Money Organizations vs. Meaning Organizations

This post has been inspired by the works of Umair Haque, Simon Sinek, Muhammad Yunus, Hans Rosling, and others. None of it stems from my original thought. I have merely summarized and crystallized a prevalent dichotomy in economics.

Money and meaning

Organizations may exist for two different reasons. They can be primarily self-sustaining and focus on their own growth, or they can embody a deeper purpose which leads their way. I like to call the first type of organization money organization and the second type meaning organization.

What is most important to understand about this distinction is that it does not imply anything about enonomic systems. Meaning organizations are not at odds with the principles of capitalism and money organizations may exist in the absence of competition and free markets. Most state-sponsored organizations—heavily buraucratic and bereft of purpose—behave like money organizations.

Consequently, money organizations and meaning organizations are not new terms for for-profit and non-profit companies, or businesses and NGOs. They are instead terms for the driving engines of arbitrary organizations. They help us understand whether an organization creates merely accidental value—as a by-product of making money—or meaningful, authentic, genuine, purposeful value. The former value is brittle, the latter is sustainable.

Meaning organizations and startups

Most startups are meaning organizations. In fact, the requirement of being a meaning organization would be part of the definition of a startup were I to define the term. Startup founders follow an audacious vision, they need to see purpose in what they are doing. Were they only in it for the money, they would have picked the wrong profession.

Most startup employees work for nickels. They are driven by a deeper sense of creating something bigger than themselves. They want to make people's lives better. They enjoy building something out of nothing. Their spirit and energy do not come from a paycheck. They come from a borderline insanity to make this world a better place.

When startups turn into established businesses, they may follow two distinct paths. They may either retain their core and remain a meaning organization, or they may abandon what they stood for and turn into money organizations. Some people may denote the latter path with euphemisms: "professionalization", "maturity", "optimization". But losing one's true purpose is dangerous. Money is transitory. Meaning is eternal.

The principles of meaning organizations

Money organizations are about turning a profit.
Meaning organizations are about making an impact.

Money organizations know what they are doing.
Meaning organizations know why they are doing it.

Money organizations focus on income.
Meaning organizations focus on outcomes.

Money organizations market their products.
Meaning organizations produce markets.

Money organizations exploit resources.
Meaning organizations create, renew, and share.

Money organizations strive to be great.
Meaning organizations strive to be good.

Money organizations dominate markets.
Meaning organizations level the playing field.

Money organizations monopolize.
Meaning organizations democratize.

Money organizations see purpose in growth.
Meaning organizations seek growth in purpose.

The Age of Mobile

When Apple announced its Q1 2012 results, I was stunned. Literally, honestly, blown away. And I believe that most people have not yet understood what these numbers actually meant. I wanted to call this post "The Age of Apple", but it isn't really about Apple at all. It is about a new industry, one that will shape the world for decades to come.

The new face of Apple

The first thing one has to understand is that the development of Apple is an unprecented one. To appreciate that, all one has to do is look at the numbers. Here is how Apple's revenues have skyrocketed within the last seven years:

Today, Apple's profits have outgrown Google's revenues. In fact, Apple's revenues are worth three Yahoos, two Googles and one Microsoft. What is important to understand is that this hasn't always been the case. In fact, this development is an extremely recent one. Apple is not the company it used to be only five years ago. It is an entirely different company today.

Let us look back in time: A mere three years ago (Q1 2009), Apple's revenue was at $12 billion, and its profit was at $2.3 billion. In Q1 2012, Apple's announced revenue had almost quadrupled to $46 billion, and its profit more than quadrupled to $13 billion.

The old Apple—the technology company—is still somewhere at the heart of this new company. But it represents only a fraction of its cashflow and a fraction of its market capitalization today. The new Apple is not a technology company anymore. It's a mobile company.

The world's first mobile company

I've long advocated that life was going mobile. What I mean by that is that the mobile internet is a transformative force, reshaping the way we communicate, the way we work, and—ultimately— the way we live.

The mobile market is going to be the largest market in the history of human civilization. It is expanding more rapidly than any market known to man, and it will reach $4 billion people in the foreseeable future. We are talking one market, one channel—the mobile internet—, one infrastructure, one technology.

The potential inherent in mobile is unprecedented and often still underestimated. Mobile will boost the whole internet industry, like a balloon that just received a fresh shot of hot new air. It is only natural to expect the first mover in that largest market in the history of mankind to become an unstoppable juggernaught.

That company is Apple. By releasing the first iPhone, Apple has repositioned itself as the world's first mobile company. It has reinvented itself and transformed both the mobile phone and the internet industry. It has made possible what Nokia, RIM, and the likes have failed to accomplish. It is no longer selling computers, it is selling the world's first successful mobile ecosystem: iOS.

Going with the stampede

Today, Apple is conquering new terrain. It is rapidly penetrating the market it has set out to create. Others can only follow. But there is a lot to be won, and the pie keeps expanding.

Google has managed to position itself as No. 2, and it is following Apple in the footsteps of the stampede, holding its head up high. Others have lost the battle, and are now hopelessly left behind.

But remember how technological revolutions happen. The infrastructure battle is being fought on conquered ground. Apple's and Google's voracious appetites will eat much of the infrastructure business. But there is still plenty of opportunity in the application layer.

Mobile is the new internet. Understand and act accordingly.

Effectual Reasoning

When I came across the paper "What makes entrepreneurs entrepreneurial?" by Saras D. Sarasvathy, it felt like many different ideas of mine on what sets founders apart from other people suddenly consolidated into a coherent picture of the entrepreneurial spirit.

I highly recommend reading the entire paper, but for those in a hurry, let me summarize its core idea in a nutshell and present it in the context of lean startups and the technology industry.

Two modes of reasoning

Entrepreneurs approach the future in a unique way which differentiates them from other people. Whereas most people—including managers and other business strategists—use causal reasoning as their primary mode of thinking, entrepreneurs prefer effectual reasoning.

• Causal reasoning starts with a predefined goal and then, given the available means, seeks to identify the most effective way to reach that goal. It emphasizes the execution of a plan and while it does allow for creative exploration of the different ways to achieve the set goal, creativity is not an inherent part of the process.
  
  
• Effectual reasoning instead does not start with a predefined goal, but with a given set of available means. It lets different goals emerge contingently over time. It does not ask, "How can I get there?", but rather, "What is the best thing I can do with what I have and what I know?" It is inherently creative and emphasizes imagination over execution.

The point is not that entrepreneurs do not use the causal line of reasoning. The most successful founders know well how to think in both modes. The point is that the entrepreneur prefers the effectual way of reasoning in the early stages of a venture, and that this is what defines him.

To understand the difference, imagine two different cooks. One cook is given a predefined meal and his job is to find the right recipe, buy the correct ingredients, and cook the meal in an optimal way. The other cook is not given a meal to cook. Instead, he is sent to a kitchen he has never seen before. His job is to explore the different corners of the kitchen, look for whatever he can find, and imagine what he can do with it. He might not even end up cooking a meal. He might do something entirely different.

The entrepreneurial mindset

Our resources as entrepreneurs are:

• Who we are — our traits, tastes, and personality
• What we know — our skills and our experience
• Whom we know — our network and our partners

We then try to imagine the different futures we can create by leveraging these resources. We make plans and we unmake them on a daily basis. We know that surprises are not deviations from our path, but that they are indeed the norm. We prefer exploration over planning, imagination over execution. Our job is to create something out of nothing. We need to constantly push the boundary and achieve what is unimaginable to others.

Logic and principles of effectual reasoning

Effectual reasoning is not random. It simply follows a logic that is different from causal logic. Where causal reasoning says, "To the extent that we can predict the future, we can control it", effectual reasoning says, "To the extent that we can control the future, we can predict it".

Here's how to do that:

• The affordable loss principle. While causal reasoning is concerned with expected returns, effectual reasoning emphasizes that there is nothing to lose. Causal thinkers plan while effectual thinkers do. Causal reasoning works top-down ("This is the market size, how do I get there?") while effectual reasoning works bottom-up ("Here's where I am, how should I take the next step?").
  
  
• The strategic partnership principle. Causal thinkers do a competitive analysis: "There is a predetermined market, how can I segment it and target my preselected audience?" Effectual thinkers do not think about competitors, they build partnerships instead. They get out of the building and talk to people. They ask questions and create a movement. They try to expand the pie wherever possible.
  
  
• The leveraging contingencies principle. Effectual thinkers live by the motto of Ready-fire-aim instead of Ready-aim-aim-aim-aim. The greatest startups are products of contingencies. Entrepreneurs leverage every opportunity in sight. Even if it means turning the entire business upside down. They do whatever looks most promising at the very moment—whether others call them crazy or not.

The entrepreneurial spirit is a methodology, it is a way of life. It defines the rules by which we choose, decide, and act. It is the path of a hacker and the path of an artist. It is in our nature, we must live by it, we cannot help it.

Effectual reasoning and the Lean Startup

In an uncertain world, effectual reasoning is the only reasoning that makes sense. Startup conditions are by definition conditions of extreme uncertainty—that is the starting point of the Lean Startup methodology. I believe that effectual reasoning and the Lean Startup are just two sides of the same coin.

Successful early-stage entrepreneurs build lean startups. Once companies grow and turn into larger organizations, clear goals emerge and causal reasoning becomes more important than effectual reasoning. That is when managers come into play and founders struggle. However, effectual reasoning will regain importance in the face of disruption.

So, we might see the Lean Startup methodology as a checklist to separate the wheat from the chaff, to identify true entrepreneurs amongst the masses, to separate founders from managers. It may also help us to discover who we truly are. Are we causal thinkers—or are we entrepreneurs?

Entrepreneurs and copycat companies

An interesting corollary to me is that copycat and clone companies are actually by definition not led by entrepreneurs. They are clearly led by managers: by people focusing on execution and causal reasoning. Their set goal is a successful copy of the original targeted company, and their only job is to leverage their means to build a copycat in the most effective way.

Entrepreneurs and technology

Finally, I believe that the effectual line of thinking becomes more important as technology progresses and as the levers become stronger and ever more powerful. Imagining the possible worlds of the future needs ever more creative thinking. There are so many things we can build from nothing today. Entrepreneurs are everywhere, and they are desperately needed.

Today's entrepreneurs should use effectual reasoning more than ever. What can you achieve with where you stand today? How can you envision the future? How can you partner up with others? How can you move quickly and learn something new every day?

Go ahead. The future is yours. You shape it.

The Cloud Business Model

The cloud business model is a freemium or premium subscription-based model. It is the internet's most natural business model for selling software or content. Companies are beginning to realize that it is not a good idea to charge for bits. You need to charge for service instead.

Media in the cloud

Selling digital music is equivalent to selling bits. But bits have no value. That is why piracy is a misnomer. Sharing digital music is not perceived to be a crime precisely because the process of copying bits incurs no cost and happens instantaneously—leaving the original intact.

What the music industry really needs is business model innovation. It needs to replace the model of selling bits with a model that charges for service. Many people have laughed about iTunes Match because it can be used to whitewash pirated music. What they don't understand is that Apple's new model is a way to finally charge people for listening to pirated music. And it charges for the service, not for the bit: $24.99 a year. That's the cloud business model.

Spotify is another such model. These models will replace the old ones and piracy will disappear, naturally. Piracy will then once again be known as what it really is: sharing. The same reasoning applies to movies in the cloud and other digital content in the cloud.

Software in the cloud

Apple's App Store delivers software through the cloud and synchronizes it to all devices a particular user owns. It also slowly shifts from selling paid apps to upselling via in-app purchases and, more recently, to selling subscriptions and thus charging for usage instead of bits. That is the cloud business model.

Adobe just announced Creative Cloud, a radical shift in Adobe's monetization strategy for its Creative Suite software package. In the near future, Photoshop, Illustrator, and the likes will be available via the cloud, for a flat monthly fee. Buying big software packages for huge amounts of money—and then paying again and again for updates—will be a thing of the past.

I believe that this is only the beginning. The cloud business model will eat the whole software industry. Charging for the service instead of charging for the bit will become the norm. Consumers will want to subscribe to use a software, they will not want to own it.

Infrastructure in the cloud

The Amazon Web Services are an unbelievable success. They are all powered by the cloud business model which Jeff Bezos famously calls the "pay by the drink" model. Paying by the drink makes sense for all digital infrastructures. It enables an entire bottom-up stack of service layers called SaaS. Heroku is just one success story living on top of the AWS foundation.

Most web-app businesses follow the subscription-based model. They enable the creation of component-based businesses with almost no up-front costs. While the advance of the cloud business model keeps transforming the internet industry, fixed costs will slowly be replaced by variable costs.

The shift in cost structures will enable more and different kinds of companies. Companies we have never seen before. Companies that would have never been able to exist only a decade ago. We will see the rise of many more highly scalable web companies.

The internet success story has just begun.

The Role of the CEO

Any startup that has both a CEO and a President/COO has the wrong person in one or the other (or both) of those roles. This sort of title inflation and proliferation is almost always – like most other “contortions” of the standard org chart – a red flag to VC’s. Can easily be taken to indicate that some of the co-founders are more worried about titles (and ego’s) than success.

— Allen Morgan

Think of a startup as a soccer team. Every good soccer team needs a goalkeeper, a couple of defenders, some midfielders, and the forwards. It is vital to the success of the team that every member respects his role and acts to the overall benefit of the team. Sure, it is mostly the forwards who score the goals and capture the bulk of the fame, but the experienced soccer fan knows that the best teams are the ones which overcome the egos of the individual players and merge into one indivisible machine of organizational efficiency—with each player magnifying the strengths of the others.

One of the most important things when building a startup team is to overcome the egos and decide who should play which role.

Choosing your CEO

When building a startup team, you want to avoid title inflation. The first and most simple rule is to have a single CEO. You want one guy in charge of the whole thing—and only one.

Sometimes, the egos of the other founders may suggest otherwise. There is the co-CEO model—which looks good on paper but is rather a recipe for failure. There is the CEO and COO solution—a crafty way to cripple the CEO's role and water down his responsibilities. And then there are other paths to title inflation: having a CEO and a President, or worse, a CEO and a Chairman. Just avoid these constructs.

The CEO needs to be in charge of the big picture. Here is what the CEO does—borrowing from Fred Wilson's definition:

A CEO does only three things.

1. Sets the overall vision and strategy of the company and communicates it to all stakeholders.
2. Recruits, hires, and retains the very best talent for the company.
3. Makes sure there is always enough cash in the bank. 

The CEO can do a lot more things, and often he does. But he should be in charge of at least all of the above responsibilities. If he is not, trouble may be ahead. If the CEO is not solely fulfilling the above functions, here's what can happen:

• The CEO will not perform well. He will think about a lot of things, but he will not think them through in the way a CEO should. He will always count on the other founders' opinions. He will not feel in charge. He will not feel that this is his responsibility and his alone.
  
  
• The startup will stagnate. There will be a focus on talking instead of doing. The founders will procrastinate a lot and spend a lot of time at the whiteboard. Whenever it is time to take action, the CEO will hesitate. The other founders will hesitate. Nothing will move.
  
  
• The founders will be distracted too easily. Insecurity will drive the startup. Nobody will actually truly feel in charge. Temporary feelings and spontaneous emotions will have a huge impact on the startup's operations. Planning will be transitory and not authoritative. Tracing failure back to individual actions will be impossible.
  
  
• In the worst case, the vision will oscillate. Someone has to internalize the vision and commit to it. If the vision isn't set in stone and dead safe, motivation will drop slowly but steadily, and communication among the founders will become more inefficient over time.

What you really want to do if you are not sure which CEO is the right one is to choose an interim CEO and evaluate the chosen solution after a previously agreed upon time period. During that time period, you do not want to challenge the CEO's position.