Learn to draw flywheels.
I love the concept of a leverage point—a place within a complex system (such as a company) where a “small shift in one thing can produce big changes in everything”.
(I first thought about leverage points thanks to my friend Gonz Sanchez, who once sent me this article by Donella Meadows, the founder of this approach to analyzing systems.)
The best tool to analyze leverage points in a business is the flywheel, made popular by Jeff Bezos. More recently, Kevin Kwok introduced the idea of a company as a “sequencing of loops”. Then we had Alex Danco following up on Kevin’s idea:
A business is a collection of repeatable processes; but it’s worth going the next step to specify: if a process is truly reputable, then it must be a loop, because you have to end at the same place you started if you want to do it again. If you don’t see the loop, then either you don’t understand the loop, or it’s not truly repeatable.
A flywheel is nothing more than the comprehensive graphic representation of this sequence of loops, which in turn reveals leverage points. It makes it possible to spot a company’s repeatable processes and to make sure they all fit together in a way that generates returns on invested capital, the most important indicator in business life.
I always draw a flywheel when looking at a new business. I’ve found them to be the best tool for understanding how things really work, and the flywheel is usually at the core of the “Economics & Financials” section of my investment memos. Here’s the one I once drew to better understand Amazon and its growth (from my 11 Notes on Amazon in 2016):
It might seem presumptuous for a company at the pre-seed stage to venture into such sophisticated territory as drawing a flywheel to describe their budding business. And it’s true that there’s nothing worse than a founder who hasn’t yet found product/market fit already having a detailed idea of what their business will look like several years from now:
“And then we’ll turn our product into a platform, open up a public API, and build a marketplace to diversify revenue from our most loyal customers.”
“OK, OK—that’s all good—but what are you going to do this afternoon? Tomorrow? Next Monday? That should be your focus at the moment.”
Yet I do find that drawing a flywheel privately is a useful exercise for founders, one that I encourage you to do from time to time:
It’s an incentive to reflect on the mechanisms of doing business, especially on the financial side. There’s no better way of thinking about the difference between profits and free cash-flow than trying to fit a potential financial model into a company’s flywheel.
It’s an incentive to explore precedents, do a bit of research and better understand how others have been making money in their various contexts. As I wrote in Blindness is bliss, ignorance a curse, there’s a lot to be learned from your predecessors in a given industry.
It will help you move faster once you’ve achieved product/market fit—and it will help you raise with better terms when it comes to your Series A because what you derive from such work is an intimate understanding of a key point of attention for investors: your unit economics.
Have you already worked with flywheels? Did you already draw one to figure out how your startup will make money along the way? In any case, join us at The Family and we’ll gladly have sparring sessions on your company’s flywheel. Again, don’t get ahead of yourself, but don’t shun a useful exercise either!
Want to think about your flywheel together with the perfect cofounder? Join us on Thursday for the next edition of Be My Cofounder!