This blog post is an attempt to condense some learnings on self-efficacy. Some of us have been introduced to the concept by this illuminating book – A Defining Decade by Meg Jay. The internet unfortunately does not provide good content on what self-efficacy is, how to build it up, the numerous aspects in which it affects your life, so the only way to dig these up is to go straight to the source – Albert Bandura’s psychology textbook that collates his pioneering research on the subject. The book, however, is 604 pages long and extremely dense with strictly academic language. A tl;dr version exists here; short, approachable, yet in heavily academic language as well. This blog post is a ‘notes to self’ version of the book, and an attempt to make learnings from the book accessible.
What is self-efficacy?
Self-efficacy is the set of beliefs and attitudes that you can get something done, influence things and events in your environments and cause certain outcomes.
Self-efficacy is not the same thing as confidence – you can be supremely confident that you will fail. Confidence is the degree of strength of a belief.
Self-efficacy is also not the same as knowing you will succeed – self-efficacy says you have a sense of agency, and that you have control, no matter what the outcome.
If you have heard any of the following references growing up and wondered if they were merely feel-good things to tell yourself, here is the good news – self-efficacy research that provides a solid backing to and understanding of these popular sayings
- Whether you think you can or you cannot, you are right.
- I am the master of my fate, I am the captain of my soul.
- Life’s battles do not go to the strongest or biggest man, sooner or later (they) go to the one who he thinks he can.
Why should I care about it?
Research shows that people with a self-efficacious outlook –
- approach difficult tasks as challenges to be mastered rather than threats to be avoided.
- foster an intrinsic interest in the activities they take up, and are deeply engrossed in them.
- set themselves challenging goals and maintain a strong commitment to them.
- heighten and sustain their efforts in the face of failure.
- quickly recover their sense of efficacy or belief in themselves after setbacks or failures.
- attribute failure to insufficient effort or deficient knowledge and skills which are acquirable, rather than some innate deficiency with themselves.
- approach threatening situations with an assurance that they can exercise control over them.
- have reduced stress and lower vulnerability to depression.
- have higher levels of accomplishment.
If such people sound awesome, self-efficacy is worth learning about.
This sounds like it is about work and accomplishments. I am not ambitious or I don’t like talking about these subjects. Why should I care about it?
Efficacy doesn’t just affect how you perform, it affects your thought-processes, the attitude you carry to pretty much any situation and as a consequence, social and emotional aspects of your life. For example, take shyness. Research shows that shy people know perfectly well how to behave socially and how to pull off smalltalk. They are simply reticent because their perception (self-efficacy) of their social skills is poor.
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‘The Defining Decade‘ is a book by clinical psychologist Meg Jay who has spent her career studying adult development and spent multiple years doing therapy for twenty-something clients helping them sort out their lives. Notes below are not exhaustive, those can be found at getAbstract which has a concise yet thorough summary of the book here.
On individual development, career and networking
- Focus on Identity Capital not Identity Crisis: Time spent brooding over who you really are or what you should be doing should really be spent on developing identity capital. Identity capital is how you come across to the world – from how you look or speak to what you choose to focus your efforts/work on.
- The only way to figure out what to do is to do something. As a therapist, the author met a bunch of twenty-somethings who wasted a lot of time trying to find the ideal thing to do rather than jumping into something they liked, experimenting and iterating.
- Are you capitalizing on your weak ties? The strength of weak ties is a seminal paper by Stanford professor Mark Granovetter – the research behind it shows that most major life-defining changes happen due to weak ties, not due to one’s inner circle. Most people stick to their comfort zone of a small number of people they know – this is detrimental, perhaps dangerous, for personal development.
- Weak ties promote (and sometimes force) thoughtful growth and change. Weak ties force us to communicate from a place of difference. The similarities and shared context that we have with our inner circle makes us comfortable, but also complacent.
- Once you start getting comfortable making use of and growing/developing your weak ties, “the world seems suddenly smaller and easier to navigate”.
- Ben Franklin effect: If weak ties do favors for us, they start to like us. Ben Franklin’s story/anecdote is worth understanding and analyzing.
- How Ben Franklin positioned himself for success (and what we should emulate):
- He found out the person’s area of expertise.
- He presented himself as a serious person with a need that matched.
- He made himself interesting and relevant.
- He asked for a clearly defined favor.
On marriage and picking a partner
- The author worked on a study that followed ~100 women from their twenties into their seventies. The women were asked to write one page about their most difficult life experience so far. The saddest, most protracted stories were about bad marriages.
- It is a misconception that getting married later can set one up for marital success, it is however true until age 25. Research shows that after 25, one’s age at marriage does not predict divorce.
- Cohabitating before a social commitment such as engagement or marriage usually leads to bad outcomes, contrary to assumptions that living together will prepare the couple for marriage.
- Travelling together in a third world country is the closest thing there is to being married and raising kids.
- Bring personality to the forefront sooner rather than later – eHarmony claims better success of the couples it matched due to ‘personality fit’. While this is hard to prove, research does show that the Big Five personality traits are key predictors of marital success. The more similar a couple is in their extremes of the big five, the more likely to stay together.
- Neuroticism is the only trait where an individual’s own (and not the couple’s match) trait matters – high neuroticism leads to lower relationship success.
- People often think that relationships end or marriages break because something changed – habits, betrayal etc. In reality, more often, people split up because things don’t change. Couples reluctantly admit that the differences were there all along.
On thought patterns
- “The slower you go, the faster you get there” – the best way to help people is to slow them down enough to examine their thinking and see the gaps in their own reasoning. Shine a light on those mental ellipses and you’ll find assumptions that drive behavior without our ever being aware of them.
On brain development
- The frontal lobe of the brain is where we learn to move beyond our search for black-and-white solutions and learn to tolerate and act on shades of grey. This portion develops/matures through your twenties.
- This explains, why as a therapist, the author often encountered school valedictorians and high-achievers who couldn’t figure out who to date or who got nerves at the workplace. Objective problem-solving skills are located in a different part of the brain, which develops before the frontal lobe.
- Calm Yourself – “It may be a match made in hell, but that’s the way it is.” Twenty-somethings who get to the workplace are still in the frontal-lobe development phase. To make things worse, they are usually paired with new, inexperienced managers. The key is to stay calm and be emotionally resilient as a twenty-something.
- Realize that what you are going through is normal. Twenty-somethings who don’t feel anxious and incompetent at work are usually over-confident or underemployed.
Getting along and getting ahead
- Making strong commitments to our social roles is good for twenty-somethings. Being a cooperative colleague or successful partner is what drives personality change.
- Human nature is to emphasize the present and discount the future. Most twenty-somethings can think of the here-and-now, perhaps the next five years and have a faint vision of when they are very old – close to the end of life. Not enough people have a realistic sense of what it might be to be 30 or 40, or how their current decisions influence their future life.
- This leads to things such as (a) not enough thinking about starting a family or the challenges of fertility over 30 (its not just the women, older sperm is an issue as well). (b) not thinking enough about retirement planning (c) not thinking about what you might cherish or value at age 30 or 40 (time with your kids) and spending time in your twenties doing things you will regret later.
- Great experiment that shows present bias: Twenty-five people entered an augmented reality environment and saw an age-morphed version of their future selves. A control group of the same size just saw themselves in the mirror. Both groups were then asked to allocate money to a hypothetical retirement savings account. The mirror group set aside ~$75, the group that saw an aged AR version of themselves set aside ~$180 (almost 2.5x).
Good stories and happy endings are way more intentional than that..
- Be intentional about your life. Good authors don’t just stumble into a well-forming story with a great ending as they are writing it. More often, they start with the end in mind, working their way backwards through the plot, to figure out where the story should begin.
- Treat your life the same way, be intentional.
- Self-efficacy: The exercise of control by Albert Bandura.
- Similarity, convergence and relationship satisfaction in dating and married couples.
“You are right not because others agree with you, but because your facts and reasoning are sound.” – Benjamin Graham
Importance of capital allocation
The 8 CEOs studied in the book far outperformed the S&P 500 over a 20-30 year period and this is attributed to their capital allocation strategies. All CEOs are investors AND managers, but the ‘investors’ part is typically ignored. As Buffett says, capital allocation is one of the most important tasks of a CEO, yet almost none of the people who rise to be CEOs are trained for it. They rise to the top based on their engineering, marketing, sales or other skills. This is analogous to a master musician being promoted to being Chairman of the Federal Reserve.
The capital allocation toolkit
- Ways to deploy capital:
- Invest in existing operations
- Acquire other businesses
- Pay down debt
- Issue dividends
- Repurchase stock
- Ways to raise capital:
- Tap internal cash flow
- Issue debt
- Raise Equity
- Together, these 8 mechanisms form a tool-kit. Long-term returns provided by a company to its shareholders will depend heavily on how the CEO uses these 8 options. Companies with identical operating results and different approaches to allocating capital will lead to different outcomes for shareholders.
Themes common to all the eight outsiders
- Free cash-flow, not earnings: Pay attention not to earnings, but cash-flow. Quarterly earnings reports are a distraction. This shapes company decisions including accounting policies.
- Clever buy/sell of own stock: Buy-back own company’s stock aggressively when it is running low and attractively priced. Use the stock to finance acquisitions or get cheap debt when the stock price runs high. Stock repurchases are a more tax-efficient method of returning capital to shareholders than dividends, which are taxed twice (corporate and individual level).
- Fly under the radar: Wall Street and the press are a distraction, ignore them. Great CEOs (as measured by return delivered in multiples over S&P 500) also avoid frequent magazine covers, interviews etc and fly under the radar.
- Anorexic HQ: Run decentralized operations, with rigorous budget monitoring. Headquarters should be ‘anorexic’, with only enough staff as absolutely needed to support the general managers of the various business units. The GMs are given utmost authority and autonomy.
- Traits as an investor:
- Concentration: “Be comfortable with concentration and buy only a few things that you understand well.”
- Patience: Be willing to wait long periods of time (while the market complains about your inactivity), often a decade or more, for the right opportunity to emerge.
- Boldness: Each of the 8 CEOs made at least one acquisition or more that exceeded 25% of their firm’s enterprise value.
- Frugality & Tax Minimization
- Focus on ‘value per share’: Do not shy away from shrinking the company if that is the best move. Most of corporate America focuses on growth, these 8 CEOs focused on increasing ‘value per share’.
- Individualistic thinking: “Cut through the glare of peer activity and conventional wisdom to see the core economic reality and act accordingly.”
- To sum it up, their advantage relative to their peers was one of temperament, not intellect.
1. Capital Cities Broadcasting – Tom Murphy and Dan Burke
- Sign of a well-run great company: Diaspora are all over the industry. For Capital Cities, the alumni went to Disney (Bob Iger, CEO), Pulitzer (CEO). Dan Burke’s son Steve was COO of Comcast, followed by CEO of NBCUniversal.
- Bought ABC, when it was 4 times bigger than Capital Cities. Warren Buffett helped finance the deal in exchange for a 25% stake in the combined company.
- Most companies fall into the trap of a ‘prosperity blinded indifference to unnecessary costs’. CC executives remained focused on the core businesses.
- Simple cycle that Tom Murphy used, which most people fail to remember or apply:
- Look for attractive economic characteristics in a business or undertaking
- Use whatever leverage you can apply to get that attractive business
- Once you have it, improve operations.
- Use the cash flow from the improved operations to pay down debt.
- Rinse and repeat.
- The above practice today is known as a ‘roll-up‘. Many companies collapsed under the burden of bad roll-up debt – they acquired too rapidly and did not integrate and improve operations well.
- Tom Murphy finally sold to Disney for an extraordinary $19 billion.
- “Paint the two sides facing the road, leaving the other two sides untouched.” – Murphy when asked to touch up a building for the advertisers who visited it.
- Be frugal, but invest heavily where it is needed – every one of CC’s TV stations led in its region, because they invested heavily in the news talent and technology.
- What employees and general managers said about CC – “the system corrupts you with so much authority and autonomy that you cannot imagine leaving.”
- Tom Murphy spent years developing relationships with the owners of desirable properties, and worked very hard to become a preferred buyer.
- While Teledyne’s own stock ran at P/E multiples in the 20-50 ranges, CEO Henry Singleton never bought companies with a P/E multiple higher than 12.
- Great investors are able to sell high and buy low: Teledyne’s stock issuances happened at P/E multiples of ~25 and buybacks at around ~8.
- Singleton, like Buffett designed an organization that allowed him to focus on capital allocations, not operations. Both viewed themselves primarily as investors, not managers.
General Dynamics – Bill Anders, Nick Chabraja
- Bill Anders, CEO, had been the lunar module pilot on Apollo 8. “After orbiting the moon, mundane business problems did not faze him.”
- Anders’ turn-around strategy to exit all businesses with low returns, commodity businesses and ones which it did not know well. He systematically shrunk the company in an era where CEOs prided on size and growth.
- Warren Buffett bought 16% of General Dynamics in 1992 after two years of observing Anders’ work.
- Nick Chabraja, a successor, sold almost one-third of company stock to acquire GulfStream when GD was trading at 23 P/E multiples (history, was 16). This was counter-intuitive as such massive stock selling hadn’t happened before. The best capital allocators are opportunistic, practical and flexible. They are not bounded by strategy or ideology. Nick sold the stock at its highest P/E and got a company that provided almost 50% of the combined company’s cash flow.
TeleCommunications Inc – John Malone
- Ditch Wall Street’s metrics: John Malone at Tele-communications Inc was among the first to realize that the first among the cable operators to hit high scale would be able to lower programming costs and create a virtuous loop (higher subscribers, move leverage with content programming costs, lower costs imply more ability to buy subscribers..). This scaling would come at the expense at EPS, which was the holy grail of Wall Street.
- It pays better to be a technology “settler” rather than a “pioneer” in traditional industries like cable – John Malone waited for other companies to test out the merits of a new technology before investing in it.
- Comcast took until mid-1980s to realize this and switch from EPS-focused to growth-focused approach.
- John Malone introduced the concept of EBITDA (earnings before interest, taxes, depreciation and amortization).
General Cinema – Dick Smith
- Learnings from Dick Smith – recognize the strong, underlying demographic trends of your generation (sub-urban theatres would be beneficial in the 1960s) and then go after them trying to gain an advantage over others (used lease financing to expand theatres faster rather than buying land like everyone else was).
- He repeated the same act with the beverage bottling businesses – recognizing that they would grow in the coming decade (1970s) and creatively growing them (financing via a sale/leaseback of the manufacturing facilities).
- Be opportunistic and willing to make sizeable bets when the circumstances warrant it (the HBJ acquisition was 62% of General Cinema’s value at that time, but it was an attractive bet since they were buying a business at 6 times its cash flow. They would later sell it for 11 times the cash flow).
- “It is remarkable how much value can be created by a small group of highly talented people.” – Spoken by a media investor about the General Cinema team.
Washington Post – Katharine Graham
- A rigorous and cautious capital expenditure approval process meant Washington Post avoided expensive investments in new technology printing plants until her competitors had vetted it.
- Stringent acquisition criteria – acquisitions needed to earn a 11 percent return without leverage over a ten-year period.
- Being part of the insider circles help – Buffett was friends with both Katharine and Tom Murphy of CC, so when FCC rules forced CC to divest some of its stations, the Washington Post got to take an exclusive look at the deal and they bought it.
Berkshire Hathaway – Warren Buffett
- Until age 35, Warren Buffett ran a non-descript investment partnership out of Omaha. He did a ‘hostile takeover’ of Berkshire Hathaway, a 100-year-old but undifferentiated/unremarkable textile company based in MA.
- Charlie Munger – “Berkshire’s long-term success stems from its ability to generate funds at 3% and invest them at 13%.“
- Advantage of being an outsider CEO (Buffett was an investment manager before Berkshire – he did not hesitate to divest the textile holdings when he did not see growth and good returns in the textile business) – you are not wedded to a particular business or industry. It is easier for you to exit businesses/industries with low returns and concentrate on those which are likely to meet their investment targets.
- “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.“
- Buffett’s portfolio management philosophy: a high degree of concentration and extremely long holding periods.
- Warren Buffett to students – your investments results will improve if, at the beginning of your careers, you are handed a 20 hole punch-card symbolizing the total number of investments you can make in your investing lifetimes.
- “Institutional Imperative” – this is the big-company/CEO equivalent of ‘teenage peer pressure.’ Buffett scorns this.
- “Be greedy when others are fearful, and fearful when others are greedy.”
- Act boldly when you see a difference between value and price.
- When your stock is low, buy it back. When it is high, use it raise debt or buy other companies.
- The best defense against revenue lumpiness is a constant vigilance on costs.
- “When you see something that you like, make a very large bet.”
Part I is here. In a hurry? Italics in the post represent key dos and don’ts for founders.
How VC firms work
- One management company (franchise) – this is the name of the VC firm you hear.
- Under them are several “general partnerships” (no longer a “general partner” i.e. single person, this is a separate legal entity of its own ). Each “general partnership” has different funds – LPs (limited partnerships) under it.
- Interest of VC firm != interest of the GP/LP always, particularly when new people join or MDs leave.
- How VCs raise money
- LPA – limited partnership agreement
- Fund amount is not actually with the VCs. A capital call is made each they want to invest in a startup, and the LPs are obligated to respond to the capital call in two weeks.
- Capital calls can fail or result in lower funding than expected .2008-like situations: LPs include HNIs who may be struggling with illiquidity themselves, banks who, like in 2008, may be dissolving themselves, endowments/pension funds etc who are facing capital crunch due to general market conditions.
- Average total fee over a 10 year period: 15% of the fund. VCs are expected to make capital gains and recycle those gains to cover up for the fees.
- Partners see base compensation with every additional fund raised.
- “It takes 10 years to kill a venture fund.” – additional funds / rounds can be raised while the performance of the first few isn’t clear.
- Carry: VCs get a 20% of the profit cut, which is known as “carry”. This can be reinvested (and is expected to be reinvested, at least till it covers the management fees).
- Friction within a VC firm – Firms don’t equal allocation between partners- seniority matters. An individual partner can make X times the amount allotted, but still get no carry because of allocation style and poor performance of the overall firm or fund.
- GP Commitment: LPs want VCs to invest a cut as well – 99% money comes from LPs, 1% from the VCs. Has gone up to 5%.
- Clawback: VCs can pocket the carry in the middle of the fund (say 20% of 50 mn in profit) and then the overall fund turns out to not do so well. VCs have taken more than the deserved carry and LPs demanding for this back is ‘clawback’. Harder to pull off across multiple partners.. (e.g. one partner got divorced, paid half to spouse. All partners paid taxes on the carry).
- Time impact of fund activity
- If you are raising with a VC fund that closers to closing, higher pressure for an exit.
- Wary of ‘zombie’ VC firms (no new funds to raise, carrying on their existing funds). Just ask when their last investment was.
- Wary of ‘secondary sale’ – VC can sell their entire portfolio to someone in a secondary sale.
- VCs close to end of the fund can also redistribute the portfolio to LPs – hassle for founder if there are too many LPs.
- Reserves – VC have a fraction of the fund (30-50%) in ‘reserve’ i.e. for future investments with their portfolio companies. Ask upfront for details on this.
- Cashflow – how does the VC maintain their cashflow? Are they recycling the carry appropriately to make up for the management fees? ([KR]: How does this affect the founder?)
- Cross-fund investing – bad idea, since there are multiple sets of LPs and multiple kinds of terms involved.
- Figure out what happens if and when the partner who invested in you departs – does it trip a ‘key-man clause’? (LP can ask for recall of funds).
- Understand your VC’s fiduciary duties – they are serving you/your board, the VC firm, their own GP/LP and a bunch of other people. Not all VCs are direct about what they have on their plate, making their behavior confusing.
- Understand your investors motives and financial incentives. Have an open, if difficult conversation about it now, to avoid surprise and trauma later.
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In a hurry? Just skim over the italics in this post – they represent key dos and don’ts for founders. Part II of the post is here.
- Typically 8-ish pages (~2012).
- Two key aspects, everything else is secondary, don’t waste too much time on other terms:
- Economics terms
- Control terms.
- Signs of the VC not being entrepreneur friendly appear during the term-sheet negotiations.
- Early VC example: AR&D: 70k for 78% of the company. Post-money valuation becomes 90k.
- Individual VCs today own less than 50%, no effective voting control. They negotiate provisions that give them control over the major decisions made by the company.
- VCs investing at different stages in the company => different ownership percentages, varying rights, diverging motivations.
- Founders should direct and control the process of financing – leave as little as possible outsourced for the lawyer.
- Capitalization-table (Cap Table): spreadsheet that defines the economics of the deal.
- MD/GP: Managing Director or General Partner. They make the final decisions and sit on the boards of the companies they invest in. Prefixes “executive” or “founding” may be applied to indicate seniority.
- Principal/Directors: Have deal responsibility, need a MD involved to take the final decision. These are junior partners making their way up to MD.
- Associates: Not deal partners, they work for the partners. They do: scout new deals, due diligence on existing deals, write internal memos about prospective investments. Associates likely spend the most time with the cap table.
– Many VC firms have a 2 year associate program – after that, the associate leaves to go to B-school, work for a portfolio company or start up her own company. Star associates may go on to become principals.
- Analysts: Bottom of the ladder, crunch numbers and write memos.
- Other people involved in VC:
- Venture partners/Operating Partners: Experienced entrepreneurs who have a part-time relationship with the VC firm. May take an active role in managing the investment as chairman or board member.
- EIR (Entrepreneur in residence): Experience entrepreneurs who park themselves at a VC firm while figuring out their next company. Help the VC with intros/networking and due diligence. Last 3-12 months typically. Some VCs pay the EIR , some just offer office space and an implicit agreement to fund the next company.
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“Bill O’Reilly who precedes me on our channel, is like a superhero. Because if you meet him in person, he is kind of shy, quiet. He would never dominate your dinner table. But you put that guy behind that desk, and he grows into this larger than life personality. And I have a little bit of that. When I sit in front of that desk, I don’t care who’s across of me, I don’t care if its a Republican or Democrat or President. It doesn’t matter. I only have one master and that’s my audience. I will serve that audience and if you try to dodge or weave, you will get pinned down. So I feel very empowered. In person, I am not a shrinking violet, but I don’t have quite as much, uh, power.”
– Megyn Kelly, 2014 interview