I was sort of a physics geek in school, and somehow I ended up in business. But in my role of running Tivix and in teaching entrepreneurship at Stanford, I am regularly reminded how the laws of physics can be observed and applied in successfully running a business.
The fundamental equation in Newtonian physics states that Force = Mass x Acceleration. Which basically means that heavy things are hard to push, and light things are easy to push.
This applies to business in many ways, but let’s just look at one: it’s easier to be agile when you are small. And agility wins in today’s marketplace. Which means that small startups have an inherent advantage over large incumbent companies. As Steve Blank says, “By the time a big company gets the committee to organize the subcommittee to pick a meeting date, your startup could have made 20 decisions, reversed five of them and implemented the fifteen that worked.” So even if you are big company, keep decision-making teams small and focus on agility. At Tivix, we generally keep software engineering teams working on a single project to no more than 5 people. Because physics.
Find me a lever.
As Archimedes said in 205 BC, “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world”. This is why successful startups today use a framework such as the Business Model Canvas to identify the high-leverage points within their particular business model. Too many new entrepreneurs focus all their energy on the wrong things (“I plan to spend most of my time creating a great logo for my startup!”), while smart entrepreneurs successfully identify the high-leverage points within their particular business model and focus all their energy on those.
The First Law of Thermodynamics
The first law of thermodynamics says that energy cannot be created or destroyed. There is as much as there is. So let’s loosely apply that to professional individuals — our time is finite, every day. So success is largely about successfully identifying the right things to focus our time on, every single day.
CAC < LTV
OK, so this isn’t a law of physics, but it’s certainly an immutable law of business. Every business has to have a way to get customers at a cost less than what they can make from them. If your Customer Acquisition Cost (CAC) isn’t less than the Lifetime Value (LTV) of a customer, you don’t have a viable business. It’s the #1 cause of startup death. There are some great case studies of businesspeople who somehow thought this law didn’t apply to them (see the infamous Pets.com case study). But it applies to every business just as much as gravity applies to rocks. If you have this equation backwards, you are just selling dollar bills for sixty-eight cents (which is fun for a while, but tends to end badly).
For many centuries amateur physicists pursued the dream of developing a perpetual motion machine. It was a holy grail. We know now that’s a fool’s errand, because the laws of physics are what they are. You can’t change them.
So entrepreneurs today should remember what Leonardo da Vinci said in 1494 : “Oh ye seekers after perpetual motion, how many vain chimeras have you pursued? Go and take your place with the alchemists.”
Or, as I like to put it: Get real. Learn your business physics.