Author: abhiyerra

  • Paying Yourself and Incentives in a Small Business

    Owning a small business has a pitfall that where you start and where the company starts are blurred. You take money out whenever you want and treat the company as a personal bank. I think this has caused misaligned incentives and coming to the conclusion that it be avoided.

    When you are the owner of a business that business belongs to you and you decide whether to keep it or not as an investment, when you work on the business you allocate capital including hiring and creating dividend, when you work in the business you get paid for the work you do. An entrepreneur needs to think in these three terms.

    An ownership of a business does not mean treat the company like a bank. A company should exist as its own independent unit that like any life force is seeking to optimize itself toward a mission while giving a ROI. The owner of the business needs to think of the business in this term. So a flush out of cash leads to the company not performing at its peak. If anything ownership is an external factor.

    Working on the company is using the capital within the company for the benefit of growing the company while also benefitting the stakeholders such as the owners. It is for this reason giving employees ownership is seen as a benefit. When working on the company Capital is allocated to where it is needed and excess capital should be returned as a dividend. The important drive here is while working on the company the incentives should be to think like an owner while acting like a worker. So the worker should be paid a compensation appropriate to their work, but their drive should be to increase the growth rate.

    Lastly, working in the company is commiserate to being paid for the work performed. Your incentives are to work to get paid.

    As a small business entrepreneur or any entrepreneur, for that matter, it seems that the best way to achieve the desired outcome is to go up the chain. When working in the company you get paid for the work performed, when working on the company you get paid for the work performed and once a quarter give a dividend if it is appropriate, as an owner you seek to ensure that the ROI is appropriate and find other investors who’d want to invest or raise capital to put into growing the business.

    Each task set is completely independent.

  • Simplicity of Execution

    Complexity is Entropy. If something takes you much longer to do than doing it the easy way you are basically wasting energy. I’ve been wondering why that is? I think the reason is that though simplicity scales better it gets boring. For people who can run a marathon or do the same weightlifting routine for years there is obvious regularity and gains. But an entrepreneur is by nature someone restless.

    Doing the same thing over and over from an execution standpoint gets boring. It is a reason I think companies like Amazon have moved to a microservices model. Each service can be modeled simply and other services can build on top. Each individual component is simple but work together to create a complex adaptive system.

    Anyways, as a business owner the real goal then is to produce simplicity at the core of what you do so that others can execute and understand the rules of the game, create rules that others are bound by which leads to an outcome. If the rules are too complex the game won’t be played well. So simplicity is quite important. Though defining if a finite or infinite game is being played also creates a challenge.

  • Managing Inconsistent Agency Cash Flows via Margin Accounts

    ![](https://nanoyak.files.wordpress.com/2022/03/image.png?w=1034)

    Banks are conservative. They don’t loan money to businesses that need money, they loan money to businesses that don’t money. This doesn’t help if you are an agency where companies pay you in whatever timeframe they want even if you say NET-15. An agency likely also has a hard time raising money since it is a services business as opposed to a product business so venture funding doesn’t really exist.

    So I’ve had to figure out how to minimize unproductive cash while being able to have access to cash readily when I need it. The simplest solution I found is to have a brokerage with a margin account with a low margin rate. I use [Interactive Broker](https://ibkr.com/referral/kesava377) (#aff).

    The idea is simple, there should be as little money in the business bank account as possible. If you are a LLC you want to minimize the liability that you are responsible for if you get sued. Second, you want to ensure that you are not holding as much cash especially in a high inflation environment like right now.

    What I have done is the following:

    1. Keep a minimum amount of cash on hand to pay bills, and a little extra for emergencies in the bank account.
    2. Move all cash into a Brokerage that is dedicated to the business. This should be a personal account as this won’t get possessed if you get sued.
    3. Invest based on your risk tolerance, with an idea of minimizing the risk so you can access that cash in the future.
    4. When money is needed by the business, take a margin loan against your brokerage account to pay for what the business needs. I leverage up to 25% of the portfolio, but I suppose I have a higher risk tolerance. This way you are not incurring capital gains taxes on your investments.
    5. Refill the brokerage when cash comes in to pay off the margin loan and continue buying more assets.

    The benefits has been I can have access cash on a low rate versus a bank loan and don’t have to deal with a bank at all. Second, the brokerage account continues to grow giving me an even cheaper margin rate.

    The risk is of course an increase in interest rates, but say you have a bunch of S&P500 ETFs, on average they grow at 15% year over year. Even if the margin interest rate is 5% you are still up 10% on average.

    (This is not investment advice, you should do your own research.)

  • Moving on From OKRs

    I’ve tried OKRs long enough now that they are not resulting in a positive outcome from a quarterly perspective. The problem lies in a couple things:

    1. Changing OKRs from quarter to quarter seems too fast and doesn’t result in actual time to develop long-term strategy.
    2. Once a strategy has been developed for an OKR it is hard to not drop it with a new OKR the next quarter.

    I may be doing this wrong, but the whiplash of constantly chasing new OKRs doesn’t create consistent throughput. New OKRs can create misalignment since changing directions, mid-route is fighting the inertia of the previous OKR.

    So I’ve changed tactics. I am no longer doing OKRs. Instead, there is a singular company-wide mission with key metrics that don’t change from quarter to quarter. This mission will be the North Star for the foreseeable future.

    Hopefully this results in some long term benefits:

    * Not wasting a lot of time planning on what new OKRs to make up. From a quarter to quarter standpoint opsZero doesn’t change that much. Companies want much the same thing they want last quarter. My goal is to make it more efficient to deliver it.
    * Build metrics dashboards to understand key results somewhat in realtime.
    * Focus on tasks that continuously benefit the mission’s key results as opposed to changing tactics quarter to quarter.

    **Planning**

    Getting rid of OKRs does not negate the need to plan. Instead, planning will be in shorter [iteration cycles of six weeks](https://docs.google.com/spreadsheets/d/1GJQj3d3-p0DH0c8LctJ95rFOsJawoeuJK8Ip_Py6oqc/edit#gid=0). Planning should be to figure out the high leverage tasks, scaffold new initiatives, and basically treat building as continuously fixing bugs.

    The optimal time for an iteration cycle seems to be 6 weeks. Four weeks is long enough to get major tasks done without having to stop for planning, two weeks are spent down-cycle, relaxing, and coming up with new initiatives. After 6 years of running opsZero, going full steam all the time is no longer a real objective. Taking breaks more frequently, has been a godsend.

  • Growing Small to Grow Big

    As I am reading The Outsiders a book about unconventional CEOs. The book has some great arguments of what the best CEOs did.

    • Focus on free cash flow as their primary metric.
    • Focused on allocating capital, not necessarily on being a manager. They would redeploy free cash flow and have others execute day-to-day operations with a focus on cutting expenses.
    • Focus on returns per share which they would rebuy when the PE of their company was low. When it was high, they would borrow against their stock to acquire and grow.
    • They would also downsize the company to achieve the above instead of focusing solely on growth. If you are making more money per unit of work, why do you need to grow at all costs?

    So what does this book have to do with me? I’ve been haphazard to say the least. I was the guy who had like 6 majors in college. However, as you grow older, the things you learn deepen if you are in constant practice. You understand your strengths and weaknesses. You have the battle scars of experience to know when things won’t work. You develop a sense of taste of how things should be.

    As opsZero has developed over the years, I have evolved with it. A company doesn’t exist in a vacuum. It exists within the folds of individuals and society. I’ve had this idea of different brands doing different things, etc. How awesome to build a conglomerate. However, this is a lack of focus. It just means you do 10 things terribly instead of one thing well.

    So I am going through an exercise of downsizing. The only two things I am working on are abhiyerra&co and opsZero. The abhiyerra&co will focus on pure capital allocation and nothing but that. Since a lot of what I am doing there is long-term bets the more I do the worst I will likely do.

    opsZero will focus on nothing but DevOps and expanding our capabilities. I am divesting everything else, including domains, other apps, etc. that don’t pertain to opsZero. The Cloud has a lot of potential and once a majority of the startups funded on cheap capital crash, people will use open source.

    This does not mean stopping experimentation. Small bets to learn are important even if the outcome is not what you expect. However, big bets should be where large amounts of value can be generated through realized cash flow. This while ensuring that every dollar provides a return on invested capital.

    This also means a personal transformation from an operator to mostly an allocator. This may be the biggest change I will need to undergo which means transitioning from doing the work to finding the people who can accomplish the work.

  • A Shift to Focus on Profit

    Capital is going to get expensive if it already hasn’t which means the era of crazy valuations and everyone getting a puppy when they join a tech company are over. This will result in a sizable adjustment as many venture backed companies will just perish as they run out of funding the next few years.

    However, this is not going to be peaches and roses for Google, Meta, or Microsoft either. The first two are reliant on the cheap Capital to help startups pay for advertising. Microsoft on the other hand has half its revenue coming from international. As the dollar strengthens relative to the other currencies Microsoft will also face the same headwinds.

    In this market Amazon seems to be in the strongest position as they seem to be the most diversified. They will have headwinds on their AWS business but a lot of the startups are playing with credits anyways and haven’t started to pay Amazon. With a focus on healthcare that they seem to be doing with their recent purchases they seem to have the most strength of the big tech companies.

    The lack of capital will kill many companies because there is just no way many of them have a way to get to profitability. This will be likely the big focus of the next decade, back to the power of cash flows and balance sheets. This may have unintended consequences on the broader tech ecosystem as the goodwill of these companies has been the primary driver of many of the innovations in tech the last decade.