188. Jordan Lams on Finding and Patiently Developing Your Entrepreneurial Focus

We define entrepreneurship in terms of people working creatively to make others’ lives better. That’s a very broad statement, of course, so it’s instructive to observe how individual entrepreneurs choose to make some customers’ lives better in some specific ways by applying special skills and knowledge. Let’s call it finding an entrepreneurial focus.

Economics For Business talks to Jordan Lams, founder and CEO of Moxie, an industry pioneer in manufacturing, branding, and distributing cannabis products.

Key Takeaways and Actionable Insights.

Entrepreneurs find their focus — or, sometimes, it finds them.

Bruce Lee is reported to have said that the successful warrior is the average man, with laser-like focus. Entrepreneurs develop focus on particular customers, in order to understand them better, empathize with their wants, and deliver them the experiences that they value. Developing this focus may take time, or it may come early in the journey, but empathy always provides the pathway.

Jordan Lams observed the pain of a family member during a time of illness, and how cannabis products could bring some relief and comfort. From that time, he became focused on the health and medical benefits of cannabis in a broad range of personal circumstances.

From a position of focus, entrepreneurs develop the deep knowledge that becomes their marketplace advantage.

Entrepreneurial focus directs research and knowledge gathering. In Jordan’s case, he gathered academic research, medical literature, and clinical studies, and he talked with medical practitioners about cannabinoid therapies. Networking brought him into contact with researchers and doctors and clinicians and product developers. He established a uniquely robust knowledge platform.

Focus plus knowledge leads to opportunity tension.

Some entrepreneurial theorists have coined the term opportunity tension — that period when an entrepreneur’s focus and knowledge point to a market opportunity, but there remains unresolved risk in the process of seizing it. The entrepreneurial solution, of course, is to take the risk. Jordan executed his commitment by taking a job in the retail sector of his chosen industry — a place to meet customers one-on-one, and look backwards at the supply chain.

Customer orientation is refined by direct contact, conversation, and experience.

Working in retail enabled direct customer contact and unfiltered conversations about customers’ preferences and wants, the benefits they sought compared to the benefits they experienced, and a general deepening of customer knowledge.

In addition, Jordan was able to observe the supply chain, including the interruptions and inconsistencies that detracted from customers’ experiences. Product quality was inconsistent and supply was unreliable. To an entrepreneur, this looks like opportunity.

Knowledge, experience, and customer contact provided the ingredient for a new firm and a new value proposition.

Jordan sums up the firm he founded, Moxie, as knowledge + infrastructure. A status quo of incomplete knowledge, inferior and inconsistent products in unreliable supply chains can be replaced by a new market of shared and distilled knowledge delivered via consistent and trustworthy quality. Customers are able to develop trust and confidence in a brand based on knowledge (“we know what we are doing”) that brings new maturity in the form of scale and process control and quality assurance to an emerging market category.

The company’s knowledge base enables vertical integration because the knowledge is broad and not narrow, the recruitment of strong partners because shared knowledge makes for robust collaboration, and new standards of quality, adherence to which strengthens customer expectations.

The firm’s foundation supports both R&D and open innovation.

All markets are changing at high rates of speed at all times. That’s why innovation is the essence of entrepreneurship. Standing still is a losing option. Jordan invests I R&D in the form of lab research (in pharmaceutical quality labs) exploring new product forms and new combinations, while also participating in the open innovation of knowledge sharing that goes on throughout the industry. R&D supports both specialization (making current offerings even better) and market expansion (new products, new forms).

Brand building will be the patient route to long term growth.

While business environments change fast, one way to invest with patience in a consistent direction is to build a brand. A brand can reflect customer values — the things that matter to them — in a way that creates lasting bonds. On its website, Moxie positions its brand as a force of character: courage, grit, determination, nerve. It provides an emotional connection to customers who value self-realization and self-actualization.

Patient entrepreneurs can see the regulatory maze as a locus of opportunity, too.

Moxie was the first licensed cannabis brand in California, and sees itself as a pioneer in leading institutional and regulatory progress. Instead of viewing regulators as business obstacles, Jordan employs his empathy skills to understand their position, their role, and their needs. He provides them with resources of information, industry knowledge and collaboration, and contributes where he can and where it’s appropriate to help them arrive at decisions and translate them into subsequent implementations.

As in building a company and building a brand, patience can pay off in future strength.

Additional Resources

EnjoyMoxie.com

Jordan Lams on LinkedIn: Mises.org/E4B_188_LinkedIn

The Long Night Of Mathematicized Economics Is Over.

Sometime in the 19th century, economists got the idea that mathematics was an appropriate language for economics. This was a strange turn, since economics is the science of how human beings, pursuing their own desires and preferences, find ways to exchange with other human beings to produce prosperity. Finding ways to exchange involves creativity, ideation, innovation, forming companies, providing services, importing and exporting – activities and processes that don’t lend themselves to algebraic symbols and mathematical equations. 

Mathematics is inappropriate for economics, yet it has become dominant. Why? Precisely because it removed the human component, the creativity, the subjectivism. The new practitioners didn’t want that mode. They wanted cold, hard calculation. They wanted to be seen as “real scientists”, like physicists and engineers, dealing in scientific precision and not the uncertainty and softness that, in their view, characterized the analytics of social science and social interaction. Human-ness is so messy. Math is clean and sterile.

But the hold of mathematics on economics is breaking. Its inappropriateness as a tool of economic understanding is widely recognized, and new alternatives are becoming well established.

The Illusion Of Knowledge

In an essay entitled The Illusion Of Knowledge, Howard Marks, co-founder of Oaktree Capital Management, points out that the mathematical models of economics can’t predict and can’t guide expectations. There are too many variables and the most important variables are human and therefore unpredictable in their reaction to changing circumstances. He asks

Can a model replicate reality? Can it describe the millions of participants and their interactions? Are the processes it pretends to model dependable? Can the processes be reduced to mathematics? Can mathematics capture the qualitative nuances of people and their behavior? Can a model anticipate changes in consumer preferences, changes in the behavior of business, and participants’ reaction to innovation? In other words, can we trust his output?

Howard Marks, The Illusion Of Knowledge

His answer is no. 

Economics Of Verbs Not Nouns

W. Brian Arthur is another prestigious economist who rejects mathematical modeling for his science. In a paper entitled Economics In Nouns And Verbs, he observes:

The economy is very much a creation of humans and a very complicated one, so given the liberty of human choices and the vagaries of people’s actions, it is not obvious why algebraic logic and calculus should apply.

W. Brian Arthur Economics In Nouns And Verbs.

The core problem, as he articulates it, is that the algebraic symbols of econometric models exclusively represent nouns:

Economics deals with prices, quantities produced, consumption, rates of interest, rates of exchange, rates of inflation, unemployment levels, trade surpluses, GDP, financial assets, Gini coefficients. These are all nouns. In fact, they are all quantifiable nouns— amounts of things, levels of things, rates of things. Economics as it is formally expressed is about amounts and levels and rates, and little else.

Ibid.

The language of mathematics does not allow actions. It can’t answer questions about how an economy or a firm or a development project emerges in the first place, how innovation works, how economic development takes place, or how structural change happens. Anything in the economy that deals with adjustment— whether it is adaptation, innovation, structural change, or history itself—falls through the algebraic mathematics sieve.

Arthur calls for a language of expression in economics that can describe these actions, changes, and innovations, and thereby develop some resemblance to and understanding of the real world.

Language and Austrian economics

Ahmed Elsamadisi, CEO of the analytical software company narrator.ai says that there is one data model that can cope with all these variables: it’s called language. Data has a role to play, but it’s subsidiary to language. Elsamadisi talks about “having a conversation with data” – it’s human beings using language to ask the right questions who are able to find the most value in historical information.

The economics that Brian Arthur is looking for already exists, but most economists ignore it. The unfortunately-named Austrian economics – its first scholars were in Vienna but the research now is global – uses language and deductive logic from first principles to develop its theories. It has no models. 

As economist Per Bylund writes in How To Think About the Economy, economics Is about people and specifically about what they do to meet their own goals. People’s wants are unlimited but their means are not, so they economize, choosing from scarce means to achieve as much as they can. Economics is life: spontaneously and adaptively doing what we can with the resources available to us. As a consequence, the economy Is unplanned order, always in flux. It can’t be modeled.

Subjective Quantification

Professors Peter Lewin and Nicolas Cachanosky propose a novel combination of thought processes to integrate words and numbers in economic calculation. Their term is subjective quantification. Human beings have the unique ability to turn subjective ideas into numbers that express the idea. We find a particular product or service that we feel has potential value to us, and we turn that feeling into a number via our willingness to pay a monetary price to acquire it. That’s turning the subjective – our idea of value – into the objective – the number of dollars we’re willing to pay. Generally, this is the process of economic calculation. Firms estimate revenues they may receive in the future from customers who perform this value calculus. The firm uses its own estimate – a subjective one, by definition – to make plans for investment and business expenditures.

Models promise prediction and guidance on economic variables. It’s an illusion, as Howard Marks puts it.

With the new resurgence of Austrian economics, and its modern expression in what Brian Arthur calls complexity economics (an economics of verbs not nouns), the dominance of mathematics in economics is coming to an end.

187. Per Bylund: The Austrian School Approach to Business versus the Business School Approach

Business is a form of applied economics. Its purpose is to make people’s lives better. Profit is the signal from society that business is doing a good job in the customer’s estimation. This is a completely human system, a form of human action and interaction. Business schools take the approach of mainstream economics, that mathematics is the tool of choice, expressed in data analytics, accounting, financialization, and numbers-based plans and strategies. The Austrian school approach offers a very different path. Professor Per Bylund joins the Economics For Business podcast to highlight some important differences.

Key Takeaways and Actionable Insights

Business logic based on understanding subjective value.

The purpose of business to facilitate customer value. The pursuit of new economic value brings new firms into existence, the continuing realization of new value experiences for customers results in business growth, and recurrent refreshment of value propositions keeps businesses thriving and healthy.

Consequently, value is fundamental to business. Yet it is widely misunderstood. Sometimes it’s misconstrued as shareholder value, a function of stock price performance. Usually, it’s financialized as a set of numbers and indexes.

True value is in the mind of the customer. It’s the experience of feeling better off as result of interacting with a business — making a purchase, taking a subscription, or using a service that makes life feel better, and that feels like a superior choice compared to alternatives.

Customers decide what to value, and therefore what to purchase, and thereby decide the success of a business. All businesses must learn this value logic, and Austrian economics for business provides the understanding that points to the implications for business action.

Thinking in subjective terms.

An understanding of subjective value reverses the flow of business thinking. It’s easy and conventional to think in objective terms about products and prices — what a firm produces and offers and the price the firm charges. It’s harder and somewhat counter-intuitive for businesses to think about how each individual customer feels — what’s important to them, individually and personally, about the unique ecosystem in which they make their choices (e.g., their family profile, what kind of a house they live in, or the subjective resource allocation priorities of each of the individual firm they work for).

The customer decides what is valuable to them, and that’s the basis from which business action must proceed.

Value-guided creativity.

Business is a creative discipline. Because customer preferences and priorities are continuously changing, because competition is continuously aiming at making a superior customer proposition, because technology is continuously making new benefits and new customer experiences possible, and because we can’t possibly know how all this will work out in the future, businesses must always be changing, improving, adding, renewing, becoming somehow better in the future than they are today.

The only way to invent the future in this way is through creativity — new ideas, new combinations, new routes to convenience, new removal of barriers. Creativity can be random and unpredictable — we don’t know what is going to be successful out of all our creative ideas. Therefore, we apply constraints so that creativity operates within productive boundaries, and the generative constraint is customer value. If all our creative ideas are guided by the constraint of “will the customer find this more valuable”, then the opportunity for productive innovation is greater. If we place ourselves in the shoes of customers, and try to simulate what they will feel when they experience a new value proposition, we’re on the track to business success. This is value-guided creativity.

Business as a flow.

Business schools emphasize planning and strategy (and strategies are often just long-term, bigger plans). These are tools of prediction and control — predict the future (we will achieve $10 million in annual revenue this year) and control how we get there (100 salespeople must sell $100,000 each). The numbers can fill a spreadsheet.

Similarly with organization design: the spreadsheet in this case is an org chart, with layers and reporting pathways and divisions and units, another exercise in statics.

The Austrian recognition of constant change results in re-thinking business as a flow. Thinking in statics is potentially disastrous because the world can change while your firm does not. Thinking dynamically opens the firm to feedback loops from the marketplace, listening to customers and monitoring when their preferences change or competition shifts, and being open to adapting and adjusting.

Organization design gives way to orchestration, the constantly changing arrangements dedicated to the improvement of the customer’s value experience.

Every business can and must act entrepreneurially.

Our term for the orientation towards and capacity for constant change — constant pursuit of new customer value — is entrepreneurship.

In the popular vernacular, the word entrepreneurship has come to be associated with charismatic individuals, like Elon Musk or Jeff Bezos or Reed Hastings. They are identified as the instigators of and catalysts for new value generation. That’s fine — such individuals are important in challenging the status quo. But for effective and commercial and sustainable new value generation, the entire firm must be entrepreneurial — highly sensitive to how a particular configuration of resources and a particular business model and value proposition serves customers, and to changes in the business environment that require adjustment on the firm’s part. The firm must be flexible enough to make these adjustments. Often, the market data comes to the firm from the edge, where front line employees working directly with customers gather the inbound information about change. The entrepreneurial firm ensures that the new information flows freely and is acted upon, and gives those closest to the customer the authority to make responsive changes.

Business schools often teach static and defensive concepts such as economies of scale and competitively insulated market structures. Business for them is production management. Business from the Austrian school perspective is value discovery, value facilitation and responsive change in the form of new products, new services, and new value.

Entrepreneurial empathy as a tool.

When we think of business tools highlighted in business schools, we might think of strategic planning, data analytics, accounting, process management, incentive compensation, and financialization.

The tool of choice for the entrepreneurial firm is empathy. Empathy is customer-first thinking. It focuses on identifying and understanding what customers feel is missing in their life, what they long for and wish for. There’s a gap between customers’ actual experiences and their desired experiences. They can’t articulate solutions, but they’re brilliant at identifying the potential for improvement. If the customer feels that some experiences could be better, or that they’re struggling in some capacity with an experience, that’s a signal for the creative entrepreneurial firm to experiment with new ways to deliver that betterment.

Entrepreneurial firms create better futures for their customers via empathy. They bring customers new things that they can want, that weren’t available to them in the past or of which they were not aware.

It’s not all numbers.

Just as mainstream economics has been rendered irrelevant and meaningless to real people because of its insistence on the use of algebra and mathematical models instead of real world observations, so mainstream business schools have made business into a world of spreadsheets, accounting, data analysis, bar charts and graphs, and structures and formulas.

Austrian school business thinkers understand the role of qualitative assessment — understanding people as humans as opposed to statistics, understanding emergent processes, understanding feelings and subjective value, and that the things that matter to people, both employees and customers, are values not numbers.

That’s why narrative and sense-making stories are taking the place of plans and strategies. Software development provides a good example: user experience design is a narrative about how customers prefer to interact with the software they are using, rather than a focus on lines of code.

Action and feedback loops.

The ultimate replacement for business school concepts of planning and strategy is action. Entrepreneurship is action. Action generates an effect — a feedback loop from the marketplace that signals the result of the action. The customer purchased or did not purchase. The rating improved or worsened. Revenue grew or declined. In the A/B test, B was preferred.

The feedback loop is processed as learning, and new decisions can be made and new actions taken based on that learning, eliminating some possibilities, and opening up others. Innovation is introduced to the market and new learning follows new innovation in a continuous loop.

In the thinking of entrepreneurial action, acting faster and sooner is better, because the effect is generated faster, the feedback loop accelerates, and the resulting new action is fresher and and more responsive to the customer’s needs. When action is bolder and more daring, the feedback loop is more informative and clearer in its signals. The future unfolds as a result of entrepreneurial action.

Entrepreneurs don’t act alone or in isolation. The unfolding of the future is the consequence of many actions on the part of many people and firms. The market, therefore, is a process. Action and reaction keep it moving in unpredictable ways — resulting in what complexity theorists call emergence.

The Austrian School is a complete system for business.

We didn’t have sufficient time with Professor Bylund in the podcast format to cover the complete range of business functions, including marketing and accounting and business model design, but these are all improved and enhanced by what we can call the Austrian approach. The goal of Economics For Business is to deliver this complete system in the form of tools, posts, articles, papers, books, videos, and podcasts like this one.

Additional Resources

Austrian School Versus Business School: A side-by-side comparison (PDF): Mises.org/E4B_187_PDF

How To Think About The Economy: A Primer by Per Bylund: Mises.org/Primer 

186. Jared Wall: How a Courageous Entrepreneur Enters a Formative Market

How do new markets form? When consumers change their tastes and preferences and behaviors, how are the markets to serve them activated? The markets don’t yet exist — entrepreneurial action is required to create them. The answer to the question, of course, is that entrepreneurs — real people taking the real business risk to initiate new business experiments — provide the new energy and new initiative to create markets where previously they didn’t exist.

Jared Wall is one of these creative entrepreneurs, and thchempspot.com is his creation.

Key Takeaways and Actionable Insights.

Courageous entrepreneurs lead the way into new markets as they are still forming.

Entrepreneurs bring the energy that opens new markets and new pathways to economic value. New markets can emerge as the result of changing consumer tastes and preferences, new channels or platforms, new forms of delivery, new technologies or a combination of several catalysts — but the energy, initiative and drive of the entrepreneur is always the necessary ingredient for the ultimate emergence of new value and new market arrangements.

New discoveries and new innovations often provide the entrepreneur with market-opening mechanisms.

Serving customers in new and different ways doesn’t always require new products and services, but it is often the case that the discovery or invention of novel combinations can lead to innovation — that is, new and better experiences for customers that were previously unknown or unavailable or narrowly distributed. In the market for consumable cannabis products, there emerged a new THC variant called Delta 8 THC, a cannabinoid that offered both different product performance and different accessibility. The emergent new ingredient provided the pathway to a whole new market opportunity.

Legislation and regulation are complications and barriers in formative markets, but often their ambiguity provides an opening for innovative entry.

The courageous entrepreneurs who lead the way into formative markets often encounter legislative and regulatory barriers, since these are static drags on progress and innovation and never keep up with the changes in markets. At the same time, the regulatory thicket can sometimes be useful to the entrepreneur who can cut a new opening others can’t imagine.

In the market for consumable cannabis products, Delta 8 THC became such a new opening, which was cut when some content in a comprehensive congressional Farm Bill encouraged the commercialization of certain kinds of hemp, of which Delta 8 THC was one of the by-products. Legislators and policy authors can’t think about the future the way entrepreneurs can, and they did not envision the future world of innovation they were unlocking.

The regulatory maze is an aspect of legislation and regulation — but every maze has an exit path.

Innovation in formative markets combines and compounds.

Jared Wall launched thchempspot.com to offer Delta 8 THC experiences to consumers. Those who shop at the site find a lot more innovation than just this ingredient. There are multiple new consumable forms for varied experience delivery — gummies, chocolate bars, chewing gum, soft gels, and peanut brittle, among others.

Where do these innovations come from? Not from the R&D labs of major corporations, that’s for certain. They originate in the creative minds of imaginative entrepreneurs, and they take shape in their experiments and prototypes and willingness to try new things. Will they all be big successes? Of course not. But they will all generate feedback loops of acceptance or non-acceptance, reviews and ratings and experience sharing; they’ll contribute to innovation as an ongoing cycle of learning. Society enjoys better choices because entrepreneurs unleash their creativity and don’t hold back from experimental designs.

Market infrastructure and market institutions can’t always keep up with entrepreneurial change, but new supportive services quickly appear to lubricate frictions and provide institutional arbitrage.

All commerce needs infrastructure such as payment systems and institutions such as banks, and market formation can sometimes move faster than infrastructure and institutions can adapt. Jared Wall had this experience — PayPal and major banks cut off services because thchempsot.com, while serving legitimate customers with legal products, was deemed a “high risk” business, outside their terms and conditions.

Yet, in a quite inspirational way, business services emerge in these situations to navigate around the barriers of poorly adapted institutions. Jared found consultants who offer the service of connecting so-called “high risk” businesses with value-network partners willing to collaborate with them. Jared was quickly able to replace his payment system and banking infrastructure. There was a service interruption, but it was temporary. A new network of mediating services quickly formed to bypass institutional barriers.

The creation and sharing of new information is a big part of the innovation equation.

Jesus Huerta De Soto1 identifies the creation and sharing of new information as the central activity of entrepreneurs – informing customers of new products and services and new offerings and prices. Entrepreneurs are constantly creating, updating, and improving the information resources they make available to customers. High quality information enhances value.

On thchempspot.com, Jared provides information in Q&A form, pull-down menus, and product descriptions. He’s self-published an informative e-book that’s free on the site, and he publishes an informative newsletter. We can sometimes feel unclear about the value of information, but in formative markets its importance is primary not secondary.

185. Jessica Fialkovich On The Business Of Selling Businesses

Every business should have an exit plan in mind from Day 1. Why? Because it’s impossible to control the timing of an exit or the changes in circumstances that might precipitate it. Venture capitalists know this, and build in their exit formulas at the time of their initial funding. Entrepreneurs should think the same way. And, like any business process, selling a business is a knowledge-based process that repays an investment in learning its techniques and critical success factors. Economics For Business talked to Jessica Fialkovich, a successful business builder in her own right, who founded Exit Factor, an advisory firm that helps entrepreneurs get the most from selling their businesses.

Key Takeaways and Actionable Insights

Entrepreneurship provides better career control and security than corporate life.

Jessica climbed the corporate ladder, investing effort and skill into being a great employee. But she was just a name on a list when the GFC came along – a list of those to be let go when Lehman Brothers (her employer’s funder) collapsed.

She realized that entrepreneurship provided her with great security. There’s uncertainty, but the entrepreneur decides what their future is, takes responsibility for those decisions, and accepts the accountability.

She built a successful business through hard work and the discovery process of identifying target customers and finding new and better ways to bring them value. Her chosen business was in wine sales to wine-loving customers, many of whom were connoisseurs. She developed many specialized services including finding rare wines for collectors, and her clientele spanned the globe. She incorporated the latest technologies and innovated in marketing techniques. She worked long hours, talking to customers across 16 time zones from Japan to California.

Then she decided to sell.

Entrepreneurs experience a lot less support when selling a business than when building it.

When you’re successfully growing a business, everyone wants to help, providing you with business services and supplies, and advice and ideas. What Jessica found when she came to sell was that she was on her own. It was hard to find expert help, or the requisite resources, or pretty much any kind of support infrastructure for a transaction of the size she was planning. For big business, there’s investment banking. For the 99.9% of businesses outside the Fortune 500, there was nothing similar. There were some so-called business brokers, but they were not dedicated specialists, not professionals in the specific process of selling, unreliable and poor at client service.

As an alert entrepreneur, Jessica understood that this finding signaled a market need.

The first step to design for an under-served market is to draw on relevant experience from parallel markets.

Business development always starts with first principles: is there a market to be served, in that some potential customers feel an unmet need or have a meaningful problem to be solved? Jessica had first-hand knowledge of the problem, and talking to entrepreneurs in similar situations reinforced her confidence in the market’s potential.

The comparison market Jessica chose was investment banking, which can be thought of as selling businesses of a larger scale. There’s an established investment banking process and a timeline of steps and milestones from preparing an evaluation, to developing the pitch deck, to the identification of the best buyers and the tailoring of a marketing plan for them. Jessica’s husband had some relevant investment banking experience which enhanced the knowledge transfer from one field to another, and provided a reality check for the process design.

Business-to-business services development and execution has its own set of rules; the most important one is the nurturing of relationships.

A business brokerage is a high-intensity B2B service bundle requiring a lot of in-person customized relationship management. There’s pitching the potential customers in the first place, customizing the service tom their particular business and to meet their specific needs, with a big need for staff training to deliver these specialized services. B2B service providers must be both sales experts and process experts. That requires a lot of human capital.

Jessica’s answer was to design and build a system-based model that, once in place, could be repeated and reproduced via well-trained staff with the right IT support.

She has found B2B services to be even more demanding than sourcing rare wines for connoisseurs. Selling a business is somehow more personal and individual. A client’s perception of what their business is worth may be quite different than the market’s perception. It’s the nurturing of relationships that smooths out the potential jagged edges in these transactions.

Some insights for entrepreneurs selling their business.

  • Identify your exit options from Day 1 of your business. Since it’s impossible to control exit timing – which may be due to unforeseen changes in circumstances – it’s best to lay the runway from the start. Plan to run a salable business, as well as one that’s profitable and growing. Don’t have a fire sale or panic sale or be unprepared.
  • Tailoring your selling process to the size and type of your business is important. There are different influences on what moves valuations up or down depending on business size, but, in all cases, it’s a process with a beginning, a middle and an end to be planned for in advance. You’ve got to know how to find buyers, how to source offers, and how to keep your business in good shape for due diligence.
  • Conduct regular health checks for evaluation. Always know what your business is worth. Find out how businesses are valued in your industry or sector. Make sure your business shows well on the criteria that are applied in your field.
  • EBITDA multiples are the dominant valuation metric. You may read in the Wall Street Journal about businesses being acquired for brand value, or for technology integration, or for other reasons of corporate M&A strategy. For small and medium size businesses, EBITDA multiples remain the dominant metric. There’s some art regarding what the precise multiple may turn out to be, but it’d within a range and is not going to vary wildly.
  • There is some room for qualitative factors and subjective valuation. Jessica listed subjective factors ranging from the degree of business involvement of the owner (and the worry that their future absence might be detrimental) to the perceived quality of the brand and its imagery and reputation.
  • The ultimate asset is a proven and scalable business model. If you can demonstrate that your business model returns increases in revenue and profit growth for additional investments in capital or people or marketing, then you are most likely to find an eager buyer. Make sure you can model your business in this way and that the data are clean and credible.

Additional Resources

Getting The Most For Selling Your Business by Jessica Fialkovich: Mises.org/E4B_185_Book

ExitFactor.com

Jessica on LinkedIn: Mises.org/E4B_185_LinkedIn

No-One Understands How Systems Work.

You may have been listening to economists debating and arguing about the state of the economy and the future of inflation. Are we in a recession or not? What will the economy look like next year? What causes inflation? Will the rate of inflation increase or decrease? What can be done to alter the future direction of change?

There is no shortage of opinions, but a total lack of certainty, of confidence, or even of sound theory.

You probably find the same phenomenon when engaged in discussions about business – about how firms can do a better job of creating customer value, to grow and succeed. How can they achieve a rise in stock price? What are the most critical constraints? What’s the best process for driving innovation? What’s the best way to manage and incentivize employees and to build a strong culture? Those are the kinds of words and phrases business consultants and business school professors use – your own peer conversations are probably more to do with increasing sales, or lead generation or your P&L, or whether all the ingredients you need will be delivered. 

But the challenge, in all these cases is the same. No-one knows anymore how these systems actually work. We can extend the list to climate as a system – some scientists claim they know how it works and can forecast the future, and another set views it as unpredictable and unmanageable. 

We saw during the so-called pandemic that virologists and infectious disease experts and pandemic modelers got their predictions – and their policies – hopelessly wrong, and it cost millions of lives and billions if not trillions of lost economic production. We can see the might modeler Ph.D.’s at the Federal Reserve make the same hubristic mistakes with their models of money supply, inflation, employment, and economic growth. The only thing they’ve ever been is wrong.

In fact, there’s a whole new science of not understanding systems which is called complexity theory, which overlaps closely with chaos theory. It says the following: A system is a collection of elements, components, parts, pieces, or, generally, agents. In an economic system, the agents might include individuals, families, and firms. There are additional elements like processes, government and institutions, norms, traditions, and a whole lot more. These elements and agents interact with each other and with inputs and outputs. There is further interaction after feedback loops establish themselves – agents react to outcomes and results they didn’t expect or anticipate. There are so many variables – individual decisions and preferences, group behaviors, trends, technological changes, money supply changes, etc, etc – that the interaction is described as complex, which means beyond understanding, unpredictable, and non-linear (it goes off in directions and at speeds that no-one expects).

Complexity is science throwing up its hands and saying, we don’t understand these systems anymore, can’t predict them, can’t control them, and can’t manage them. We don’t even have any ideas on how to do so.

There are many fancy new words that come out of this science. One, for example, is emergence. Systems have emergent properties, meaning s*** happens that we can’t account for and couldn’t even imagine in advance. Emergence is a kind of magic.

Another new term is self-organization, which means that the system will evolve and develop as it likes without any input -or despite any input – from the scientists.

Don’t worry, there are lots of government grants being given for the study of complexity, lots of papers and journals, lots of conferences, and lots of sabbaticals being taken to contemplate future studies and grant applications. There is money in complexity.

What’s the alternative? Pragmatism.

When the system (of life, of business, of health, of the economy) is complex to the point of incomprehension and unpredictability, there is only one action: do something and see if it works or it doesn’t work. In business, it takes the form of what is called today A/B testing. Try two different actions (without any prediction or bias or even desire as to which outcome will result) and choose one that works, i.e. moves in the direction you feel is better. Then do another test and another and another until there’s a string of results. Expand the actions so long as they keep working. Start a small store and keep expanding it unit by unit until there’s a big store. Be prepared for things to change without notice. Go back to square one if they do. 

There are fancy terms for this too. Economists call it entrepreneurship. Constantly trying and re-trying, combining and recombining, testing and re-testing. If a promising pattern is established, pursue it and reproduce it, but only so long as the pattern holds. Drop it as soon as it becomes erratic. Start another one. Creativity is the required skill set, and the whole point about creativity is unpredictability. 

Creative entrepreneurship doesn’t try to study complexity. Entrepreneurs face it every day and they take action rather than studying it.