:
Is this signal? Or is this just noise.
As Taleb says in his book: “The wise man listens to meaning; the fool only gets the noise.”
[This post was originally published on Dan's blog.]