In the book Zero to One, the authors discuss what investors are looking for in a startup. Among other factors, they note that venture investors want to find a startup that has the potential to return 10 times on the investment. In the context of venture investments, the 10x principle is mean as a way to use the “wins” to pay for the “losses.” This morning, I started thinking about how the 10x principle applies more broadly to businesses, and there are some real nuggets of wisdom that entrepreneurs can get from this exercise.
The 10x Principle in New Products and Services
Entrepreneurs are constantly looking for new ways to generate revenue. The most concrete way to do this is to launch a new product or service. But launching a new product or service is not always a recipe for success. Many new products/services end up as expensive failures. Part of the problem is that we entrepreneurs always love our new product/service ideas and too often can’t imagine that they might fail. But many will. So how can entrepreneurs go about deciding what new products/services are worth the effort?
How about applying the 10x principle to products and services. If you focus on the return on investment in a new product or service, you can maximize the chances that your successes will be big enough wins to pay for your losses. If you constantly focus on products/services that you hope and/or expect will have a 2x return, you are likely to end up underwater based on the failures. As your expected returns move more towards 10x, you are more likely to end up with enough big wins to pay for the small losses.
Let me be clear, I’m not saying that you should give up on a product or service that is not ultimately making 10x the costs. Instead, the 10x principle is something to apply prospectively as you are considering whether to launch a new product. The new product may not ultimately live up to your expectations, but focusing on products that you expect to have 10x returns will give you the best chance of launching products that will at least make some profits.
The 10x Principle in Marketing
Successful entrepreneurs are always marketing. And if you are honest, you’ve had many marketing failures. I personally have had a number of marketing spends that did not result in any additional revenue. Doh! So how can you go about making sure that your marketing dollars are well spent?
How about applying the 10x principle to your marketing efforts. If you make a conscious decision to only start marketing campaigns that you expect will result in a 10x return on your marketing spend, you should be able to get enough big wins in marketing to pay for the failed efforts. Given that we all have limited resources, focusing our marketing dollars on the potentially most lucrative efforts is a key to success.
The 10x Principle in Legal Matters
As a lawyer, I would be remiss if I didn’t suggest that the 10x principle can also be applied to your legal affairs. Too many entrepreneurs waste their resources for legal issues on areas that are not very valuable. To cite one example, too many entrepreneurs reflexively think they should patent an invention. I would push you to consider what the likely return on the investment in that patent will be. Is the invention important to your business? Is it likely to generate significant revenue for your business? If you can’t answer yes to both of these questions, you should think long and hard about whether it is worthwhile to pursue the patent.
The same analysis applies to initiating a lawsuit. I can tell you from many years of experience that plaintiffs rarely get everything they were hoping for and/or expecting in a lawsuit. And that does not even account for all of the plaintiffs who end up losing their case all together. If you are considering filing a lawsuit, you should carefully consider whether the likely payoff is worth the time and expenses that will be involved. If the hoped for result is a judgment that is only two or three times the cost, the suit is almost certainly not worth pursuing.
There are no guarantees in business and entrepreneurship is a risky venture. That being said, entrepreneurs can increase their chances of success by applying the 10x principle to business decisions.