Four Planning Strategies

Michael Frese divides real-world small-business planning into four methodologies. As you read, try to think about how you would apply these methodologies to your current projects.

Reactive Strategy.  Your actions are not planned in advance, but are instead determined on-the-fly in response to the current situation.

Complete Planning Strategy. Your actions are proactively planned well in advance. You try to have a clear knowledge of what tasks you will need to complete and what scenarios will occur, and you try to anticipate exactly what problems may arise.

Opportunistic Strategy. You begin with a basic plan, but then adjust the plan frequently as new information presents itself.

Critical Point Strategy. "Do the hardest part first," to paraphrase Bloomberg. You start out with a goal and tackle the most important or the riskiest barrier to achievement of your goal. Once you've implemented a solution to that problem, you go on to the next-highest priority issue.

From two related studies of 80 small business owners in the Netherlands:

"Reactive Strategy was negatively related to firm success, while a Critical Point Strategy was positively related. The combination of Critical Point and Opportunistic Strategy was most and the combination of Opportunistic and Reactive was least successful." -How to Plan as a Small Scale Business Owner

The Critical Point and Opportunistic strategy combination was also the most common combination in the sample.

"Business owners that perform poorly employ a Reactive Strategy, with poor performance leading to increased use of reactive behavior. High performing business owners start out focussing on the most crucial issues (Critical Point Strategy), with high performance leading to a more top-down (Complete Planning) approach... Strategy use is dependent upon the type and level of environmental uncertainty. Complete Planning strategy is used less frequently in a fast changing environment and more often in a complex environment." -Strategies, uncertainty and performance of small business startups

Complete Planning can be beneficial if events usually unfold as planned, but most of us in Silicon Valley find such predictability elusive.

Experienced VC's Add Significant Value

Many experienced venture capitalists claim they add significant values to the ventures they invest in. Many entrepreneurs claim that their experienced venture capitalists are incompetent meddlers who might as well make decisions based on dartboards. (The word 'monkey' or 'vulture' often comes up in such discussions, depending on whether stupidity or evil is invoked as the main causal factor.) What does the scholarly literature claim?

First of all, active VC's tend to do better than passive VC's. According to Who are the Active Investors:

"After controlling for endogeneity, investor activism is shown to be positively related to the success of portfolio companies."

How does VC experience factor in? Let's revisit Skill vs. Luck:

"At the 75th percentile of VC EXPERIENCE and at the means of all the other variables, the predicted success rate is 19.0%, while at the 25th percentile, the predicted success rate is only 13.3%."

Is this solely because experienced VC's snap up the best startups, or are they also adding more value than less-experienced VC's? How Smart is Smart Money? uses a two-sided matching model, similar to Gale and Shapley's College Admissions Model, to compare VC ability to invest in better startups (sorting) with investor influence and concludes:

"If an investor without any experience were to make random investments, the probability of success would be 15.1%. The observed probability of success for an investor with an experience of 225 is 38.9%... The influence of the more experienced investor accounts for 10.0% of this difference... Sorting thus explains 58% and investors’ influence explains 42% of the total increase in the probability of a successful investment for the most experienced investors in the market."

So there appears to be a significant causal benefit of VC experience. Many entrepreneurs do understand the value of a good VC. What do Entrepreneurs Pay for Venture Capital Association:

"Offers made by VCs with a high reputation are three times more likely to be accepted, and high-reputation VCs acquire start-up equity at a 10–14% discount." (Caveat: For Internet-focused investments, the results are less clear, because finding a good reputation marker is more difficult given the relative youth of the industry.)

Multitasking and Music

One theory for how human multitasking works:

"It appears that rule activation takes more time for switching from familiar to unfamiliar tasks than for switching in the opposite direction... [T]ask switching may often be mediated by a rule-activation stage of executive control through which the rules for prior tasks are disabled and the rules for current tasks are enabled in distinct operations."

Multitasking is necessary in business to the extent that unexpected higher-priority items need to be able to preempt lower-priority activities. However, frequent gratuitous task-switching is a productivity drain that should obviously be avoided.

On the plus side, engaging in side activities that don't come to the attention of your brain's "executive system" may be relatively harmless. Under many circumstances, listening to music may be one such activity; the data on the topic is mixed. One line of studies claim that music can reduce cognitive performance; for example, lyrical music may harm recall in the short term. Other studies claim listening to enjoyable music over the course of multiple weeks can increase productivity by producing positive affect and lowering stress.

Advantages of listening to music include:

• Positive affect
• Reduction in mental fatigue
  
• Reduced stress
• Screening out other environmental distractions

The emotional benefits can often increase productivity. The main disadvantage is a risk that the music itself can become a distraction, especially for more complicated tasks. Some factors that may affect the cost/benefit ratio (again, the data is mixed, and many of these points have been unevenly replicated, so take with even more of a grain of salt than usual):

• In terms of productivity benefits for simple tasks, the genre of music may be less relevant than whether you find the music enjoyable.
• In terms of distraction, certain genres (such as lyrical and pop instrumental) may be more distracting than others.
  
• The simpler your tasks are, the greater the productivity boost; conversely, the more complicated the tasks, the more distraction can harm you. However, even the tasks involved in a typical software development workflow may be simple enough to gain some productivity benefits.
  
• Extroverts might gain a greater productivity boost than introverts do.

 See also:

• The multi-tasking paradox

Metapost: Posting Schedule and Python

1. As the prophecy foretold, we've had one post per day in November, and starting tomorrow will scale back the attack on your poor RSS reader.

2. This month I'm looking for fellow Python developers in the Silicon Valley area to collaborate with on some small Google Wave and CRM projects. If you know anyone who might be interested, have them drop me an email.

The Mental Athlete

As with a physical athlete, the mental athlete (or, as we call him nowadays, "knowledge worker") should pay attention to what he puts into his body.

Nutrition

Besides adopting good overall nutrition, remain aware that the brain runs on glucose, and is quite a pig. Familiarize yourself with the concept of glycemic load. Don't skip breakfast; your blood glucose levels are low when you wake up. Based on basic biochemistry, vitamin or protein deficiencies are presumably harmful as well to cognition.

Caffeine

Caffeine raises alertness and (at larger doses) increases mental performance. Habituation poses a significant problem, especially at 900 mg/day or more. Happily, lower doses appear not to cause complete habituation, even in the long run. The half-life of caffeine is about five hours, with some caveats. So, if you drink two cups of coffee with dinner, you might have as much trouble sleeping as if you drank a single cup at midnight.

Prescription Nootropics

Modafinil improves working memory and may be neuroprotective. Ritalin (Methylphenidate) focuses attention (which can be a good thing or a bad thing) but carries a risk of habituation. The long-term effects of most nootropics are unknown.

Other

Stress tends to increase mental fatigue, as does a lack of sleep.

See also:

• Bostrom and Sandberg on cognitive enhancement
  
• Nature on Cognitive-Enhancing Drugs
  

Time is Money (a quick and free guide)

Putting an explicit monetary value on your time has the advantage of ironing out certain irrational habits. (Of course, if taken too far it could be a source of stress, for example if you were to constantly interrupt your leisure time with thoughts of how much it's costing you.) Here's some advice for putting a ballpark dollar value on your time.

1. Your time value should be your marginal salary increase if you consistently were to try to work an extra hour, not your average hourly wage. Your marginal wages may be above or below your average wages, depending on your circumstances. (If you're unlikely to follow through on efficiently working the full extra hour, you would want to factor that in.)
   
2. Factor in expected marginal taxes, both personal and (for some entrepreneurs) corporate taxes.
3. Factor in a discount rate if returns are far in the future or if you're currently short on cash.
4. For entrepreneurs or anyone else exposed to high levels of risk, figure out an expectation value and adjust for your personal level of risk aversion.
   

Setting a time value doesn't magically instantly increase or decrease your cash flow. However, it does help you decide whether you should:

• spend more (less) money on leisure activities and personal expenditures, and indulge in less (more) leisure time
• invest more (less) money in business automation and hired help
  

Not all hours are equal; the monetary value can be adjusted by situation based on many criteria, such as:

• How pleasant or unpleasant is the given activity?
• Does the activity provide a learning opportunity?
  
• How much does the activity affect your level of mental fatigue?

Cheat sheet: Success Factors in New Technology Ventures

Some sobering statistics remind that, even after gaining initial funding, your high-tech startup still isn't out of the woods. From Success Factors in New Ventures: A Meta-analysis:

...after four years only 36 percent... of (U.S. New Technology Venture) companies with more than five full-time employees had survived.

If you want a handy reference to which factors consistently were correlated with survival for U.S. NTV's, here's your cheat-sheet (in order of decreasing importance):

1. Supply chain integration: "A firm’s cooperation across different levels of the value-added chain (e.g., suppliers, distribution channel agents, or customers)"
2. Market scope: "Variety in customers and customer segments, their geographic range, and the number of products"
3. Firm age
4. Size of founding team
5. Financial resources
6. Founders’ marketing experience
7. Founders’ industry experience
8. Existence of patent protection

Interestingly, the "market scope" factor contrasts with Scott Shane's advice that "new businesses that focus their activities (on one market or product) perform better than those that do not," which cites (for example) "Survival chances of newly founded business organizations."

The positive correlation of patent protection contrasts with Guy Kawasaki's disdain for patent protection, although Guy may be speaking towards new software startups specifically rather than to NTV's as a whole.

These factors consistently failed to be correlated with survival for NTV's:

1. R&D experience
2. Prior start-up experience (a recurring puzzle)
   
3. Environmental dynamism: "High pace of changes in the firm’s external environment"
   
4. Environmental heterogeneity: "Perceived diversity and complexity of the firm’s external environment"
   
5. Competition intensity

The non-correlation of competition intensity suggests that entrepreneurs as a group are well-calibrated, neither shying away from competition to an irrational degree, nor irrationally ignoring the existence of competition.