Habit Forming and Compounding – The Lindy Principle
Recently, I have been thinking a lot about the value of habit forming. I’m reading “Clear Thinking” by Shane Parish (highly recommend) and thinking about the positive and negative habits I’ve formed within my own routines. Similarly, I’m thinking about the habits of our team at Equal (especially given the new hires we brought on as we launched Fund 2) and those of our founders.
As I think about these habits forming within our startups, I’m reminded of the power of compounding. Startups begin from the tiny nucleus of a small team to hopefully grow into becoming iconic companies with thousands of employees, but it’s the infinite small decisions that are made along the way that determine both the success they reap and the culture they shape. These startups are much like humans. Yes, there are some predetermined characteristics based on the composition of the team and their initial point of focus, but so much of their future is informed by their environment – the investors, teammates, customers and market that surround them during their journey.
As we think about how this relates to compounding, it frames the importance of those early days so critically. One great hire may shape your culture when you are a 5 person team. That person will hire other great people, contribute great ideas, help launch great products and/or secure customers. These accomplishments all reinforce themselves, helping you attract more great talent and potentially help secure resources/funding for your company. Conversely, one bad hire would have the inverse effect - poisoning your culture, hiring bad people (B players, don’t just hire C players, they tend to hire a LOT of them) and potentially diminish your fundraising prospects. The impact of a great/bad hire when you’re a 500 person company is so much less material. Yes, it matters, but the compounding impact is so much less consequential when your base is established.
This is why it’s so incredibly important to form the right habits within a company at the earliest stages. Yes, its chaos in those early days, but the compounding nature of those habits is so incredibly defining in terms of the long-term success of the company. I’ve seen it firsthand where sloppy habits persist and become infectious with new hires – this becomes incredibly hard to cure without doing a complete cultural reset of the team and its personnel. Conversely, I’ve seen teams define amazing habits, it defines their cultures and helps lead their companies to great success.
The margin for error for startups is so small, especially in those early days. One customer won/lost. One great/bad hire. One big strategic decision made wrong/right. These can all be the determining factor between whether you ultimately succeed or not. Each of these could determine whether you secure the next funding round or you competitor does, whether the best talent chooses you or that competitor or whether business development partners choose you over that competitor (think Taxi Magic vs. Lyft vs Uber). A single sloppy move in the wrong direction can define your pathways.
This is part of the reason why I love seed-stage investing. If nothing else, this is where the future is MOST uncertain – where startups are living in the unknown grey area between being hopeless and “crushing it”. This is where we believe VCs can have the greatest impact on the potential outcome of the company, helping to nudge those companies to the right side of that line. This is when habit forming around the right habits BEFORE you scale is so important, and it’s something that we believe we can/have been helpful to our companies. While not every company we have invested in will grow into the category monopolies we hope they will be when we invest, 95% of our companies have raised subsequent financings with meaningful mark-ups (vastly exceeding industry comps). We attribute this, in part, to helping those early teams kickstart their flywheels (getting early customers, making great early hires, focusing on the right market opportunities), so they can capture an early edge on the competition and benefit from the exponential nature of compounding as easily as possible.
Fred Wilson recently wrote a post on Streaks that reminded me of the premise of the Lindy Principle. The Lindy Principle suggests that the longer something persists, the more likely it will continue to persist. Intuitevely, we can think about this in terms of the persistency of a religion (Christianity is more likely to exist a year from now than a new religious faction started today), a brand (McDonalds is more likely to exist a year from now than the sandwich shop opening across the street) or even a venture capital firm (Sequioa is more likely to exist a year from now than the emerging manager that sets up shop tomorrow or even Equal Ventures).
But more importantly, it applies to cultures of excellence. If a startup’s team is able to secure those early wins and define an edge on the competition, it is more likely to retain that edge a year from now than its competitors attempting to catch up with them today. The longer that lead persists, the more likely it is to persist. Do that long enough and you may have the opportunity to build a really large company.
This equally applies to your own habits and the culture you set as a team. The more days you and your team show up and kick ass, the more likely you will continue to do so a year from now – that’s not a subjective POV, that’s an observed mathematical fact. So go out there and kick ass today. Kick ass tomorrow. Develop your own streak and that will make it easier to kick ass a week from now and hopefully a year from now. Form those habits early and they will compound not only with yourself, but with your teams.
As I wrote about several weeks ago, “The formulas for “success” and “failure” are the same - it’s the application of small actions/inactions consistently over a long time horizon. The difference between these two are the infinite small decisions you make on a daily basis - those little wins compound in dramatic ways.” Developing habits around making the right decisions consistently can lead to amazing impact when compounded of the arc of a company, a career and even a lifetime.
