Labor Power Laws
Inspired by this tweet from @balajis who introduces the term labor power laws — basically illustrates the asymmetry in outcomes not only in venture portfolios but more notably in the labor market in general
Conventional wisdom has conditioned us from a young age to view the world linearly as a series of checkpoints. Work to reward typically follows a near 1:1 relationship in this model (more checkpoints / more time worked = more $$). So if the ultimate goal is financial freedom the common strategy is to simply optimize personal savings rate — as long as cash inflow is appropriately higher than cash outflow there will be a path to independence over a viable timeframe. However if circumstances are such that current savings rate is too low to reasonably hit inflection point, the only active lever is to reduce spending (since salaries typically only increase in annual cycles) which directly correlates to reducing quality of life
Reality is the world is non-linear and tends to operate under the power law. This implies that often it’s a small % of time / work investment that generates a large % of total outcome. In this context, someone who’s worked fewer years / fewer hours per week could actually have earned 10x more than her equally skilled linearly tracked counterpart in the same timeframe. The key defining feature of such a non-linearly rewarded worker is their equity in some outlier success
Equity here isn’t necessarily referring to owning stock in your employer it could also be in the form of personal equity (eg: reinvesting marginal savings into dropshipping business) or career equity (gaining skills and notoriety by working around highly reputed people — think Yves Saint Laurent with Christian Dior) — any mechanism that offers opportunity for some small chance of outlier success that you can actively influence. Think of equity as a tool for capturing the value you create from your work — in a lot of ways typical salary for wage workers is really a fraction of the value created from work after subtracting a “risk removal tax”. So while equity does expose you to more risk and ambiguity ever present in a random world it also gives you access to unbounded upside that is far less attainable otherwise
The modified financial strategy abiding by the non-linearity in the world would instead be to optimize for outlier success. Instead of having to carefully adjust the personal savings rate the real path to independence now lies in increasing the likelihood of some fortuitous event. The active lever now is to radically focus work towards creating the conditions that allow for more “luck” to find your way. For example, instead of penny pinching at a service job in his hometown an aspiring actor would strive to move to LA, spend on classes to refine acting skills and build social capital necessary to land that first major gig. Despite the downside in the short term, landing the first gig is an outlier event that levels and far exceeds the expected outcome in the longer term
Accepting the power law in strategizing labor requires a change in mindset to one that is optimized for personal growth over loss aversion which must first be internally reconciled (fundamentally: would you bet on yourself?)
Discussion:
Is it rational for people to have an internal threshold for time / work investment vs expected return? Does outlier success in this model almost require an irrational persistence to see return?
What are ways industries that don’t have explicit equity incentives can introduce opportunities for outlier success for its labor pool?
What I've been consuming recently
How Venture Capital is Inflating Valuations
How Hood by Air Changed Fashion in the 2010s
Personal Update
I'm taking a couple weeks off from work to reset and return fresh for the new year. I'm backpacking through Europe and currently in Paris (let me know if you or someone you think I should meet is around - would love to get in touch!)
p.s. speaking of Paris this tik tok made me laugh uncontrollably loud in the airport (u might enjoy if u have the same weird ass sense of humor)
https://www.tiktok.com/@thecadenturner/video/6749279931152289030