Pareto Principle When It’s Time to Build

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The law of the vital few or the 80/20 rule refers to the fact that 80 percent of outcomes come from only 20 percent of the inputs. Put another way, 80% of the value comes from 20% of the effort. It’s a power distribution law unto itself. A change in inputs impacts the outputs.

The Pareto Principle seems strikingly important especially for entrepreneurs. If you’re working to build something from scratch the reality is that 20% of the work you do will end up creating nearly 80% of the value. For some reason we don’t teach this principle in schools. We certainly don’t ever talk about the Pareto Principle in reverse. Ie: most of what you do will result in little to no value.

This is a mistake. It’s important to keep the Pareto Principle in mind when building new things in order to maintain perspective. Most of what we build will not lead to any value. We will fail a lot. With entrepreneurship, failure is a regular part of the beginning phases of launching a business. The iterative nature of fine tuning products and services to obtain product market fit is a crucial but mentally challenging aspect of building successful businesses. It’s hard to maintain the mental fortitude to continue working on a product with little to show for it.

It seems like a better idea to approach the early stages of company building with Sturgeon’s Law. “90% of everything is crap”. Meaning most of what you do in the beginning wont be great. But it’s an important reality to keep in mind when starting out. Without it, many people may quit after the first few iterations.

The truth however, is that most young companies need the iterative battle of finding product market fit to harden themselves along the way. You can’t establish a power law distribution of 80/20 with only 2 or 3 data points. You need the carcasses of failed ideas to get to the 20% that will ultimately produce the value.

This has been particularly front of mind for me lately. Especially as I struggle to produce value in my writing. I’ve noticed the Pareto Principle start to form in my work. But I’ve been acutely aware of the harsh mental battle that results from reconciling that 80% of the effort I make produces little in terms of overall value.

This was also front of mind when I read Marc Andreeson’s recent essay, It’s Time To Build. Andreeson is the quintessential Entrepreneur and VC. In his drive to create a positive impact on society, he knows full well the 80/20 principle exists in entrepreneurship. I suspect that’s why he challenges everyone to get involved. The more people building at one time creates an increasing likelihood of achieving Pareto Fit quickly. I also believe that of all the people cheerleading Andreeson’s essay, only 20% of them will end up “building”.

For an entrepreneur, the most important aspect of the Pareto Principle appears to be the staying in the fight. The more data points your able to establish through iteration, the more you increase the likelihood of achieving a Pareto Distribution for product market fit. Keep tinkering and learning along the way. Don’t quit too early.

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