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profitable
impact. The
UNSCRIPTED
business is about profits, not ten years from now but within your
first year. Nowadays, too many businesses are labeled a success by virtue of
growth or run rates. Many never make a profit for years and bleed cash like an
Instagram playboy. Most start-ups birthed on the tech coast create value and
make an impact. The problem is, they don’t make a
profitable impact
for years.
Amazon is a great example of a company that makes a phenomenal impact
but largely hasn’t been profitable. Remember: Selling hundred-dollar bills for
fifty bucks isn’t what we want. “Bleeding value” might grow a company
fabulously and have VC’s drowning us in term sheets, but that’s not our
objective. Let the deep-pocketed sultans of Silicon Valley make those gambles.
Your goal is
UNSCRIPTED
, which demands profitability now, not later. And
if you want to create the next hot start-up reveled on TechCrunch, the better bet
is doing it
UNSCRIPTED
where “fuck you” opens up more possibilities.
As producers, we are in the business of serving consumers—not few, but
many. However, before impacting the masses, we must first
impact one
—and do
so profitably. If you can impact one profitably and your legacy system is
replicable, congratulations, you’ve laid a scaling track.
For example, each book I sell makes me about six bucks. I only needed to sell
a few hundred to break even. Thereafter, each book sold makes a profitable
impact. Similarly, each new user at my forum is worth about a dollar. Each list
subscriber, also worth about a buck. When I owned my Internet company, each
new user represented a lifetime customer value of thousands. For every dollar I
spent in advertising, four came back in revenue and nearly two in profit.
Profitable impact.
The act of profitably impacting many is where your income (and life) makes
quantum leaps. Optimally, your business solution should impact an industry
large enough to impact your life. If you have a software solution appealing to
hospitals, the appeal of magnitude scale exists. If any business owner could use
your product, the appeal of mass scale exists.
The market size constructs the ceiling under which we limit ourselves. If your
solution sells for twenty bucks and your target customer is an Internet-savvy
octogenarian who owns a Corvette, the market ceiling is at your ankles. How big
is that market? You can’t fill a pool with an eyedropper. Olympic swimmers
don’t train in bathtubs. Swim in bodies of water large enough to take you
somewhere.
EXPECTED VALUE (BOWLING FOR BILLIONS, NOT HUNDREDS)
The mathematical construct behind the Scale Commandment is
expected
value.
Expected value, or EV, is the expected outcome of many random
occurrences.
E(x) = SUM * P(x)
EV is calculated by multiplying each occurrence’s estimated probability and
adding the result in a comparison metric. EV positive results are favorable to
pursue while negative ones are not. Higher EVs are better than lower ones. For
instance, say you are offered a ten-dollar raffle ticket for a chance to win a new
car valued at $25,000. Only 5,000 raffle tickets will be sold. Is this a raffle you
should enter? Not according to expected value.
Outcome #1:
Lose $10
(Odds of occurring 4999/5000) [-10 X .9998 = -9.998]
Outcome #2:
Win $24,990
(Odds of occurring 1/5000) [24990 X .0002 = 4.998]
When you sum the two values (-9.998 + 4.998), you get an expected value of
negative five
(-5)
. That means, if you play this raffle infinitely, you will always
lose.
The world’s casinos operate on the same principle, where odds are slightly
EV positive, while for the gambler, EV negative. This is why the house eventually
wins if you play long enough. As occurrences increase over time, expect a mean
reversion to expected value.
In life, your outcomes (and consequences) are based on your EV plays, the
opportunities and risks taken, and the ones avoided. For example, let’s say you
are considering two businesses in two markets. Business A is something you love
—a laser-tag facility serving your local city. Business B is a software/gaming
company educating millennial investors on financial planning through a unique
video-game experience. The chart below represents the potential monthly profits
and their estimated probability given a business investment of one year.
Which business should you pursue? Open a laser-tag facility and “do what
you love”?
Or the riskier software biz?
According to the chart, the laser-tag business has an 86 percent chance at
profitability while the software company’s is just 57 percent. Notably, your
chances of failing in software are more than three times greater, 14 percent
versus 43 percent. So is the laser-tag business and its higher success probability
the better opportunity?
Nope, not by a long shot.
Business B, the software company, is the business to own, and expected value
is why. EV marks the difference between entrepreneurs who own businesses that
pay the bills for the month and businesses that pay bills for a lifetime. First is the
best-case scenario.
Laser Tag, Best Case:
$5,000/mo
Software Co., Best Case:
$1,000,000/mo
While Business B’s best-case scenario is low probability, its results are life-
changing. Over time, large EV opportunities and their probabilities put big
outcomes within your grasp. The gumball machine is packed with golds, and
luck starts lurking around corners. Or, as Mark Cuban says, you only need to be
right once. And as I say, hit for singles, but make sure you can hit a home run.
On the flip side, the best-case scenario for your laser-tag facility is $60,000
yearly profit, a nice middle-class paycheck that will make you the newest
millionaire-next-door in about forty years. And it will jeopardize your love for
the game.
The second reason the optimal choice is the software company is expected
value, which is nearly ten times (10X) better than A.
Expected Value of A:
+$1,110
Expected Value of B:
+$11,570
Remember the gumball machines. Expected value is the machinery operating
the luck spigot. If the gumballs are the potential business outcomes, you want
machines packed with golds, big-win gumballs with life-changing outcomes.
If your overall vision is rolling into a construction site and selling burritos
from a roach coach, I can say without doubt, no life-changing homers will occur
in that endeavor. (Not unless you apply one of the strategies below.) Dial coins
into big EV gumball machines where the best-case scenarios (and their EVs)
change lives.
HOW TO KILL SCALE (AND EXPECTED VALUE!)
Expected value is the expected outcome of many occurrences. For EV to
work, you need occurrences. In entrepreneurship, we call occurrences failure.
Practically every day on my forum, I can predict entrepreneurial failure before it
occurs. These bulls ride into town with gleeful proclamations about starting a
business, saying things like:
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