How to make better decisions
Making good decisions is an essential skill in business, and in life.
Henry Ford attributed his success in building The Ford Motor Company to his ability to make good decisions swiftly.
Andrew Hatcher, a lecturer at The Judge Business School in Cambridge, has researched and studied the decision making process and shared the basics of how we can learn to make better decision and, crucially, how not get paralysed by procrastination.
These are the main points that Andrew covered:
We make about 170 medium sized decisions every day.
Every decision is a battle between rational factors and emotions.
Sub consciously we may give one factor more weight than the other because of pre-set biases.
What is the benefit of the decision?
Building a plane in 48 hours - logic says it won't be safe, won't be of much use but the benefit is the emotional impact of proving that the workforce can be productive and to raise morale.
The value of forecasting the result of the decision is not necessarily in the accuracy of whether it is a good decision but of whether the decision is publicly acceptable.
There's no point in looking backwards on your previous decisions.
You can't evaluate a decision based on information you didn't have at the time you made it.
Worrying about an outcome you can't predict can put you into paralysis. There is always an element of luck.
Planning for decision making:
You can't make the decision until you've done some research
Small impact / big impact
Short term / long term
Your money / someone else's money
Only do as much research as you need to come up with a decision (In dating make a decision from the first 37 people. No point in going on to research 100)
Pros and Cons
The easiest and therefore often discounted way to make a decision, make a list of Pros and Cons.
This should only take about 3 minutes. Get somebody else to review it for bias.
Cost benefit analysis
How much will it cost to implement the decision, what is the value of the benefits?
Tangible costs / Intangible benefits. Whenever you see an intangible benefit try and evaluate it. Better to put a value on it than ignore it.
Ford Pinto - used to catch fire. Cost $11 to upgrade each car = $137 million. Nominal costs of deaths to society $45million.
Ford used this information to decide not to upgrade the cars.
The result was $125 million in punitive damages, reputation damage etc. Rational decision was not the right one.
What is the cost of doing the calculation?
Don't spend days and weeks on the calculation if the impact of the decision doesn't warrant it. Keep it in proportion.
When do you decide to give up?
Would you leave a movie half way through if you didn't like it, or stick it out?
Would you finish a bottle of expensive wine even though you don't like it, or throw it away?
If you had to decide to give up one project out of three, how much would you consider the time and money you'd already invested?
This can sometimes be skewed by the amount of time or money already invested instead of looking at the consequences of investing more.
Try and forget about what has already happened (the investment of time and money) and look at the benefits you will get (or not) by continuing.
Make sure you are doing the highest value work.
Work out the opportunity cost.
"By doing bookkeeping I'm losing the opportunity to do something else that is (potentially) of higher value."
The fewer choices we have, generally, the more committed we are to the decision that we make.
Emotional decisions tend to be fast, based on experience, self evident and highly context specific.
Rational decisions tend to be slow, logical, not context specific.
If you are struggling with making a decision, stop and do something else, preferably sleep on it. When you come back to it, the subconscious mind will help to balance things up and make it easier.
Re-evaluate decisions you make on a regular basis, e.g going to the same business exhibition every year.
Share your thoughts on Andrews talk, or your experiences and questions on decision making in the comments below.
How to attract a business investor
Ever wondered what it takes to get someone interested in investing in your business?
Peter Cowley was UK Business Angel of the Year 2014/15, is a charity chair and trustee, mentor and non-executive director.
Peter’s talk at Drive Cambridge was, in the words of one of the delegates, “... the whole story, warts and all. Fascinating and unflinching in his delivery, we all left the meeting wiser and energised. The banks are now in the back seat and private equity is in the front and available. But you have to have the right idea and, most importantly, you have to be the right person for Angels to invest.”
Win some, lose some
Peter started by putting things in perspective and illustrating that investing is an educated gamble. Of the businesses he invested in recently, he has had 4 positive exits, 5 failures and 5 are terminally ill, so likely to fail soon.
Of over 1,000 positive leads he gets annually, only 30 are likely to survive the due diligence process and of those, only 10 will go on to a completed deal.
The ideal team size of founders for Peter is two or three.
What could go wrong?
In the US, of all tech businesses founded in 2000, only 20% were still in existence in 2009.
The top five reasons for failure include:
No market need 42%
Ran out of cash 29%
Not the right team 23%
Outcompeted 19%
Poor product 17%
It’s not just about the money
It was obvious that Peter likes to invest in businesses where his experience and expertise can add real value and where he can form an enjoyable working relationship with the founders.
Angels typically invest £40k - £60k a year and get between 25% - 30% return.
Of the people Peter invests in, the average age is nearly 40.
1/3 were born overseas and 43% are repeat entrepreneurs.
A previous failure is not an obstacle to future success.
A typical deal timescale is 3 - 6 months.
The business plan is crucial
Many plans that Peter sees are ludicrous, many are untrue and many wildly optimistic.
The numbers Peter looks for in every business are, “How much does it cost to acquire a new customer?” In B2C business this can be £40. In B2B it can £20,000 per customer.
The next one is, “What is the profit over the lifetime of each customer?”
Too many businesses don’t work this out properly and end up running out of money because the business can’t be run at a profit.
Lessons learned
Don’t back founders who are in a personal relationship - a couple is more like one person than two.
Build up trust and knowledge of founders before investing.
Have the difficult conversations as early as possible.
Choose co-investors with care.
Have an open, trusting relationship with founders.
It’s easier to get divorced than sell illiquid shares!
These are some of the comments sent to us after the event:
From Jeremy Harrall PhD RIBA:
Thank you for Friday’s event, I enjoyed it so much so I felt compelled to contribute a few words.
The profession of entrepreneurship, is not to be confused with the fashionable yet trite references used to describe the well trodden and relatively safe business activities of most people. Peter Cowley is a professional entrepreneur, one of a handful in the UK that can lay claim to a full-time career in this arena.
As a front row attendee, I witnessed close-up the innate passion and confidence that underpins Peter's no-nonsense approach to his chosen endeavours. It became apparent that one of his singular tenets is a self-belief that when an opportunity is identified, he can play a pivotal role in making it a reality. Few people have this ability, even fewer have the gonads to put their own money at risk.
Listening to Peter Cowley's words of wisdom will benefit any entrepreneur at any stage of their business.
From Mary Mansfield:
"It was good to learn that Angel investment is not just about money, but also about networking and working with businesses as they hatch and grow. It was also useful to be informed about the criteria that Angel investors use when they consider applications, given the fact they are bombarded with thousands of applications at any one time, which are then whittled down to 30, then just 10!
Some of the advice given was that:
- the business plan must be realistic.
- that those seeking investment are actually LISTENING to their market, suppliers etc. The investor is also listening and deciding whether they can work together with you.
- Trust – no use lying on your application.
- Do due diligence – investors need to know you are going to be honest and good to work with and will check out your network.
- Team size matters – hard for an investor to back a single founder. Although less to argue with, if there is a problem, there is no one else to turn to.
- Failure is okay, if you learn from it. Look at Silicone Valley."
From Sam Sales:
It was great to hear from Peter Cowley some very straightforward advice about growing your business. The list of why businesses fail is certainly something that should be given to all business when they start out. Peter mentioned that you should listen to your investors, it is a key skill in business, and taking advice that might not be what you want to hear could be a factor for a businesses success.
From Kelly Anstee:
Peter Cowley really is a genius, with a personality. I never imagined an Angel (Peter in this case) to be so entertaining and I was chuckling throughout - the best way to finish your working week. (I guess that's how people perceive accountants so I should be used to this mismatched alignment.) His presentation was honest from start to end. The skill sets, experience and tips he laid down were fantastic. Down to earth and completely an expert in his field - it was a pleasure to hear his story (and he Rt'd @TaxSwag too - Happy Days!)
How to create a recurring £200k a month income
Every business owner dreams of making money while they sleep.
The sort of product that you create once and sell many times, in an automated system, is much sought after.
How do you come up with that killer business idea?
Rob Percival was a maths teacher who did a bit of coding on the side, building websites and dabbling in being an entrepreneur.
Over a period of eight years he created a few businesses that didn’t work (Homesexchange.org anyone?) and two businesses that between them now bring in £200,000 a month.
The two successful businesses are EcoWebHosting and Rob’s on-line training courses for Udemy, the web's biggest training platform, which have been bought by over 250,000 people.
Rob is delightfully open about everything he’s learned along the way – good and bad – and has put together these six lessons that can can be applied by anyone who is looking for that breakthrough idea:
Lesson #1. Build something people want
Seems obvious but a lot of people throw marketing money at something they think people “should” want instead of really testing an idea to see if anyone will buy it. It’s turning the usual business model on its head and asking “How many people want this?” instead of “How much money will this make?” See what Paul Graham of Y Combinator has to say about this.
Lesson #2 Automate everything
(specifics depend on the type of business)
Holy Grail: Create recurring revenue!
Use text expansion – save typing the same phrases over and over
Set up FAQs and a help section on your website to reduce queries
Allow customers to do as much as possible for themselves on your website
Outsource repeated tasks
Use IFTTT (If This Then That Workflow app)
Learn to code – even a little bit can save a lot of time! (A.H. -I learned HTML in 1990 but I’m not sure that counts!)
Lesson #3 Talk about everything, especially money
Be open and honest
Two ways to ensure success: become the best at one specific thing OR become very good (top 25%) at two or more things.
Get a mentor (Yeay! – I didn’t pay him to say this!)
Join a MasterMind Group (or this!)
Find someone who does something similar and get together to compare notes
Spend at least 2 hours a week just thinking about your business
Read Rich Dad Poor Dad and understand the difference between being self employed (you own a job) and owning a business (you own a system).
Lesson #4 Create recurring revenue and systematise your business
Transform the business so it’s not about you.
Think of ONE thing, right now, that you could systematise in your business.
Find a way for people to pay a small amount of money regularly, over a long period of time.
Choose related products so that you can sell more things to the same people. (Again, I didn’t pay Rob to say this but it’s always cheaper to sell more to existing customers than to spend time and money acquiring new ones.)
Lesson #5 Don’t rush to take on employees.
When you try to replace yourself you’ll need more people than you think. (But do it anyway).
Plans are useless but planning is indispensable.
We overestimate what we can do in a day but underestimate what we can do in a year.
Lesson #6 Begin with the end in mind
What would you do if you had £10m in the bank? What would your ideal life be like? Work towards that now.
Persist! It took Rob eight years to come up with an idea that worked.
If this talk has inspired you to make changes in your business, or you have questions about Drive events, please add them to the comments section below or get in touch to find out how you can become part of it all!
How to go from start-up to chain in three years
How has The Pint Shop created such great success in just three years?
Richard Holmes and Benny Peverelli opened The Pint Shop in Cambridge in November 2013 with £200,000 from investors.
In late 2014 they announced plans to expand into two new locations and raised £600,000 in one day from existing investors.
In January 2015 they approached the hospitality industry for £2 million to fund the expansion plan.
They got what they needed, with offers still coming in, because they could show that they have a formula for generating growth, with revenue to match.
Year one £1.6 m
Year two £1.9 m
Year three £2.3 m
They also won 2 awards - from the Times and the Independent - which they estimate brought in an extra £2,000 a week.
Do Simple Things Well
Pitching to investors to raise the initial cash was a wake up call.
They were told, "What you're proposing isn't different, isn't exciting, isn't special."
They went back to the drawing board and came up with the ideas that have made The Pint Shop unique - and very successful.
British bread, meat and beer are their staple offerings but done with style and in a way that answers the customers needs before all else.
There are several ingredients that are contributing to the success of the Pint Shop, but the main ones are:
- Good planning and forecasting based on solid experience
- Well financed with growth in mind
- Differentiated from the competition
The friends met in 2008 and had each spent 14 years working in the hospitality industry before they decided to start their own business.
They spent a year working on their business plan and raising money for their new venture before they left employment.
When asked how they will maintain the individual character of The Pint Shop Cambridge when they expand to Oxford, London and other locations, Rich and Benny said,
We'll give ownership to the local team, guaranteeing the same quality but allowing each branch of the chain to have its own personality