Parwy's Blog: Starting and running a business - The Diary of a CEO with Josh Kaufman

Josh Kaufman is a renowned business expert and the author of the international best-selling book, ‘The Personal MBA’ which has sold over 900,000 copies worldwide. He is also the author of books such as, ‘The First 20 Hours’, and ‘How to Fight a Hydra’. In this conversation, Josh and Steven discuss topics such as, the 5 laws of business, how to turn $100 into $10k, the psychological tactics of millionaires, and how to make money in your sleep.

Critique of Traditional MBAs

An MBA (Master of Business Administration) is an economically successful academic degree with exploding growth worldwide, but Kaufman believes it's often a mistake to start there for business education.
Approximately two-thirds of business school graduates enter management consulting or investment banking, with the rest typically joining very large companies. The value of an MBA often functions as a "very expensive interview" for entry into these industries.
Top 10 business schools can charge $240,000 - $250,000 for a two-year program, usually financed with debt, which creates a significant obligation with an "unsure outcome".
Research suggests no correlation between getting an MBA and long-term career success. Jeffrey Pfeffer and Christina Fong's study indicated that if someone is capable enough to get into a top program, they are likely capable of succeeding regardless, making the MBA more of a "credentialing system".

The Five Fundamental Parts of Every Business

Every business, from a small startup to a large corporation, has five universal, essential, and fundamental parts. Understanding these is crucial for anyone involved in business, whether creating one, seeking a job, or pursuing a promotion.
These parts serve as the foundation of any business plan and help understand existing businesses deeply.
The parts are: Value Creation, Marketing, Sales, Value Delivery, and Finance.

1. Value Creation

This is the first step in designing a business, focusing on finding and meeting "important unmet needs". A venture that doesn't provide fundamental value to others is considered a "scam".
Identifying Needs: It involves understanding why people buy things and what problems they are trying to solve. This requires keen observation of people's behaviour (which often speaks louder than words), noticing subtle annoyances, frictions, or suboptimal experiences in daily life.
Trade-offs: Value creation often involves making trade-offs between competing priorities (e.g., best scent vs. longest lasting vs. cheapest). Most successful businesses pick one or two priorities and "turn that dial all the way up".
Validating Demand: Relying on friends and family for feedback is insufficient. The most reliable way to validate an idea is to ask people to "lay down money" through early pre-orders (e.g., Kickstarter, letters of intent). This proves the problem is significant enough for people to pay to solve it.
Iterative Process: Entrepreneurship involves prototyping, gathering input from potential beneficiaries, and using that information to either continue or discard an idea based on critical assumptions and viability.
Complexity vs. Complicated: Business is complex due to many interrelated parts but not "complicated" in terms of its core ideas, which are often "common sense and simple arithmetic".

2. Marketing

Marketing is the process of attracting the attention of people who might be interested in the value being created. It's distinct from sales, which is about convincing someone to buy.
Human Drives: Effective marketing requires understanding human psychology, particularly five fundamental human drives: to acquire, to bond, to learn, to feel, and to defend. The more drives a business offer hooks into, the more attractive it generally becomes. Social media's popularity, for example, is attributed to hitting multiple drives.
Emotional Compulsion: Products are often sold more on emotion than logic. Marketing helps people mentally simulate a potential future where their lives are better with the product, leveraging storytelling to engage this part of the brain.
Distinctiveness and Counter-Signaling: In saturated markets, a powerful marketing strategy is to be the "antithesis of the incumbents," clearly stating what the brand stands for and, by extension, what it stands against. This "counter-signaling" differentiates a brand from the prevailing trend and can attract significant attention, even if it courts controversy.
Focus on Hyper-Responders: Rather than trying to appeal to everyone (being "vanilla wallpaper"), successful marketing targets the "hyper-responders" – the small fraction of people who care deeply and consistently about the product, even if it means alienating others.
Grabbing Attention: Given that most people are busy, stressed, and overwhelmed with information, the primary skill of marketing is to highlight what's most important, interesting, and valuable quickly to grab and hold attention.

3. Sales

Sales is the part of the business where money comes in. It involves convincing someone to buy and setting them up as a customer.
Repeat Customers: The goal of sales is not just to make a single transaction but to gain a happy, satisfied customer who will make repeat purchases. Repeat customers are the best customers because they already know the business, require less marketing effort, and have a high "lifetime value" (the sum total of all sales from that customer over time).
Customer Service: Post-sale support and positive customer experiences are crucial because they foster loyalty and generate valuable "Word of Mouth" marketing. Treating customers as a nuisance is a mistake.
Benefits vs. Features: Effective selling focuses on the benefits (how the product fulfills core human drives and improves the customer's life) rather than just the features (technical specifications). Features should be used as reasons to believe the promised benefits.

4. Value Delivery

While not explicitly detailed as a separate section in the provided text, it is mentioned as the fourth part of every business. It logically refers to the process of actually delivering the promised value to the paying customers.

5. Finance

Finance is the systematic way of making decisions around monetary considerations. It involves understanding how money comes into and flows out of the business.
Core Metrics: For early entrepreneurs, key numbers to track include monthly fixed overhead, monthly sales numbers, total cost to deliver the product/service, and net profit (how much money is left after all expenses). This determines if the business is sustainable and "worth it" based on personal goals.
Simplicity: Finance largely relies on "common sense and simple arithmetic" (addition, subtraction, multiplication, division), dispelling the myth that one needs to be a math expert. Concepts like profit (selling price minus costs to make, market, and deliver) are straightforward.
Budgeting: It involves allocating available funds (e.g., savings, loans) across critical needs like product creation, packaging, shipping, marketing, and sales.

Experimentation and Learning

Path to Success: Increasing the rate of experimentation increases the rate of success. Experimentation removes the pressure to always "know" the right answer, as in business, the honest answer to "will this work?" is often "I don't know, let's find out".
Explore/Exploit Trade-off: This mental model from computer science suggests two phases: exploration (trying many new things and collecting information) and exploitation (using gathered knowledge to perform the best-performing action more often). Optimal strategy involves continuous, albeit smaller, exploration.
Importance of Feedback: Experimentation is "wasted time" without accurately collecting and using feedback. Paying close attention to what happens after trying a new thing is the valuable part. This can involve direct customer feedback (qualitative) and sales data (quantitative).
Gaul's Law: Any complex system that works evolved from a simpler system that worked. Therefore, it's beneficial to start simple and build complexity only when justified by a clear purpose or customer feedback, avoiding unnecessary features that don't add value.

Rapid Skill Acquisition ("The First 20 Hours")

Kaufman's TED Talk and book "The First 20 Hours" challenge the "10,000-hour rule," arguing that while 10,000 hours are for mastery in highly competitive fields, most skill acquisition in daily life is about learning something "reasonably good" for the first time.
He found that 20 hours of focused, deliberate practice (approximately 40 minutes a day for a month) is enough to go from knowing nothing to being reasonably good at a new skill.
10 Principles for Rapid Skill Acquisition:
1. Choose a lovable project: Ensure the project is important enough to justify the time and energy investment.
2. Focus your energy on one skill at a time.
3. Define your target performance level: Start with a specific, concrete, and approachable goal rather than a huge, nebulous one.
4. Deconstruct the skill into subskills: Break down complex skills into smaller, learnable components.
5. Obtain critical tools: Make it easy to practice by having necessary tools readily accessible and removing friction.
6. Remove barriers to practice.
7. Make time for focused, deliberate practice.
8. Create fast feedback loops.
9. Emphasise quantity and speed over perfection: Practicing imperfectly more often leads to faster learning and greater variety of experiences.
10. Pre-commit to at least 20 hours: A behavioural psychology technique where pre-committing to a certain amount of practice increases follow-through, especially during the emotionally brutal "frustration barrier" of the first 10 hours.
Overcoming Discomfort: Adult learners often hate to feel stupid or incompetent, leading to "researching themselves to death" instead of taking action. Comparison to others or an ideal self also creates self-consciousness, which is a barrier to starting.
Value of Diverse Experiences: Learning from seemingly unrelated fields (like Steve Jobs taking a calligraphy class) can unlock surprising insights and value in different contexts. There is "no such thing as a waste of time" when viewed through the lens of continuous learning and inspiration.

Chapters

00:00:00 Intro
00:02:00 Why Did You Write The Personal MBA
00:04:32 What Is An MBA?
00:10:30 Should You Do A MBA?
00:14:19 How Difficult Is Starting And Running A Business?
00:16:57 First Steps To Setting Up A Business
00:19:29 Loads Of Business Are Finding Problems To Solve
00:27:49 How To Give Value To The End Consumer
00:35:47 How Do You Find Out If Your Idea Is Good?
00:39:11 This Is The Wrong Approach When Starting A Business
00:40:49 Why Should You Start With Value?
00:42:35 How To Market
00:44:04 Psychology & Marketing
00:46:06 Creating A Drive In The Marketing Strategy
00:48:23 Think Different
00:50:52 Be Brave To Do Something Completely Different
00:58:39 How To Become A Good Marketer
01:00:31 The Sales Piece In Any Business
01:04:38 Customer Service Matters
01:06:09 The Sales Framework
01:13:06 How Important Is Hiring?
01:14:50 What Role Does Competition Play?
01:19:09 Let's Talk Money
01:24:17 What Numbers Should I Pay Attention To?
01:26:35 Experimenting
01:34:55 Every Complex System Starts In A Simple Way
01:39:06 Mastering A Job
01:43:54 Ten Major Principles To Learn Anything
01:55:24 Removing Any Friction In The Process
02:01:38 Last Guest Question