Many consumer Internet business executives are loyalists of the Lifetime Value model, often referred to as the LTV model or formula. Lifetime value is the net present value of the profit stream of a customer. This concept, which appears on the surface to be quite benign, is typically used to compare the costs of acquiring a customer (often referred to as SAC, which stands for Subscriber Acquisition Costs) with the discounted positive cash flows that will come from that customer over time. As long as the sum of the discounted future cash flows are significantly higher than the SAC, then people will argue it is warranted to “push the accelerator,” which typically means burning capital by aggressively spending on marketing.
This is a simplified version of the formula:
The key statistics are as follows:
- ARPU (average revenue per user)
- Avg. Cust. Lifetime, n (This is the inverse of the churn, n=1/[annual churn])
- WACC (weighted average cost of capital)
- Costs (annual costs to support the user in a given period)
- SAC (subscriber acquisition costs, sometimes refereed to as CAC = customer acquisition costs)
The LTV formula, when used correctly, can be a good tactical tool for monitoring and comparing like-minded variable market programs, especially across channels. But like any model, its proper use is entirely dependent on the assumptions used in that model. Also, people who have a hidden agenda or who confuse a model with reality can misuse it. For many companies that subscribe to its wisdom, the formula slowly takes on more importance than it should. Seduced by the model, its practitioners often lose sight of the more important elements of corporate strategy, and become narrowly fixated on the dogmatic execution of the formula. In these cases, the formula can be confused, misused, and abused, much to the detriment of the business, and in many cases the customer as well.
Here are ten reasons to avoid worshiping at the LTV altar:
- It’s a Tool, Not a Strategy. Heavy LTV companies forget that the LTV model does not create sustainable competitive advantage. You shouldn’t’ confuse output with input. The LTV formula is a measurement tool to be used by marketing to test the effectiveness of their marketing spend – nothing more and nothing less. If one asserts that buying customers below what they charge them is a corporate strategy, this is in essence an arbitrage game, and arbitrage games rarely last. Too many of the variables (specifically ARPU and SAC) are outside of your control, and nothing would prevent another player from executing the exact same strategy. It’s not rocket science; it’s a formula that any business school graduate can calculate. Do not fool yourself into believing it creates a proprietary advantage.
- The LTV Model Is Used To Rationalize Marketing Spending. Marketing executives like big budgets, as big budgets make it easier to grow the top line. The LTV formula “relaxes” the need for near term profitability and “justifies” the ability to play it forward – to spend today for benefits that are postponed into the future. It is no coincidence that companies that put a heavy emphasis on LTV are also the ones that have massive losses as they scale, frequently even through an IPO. Consider that most companies limit any “affiliate fee” they would be willing to spend to 5-10% of sales. Yet when they are marketing, they use different math. They use LTV math, and all the sudden it’s acceptable to spend 30-50% of revenue on customer acquisition. Find the most boisterous executive recommending excessive spending, and you will usually find a loyal servant of the LTV religion.
- The Model is Confused and Misused. Frequently the same group that is arguing for more spending is the same one that “owns” the LTV calculation. (This is a mistake – finance should monitor LTV). As a result, it is not uncommon for one to see shortcuts taken that allow for greater freedom. As an example, marketers often divide spend by total customers to calculate SAC rather than just those customers that were “purchased.” If you have organic customers, they shouldn’t be included in the spend calculus. They would have arrived regardless of spend. Also, many people discount “revenues” rather than marginal cash contribution. It is critical to bundle all future variable costs of supporting the customer in order to fairly estimate the future contribution. As an example of the sloppiness that exists around the formula, consider this blog post (http://blog.kissmetrics.com/how-to-calculate-lifetime-value/) from KISS metrics, a company whose aim is to “help you make smarter business decisions.” Not only do they include a version of the model that specifically ignores future costs, but also they recommend taking an average of three different results, two of which are clearly flawed. This voodoo-math has no place as part of a multi-million dollar marketing exercise.
- Business Isn’t Physics – The Formula Is Not Absolute. LTV zealots often hold an overly confident view of the predictive nature of the formula. It’s not “hard science” like say predicting gravity. It’s at best a “good guess” about how the future will unfold. Businesses are complex adaptive systems that cannot be modeled with certainty. The future LTV results are simply predictions based on many assumptions that may or may not hold. Yet the LTV practitioner often moves forward with a brazen naiveté, evocative of the first time stock buyer who just found out about the price/earnings ratio, or the newcomer to Vegas who has just been taught the basics of twenty-one. LTV models win arguments because executives perceive them to be grounded in science. Just because its math, doesn’t mean its good math.
- The LTV Variables “Tug” at One Another. This may be the single most important issue and it lies at the heart of why the LTV model eventually breaks down and fails to scale ad infinitum. Tren Griffin, a close friend that has worked for both Craig McCaw and Bill Gates refers to the five variables of the LTV formula as the five horsemen. What he envisions is that a rope connects them all, and they are all facing different directions. When one horse pulls one way, it makes it more difficult for the other horse to go his direction. Tren’s view is that the variables of the LTV formula are interdependent not independent, and are an overly simplified abstraction of reality. If you try to raise ARPU (price) you will naturally increase churn. If you try to grow faster by spending more on marketing, your SAC will rise (assuming a finite amount of opportunities to buy customers, which is true). Churn may rise also, as a more aggressive program will likely capture customers of a lower quality. As another example, if you beef up customer service to improve churn, you directly impact future costs, and therefore deteriorate the potential cash flow contribution. Ironically, many company presentations show all metrics improving as you head into the future. This is unlikely to play out in reality.
- Growing Becomes a Grind. Let’s say you have a company that estimates it will do $100mm in revenue this year, $200mm the next, and $400mm the year after that. In order to accomplish those goals it is going to invest heavily in marketing – say 50% of revenues. So the budget for the next three years is $50mm, $100mm, and $200mm. How realistic is it to assume that your SAC will drop as you 4X your spend? Supply and demand analysis suggests the exact opposite outcome. As you try to buy more and more of a limited good, the price will inherently increase. The number one place on the planet for marketing spend is Google Adwords, and make no mistake about it, this is an increasingly finite resource. Click-outs are not growing at a meaningful pace, and key word purchases are highly contested. Assuming you will “get better” at buying while trying to buy more is a daunting assumption. The game will likely get tougher not easier.
- Purchased Customers Underperform Organic on Almost Every Metric. Organic users typically have a higher NPV, a higher conversion rate, a lower churn, and more satisfied than customers acquired through marketing spend. LTV heavy companies are in denial about this point. In fact, many of them will argue until they are blue in the face that the customer dynamics are the same while this is rarely the case. A customer that “chooses” your firm’s services will be much more staisfied than one that is persuaded to buy your product through spend. Find any high-marketing spend consumer subscription company, and I will show you a company with numerous complaints at the Better Business Bureau. These are companies that make it almost impossible to terminate your subscription. When you are scheming on how to trap the customer from finding the exit you are not building a long-term brand.
- The Money Could Go to the Customer.Think about this. If you are a company that spends millions and millions of dollars on marketing, wouldn’t you be better off handing that money to the customer versus handing it to a third-party who has nothing to do with the future life-time value of the customer? Providing a better value-proposition to the customer is much more likely to endure goodwill than spending on marketing. A heavy marketing spend necessitates a higher margin (to cover the spend), and therefore a higher end user price to the customer! So the customer is negatively impacted by the presence or “need” of the marketing program. Plus, a margin umbrella now exists for competition that chooses to undercut your margin model with a more efficient customer acquisition strategy (such as giving the customer the money).“More and more money will go into making a great customer experience, and less will go into shouting about the service. Word of mouth is becoming more powerful. If you offer a great service, people find out.” – Jeff Bezos
- LTV Obsession Creates Blinders. Many companies that obsess over LTV, become overwhelmed by LTV. In essence, the formula becomes a blinder that restricts creativity and open-mindedness. Some of the most efficient forms of marketing are viral, social, and effective PR (public relations). Most companies that obsess about LTV are less skilled at these more leveraged techniques. Ironically, it’s the scrappy and capital starved startup with absolutely no marketing budget that typically finds a clever way to scale growth organically. I love this historic slide from Skype comparing their SAC with that of Vonage, an iconic disciple of LTV analysis.
10. Tomorrow Never Arrives. The Utopian destination imagined by the LTV formula is a mirage. It almost never works out as planned in the long run. Either growth begins to slow, or you run out of capital to continue to fund losses, or Wall Street cries uncle and asks to see profitability. When this happens the frailty of the model begins to appear. SAC is a little higher than expected. You met your growth target, but the projected loss was bigger than expected. Wall Street is hounding you for churn numbers, but you are reluctant to give them out. The lack of transparency then leads to cynicism, and everyone assumes the worse. It turns out that the excessive marketing spend was also propping up repeat purchase, and pulling back to achieve profitability is increasing churn. Moreover, a negative PR cycle has ensued as a result of your stock decline, and the press’ new doubts about your model. This also impacts results, and customer perception of your brand. The bottom line is that “one day we can stop spending and be remarkably profitable” rarely comes to fruition.
It is not impossible to create permanent equity value with the LTV approach, but it’s a dangerous game of timing – you don’t want to be the peak investor. Let’s say a new business starts with an early market capitalization of A (see graph below). Through aggressive marketing techniques, and aggressive fund raising, the company is able to achieve amazing revenue growth (and corresponding losses), but nonetheless creates a rather sizable organization. At this point, the company is value at point B. Eventually, however, gravity ensues and the constraints outlined herein raise their head, resulting in a collapse to point C. For early founders and investors at point A, they may do OK (as long as C>A), but it will be accomplished on the backs of later stage investors that helped fund the unsustainable push to point B. This is the story of many a telecom and cable provider expansion history, as well as a few recent Internet companies.
This should not be misconstrued as a eulogy for the LTV formula. It has a very important place in business as a way to contrast and compare alternative marketing programs and channels. It is a tactical marketing tool that requires candor and thoroughness in its implementation. The fundamental reason that it is so amazingly dangerous and seductive is its simplicity and certainty. Generic marketing is conceptual. LTV marketing is specific. Building a plan to grow to a million users organically is an order of magnitude more difficult than doing it with the aid of the LTV formula. There is comfort in its determinism, and it is simply easier to do.
Some people wield the LTV model as if they were Yoda with a light saber; “Look at this amazing weapon I know how to use!” Unfortunately, it is not that amazing, it’s not that unique to understand, and it is not a weapon, it’s a tool. Companies need a sustainable competitive advantage that is independent of their variable marketing campaigns. You can’t win a fight with a measuring tape.Read Full Post | Make a Comment ( 8 so far )
This morning, Intuit announced its agreement to acquire one of Benchmark’s portfolio companies, Demandforce, for $424mm. As with Instagram, Benchmark Capital is the largest institutional investor in Demandforce. Unlike Instagram, which is a consumer application and is extremely well known, Demandforce focuses on local professional businesses and has chosen to keep an intentionally low profile – a strategy that has served them well.
Great entrepreneurs often blaze their own trails, and the founder and CEO of Demandforce, Rick Berry, is no different. In a day and age of social media, where many companies project a persona much larger than reality, Demandforce chose instead to focus on its customers and its products. We never even announced Benchmark’s funding of the company, which I believe is unprecedented. The Demandforce team always felt that the attention should be focused on the customer rather than the company.
Demandforce’s customer mission has always been the same – to help small businesses thrive in an evolving and increasingly complex connected world. Today, they are the leading provider of interactive “front office” SAAS services to thousands and thousands of professional small business owners. The Demandforce product is a powerful web-based application that seamlessly integrates with existing workflow systems, works automatically, and delivers guaranteed results. Through this, Demandforce provides local businesses – like salons, auto shops, chiropractors, dentists, and veterinarians – with affordable and easy access to the tools and platforms that large enterprises use to communicate with customers, build a strong online reputation and leverage network marketing. It you have ever received an automated communication from your dentist, it was likely sent through Demandforce.
Demandforce’s success puts it at the forefront of the burgeoning “Local Internet” wave. The combination of Internet pervasiveness and smartphone penetration has led to a complete reconfiguration with regard to how local businesses interact with their customers. These local businesses have traditionally spent over $125B/year on traditional media, and this is only in the U.S. But the channels they have historically used, such as the newspaper and the yellow pages, are increasingly compromised. These business owners know they need new solutions, and these dollars will be reallocated to these exciting new platforms. Benchmark believes this “Local Internet” wave is many times larger than the “social” and “mobile” themes with which it is often contrasted. In addition to DemandForce, Benchmark is fortunate to have backed such “Local Internet” market leaders as OpenTable (OPEN), Zillow (Z), Yelp (YELP), Peixe Urbano, GrubHub, Uber, and Nextdoor.
It has been an honor and a pleasure to work with Rick Berry, Patrick Barry, Hoang Vuong, Mark Hale, Sam Osman and Annie Tsai at Demandforce. This is truly one of the best teams ever assembled. It was also a pleasure to work with Steve Kostyshen as well as Mike Maples of Floodgate and Peter Ziebelman of Palo Alto Venture Partners, all of whom preceded us in their investment, and all of whom are passionate fans of the company.
It is certainly thrilling to see a team of entrepreneurs reach a significant milestone such as this. That said, it is equally bittersweet as it means we will no longer be working directly with them on this incredibly compelling mission. Our loss is unquestionably Brad Smith and Intuit’s gain. Combining the leading “front office” small business SAAS vendor with the iconic Silicon Valley small business company is an incredibly compelling combination.Read Full Post | Make a Comment ( 21 so far )
For the past two months, I changed the default search engine on my browser (ironically Chrome) from Google to Bing. I have used Bing almost exclusively for this period, and have two quick conclusions.
1) With regards to core search, the Bing results were perfectly fine. I never struggled to find anything. I never forced myself to redo the search on Google. So I would say Bing is on-par in terms of traditional, core search quality.
2) Where I did struggle was with the non-core search searches (i.e. maps, images, videos, news). Microsoft and Google use slightly different UIs on these non-core searches, and I had no idea how trained I was on the Google UI. Trying to learn the Bing tools and features was quite frustrating, and on those searches – I kept returning to Google. Plus, I didn’t realize how often I transition from one type of search to another (from core to maps, or core to news). This was another point of frustration. Keep in mind, I did not have a problem with Bing’s non-core results, just rather the navigational elements.
At the end of the day, for me, my user “lock-in” is associated not with the quality of Google results, but rather with the understanding of the UI features and levers. More like a traditional software application.Read Full Post | Make a Comment ( 11 so far )
Back in October, Techcrunch announced that Dropbox had raised $250mm at a seemingly absurd valuation. Many firms, including my firm Benchmark Capital, participated. When this happened, many people asked us why this was a special company that would cause us to break our standard investment paradigm. They didn’t quite understand why this was a company that deserved once-in-a-generation special attention.
The first answer to this question is rather straightforward, but not earth shattering. Drew Houston and his team had taken a hard problem — file synchronization — and made it brain dead simple. Anyone that had used previous file synchronization programs, including Apple’s own iDisk, constantly encountered state problems. Modifications in one location would get out of synch with those in another, ruining the entire premise of seamless synchronization. It wasn’t that these other companies did not understand the problem, it was just that they could not execute on the solution. The Dropbox team solved this, which was a critical innovation.
Although this was critical, nailing technical synchronization would not necessarily warrant outsized valuations. In order to be worth $40B one day (which is 10X the $4B reported round, the objective return of a VC investment), the company would need to hold a place in the ecosystem that is far more strategic than that of a simple high-tech problem solver. So what is it Dropbox does that is so special?
This evening, TechCrunch reported that Dropbox would automatically synch your Android photos. Once again, someone could suggest “so what, how hard is it to do that?, and why is that worth billions?”
Here is why. Once you begin using Dropbox, you become more and more indifferent to the hardware you are using, as well as the operating system on that device. Dropbox commoditizes your devices and their OS, by being your “state” system in the sky. Storing credentials and configurations of devices, and even applications are natural next steps for this company. And the further they take it, the less dependent any user becomes of the physical machine (HW and SW) that is accessing that data (and state). Imagine the number of companies, as well as the previous paradigms, this threatens.
That is a major, major deal. And it comes at a time where there are many competing platforms on both desktop and mobile. This “unsure” market backdrop ensures the need for a cross-platform solution and plays right into Dropbox’s hand. You can lose your desktop computer, you can lose your smartphone. It doesn’t matter, because all you really care about is in the Dropbox cloud.Read Full Post | Make a Comment ( 153 so far )
Attached are my thoughts on the Facebook S-1 along with some quick stabs at valuation. Brief disclosure, Benchmark Capital has a minority position in Facebook as a result of the acquisition of FriendFeed, a company that was incubated in our offices.
I thought it would be useful to look at Facebook using the scorecard from our May 24 blog post, “All Revenue is Not Created Equal, the Keys to the 10X Revenue Club.” For those that want to save time, the key point of this piece is that there is a broad disparity of Price/Revenue multiples for global Internet stocks, and that only a very small fraction of these companies achieve a multiple over 10X. We also created a list of 10 factors that public investors consider when trying to qualify if a company is deserved of such a prestigious and lofty valuation.
On a roll, these factors are:
1. Sustainable Competitive Advantage – how big is the competitive Moat?
2. Presence of Network Effects – does the model tip to a single vendor?
3. Visibility/Predictability – is the revenue consistent
4. Customer Lock-in / High Switching Costs – is it expensive to leave?
5. Gross margin levels – How much leverage exists is the business?
6. Marginal Profitability Calculation – is the leverage still expanding?
7. Customer Concentration – are there key dependencies?
8. Major Partner Dependencies – are there key dependencies here as well?
9. Organic Demand vs. Marketing Spend – is customer acquisition expensive?
10. Growth – how big will the future be?
So how does Facebook score on these metrics? As you would expect, pretty well.
|Sustainable Competitive Advantage||It would be extremely hard to launch a direct-on competitor to Facebook. Look at what has happened to Friendster, MySpace, Bebo, and is happening to Orkut in Brazil. Google+ as a FB competitor is a tough slog.||A+|
|Presence of Network Effects||These are about as strong as you could design. All current non-US Facebook users have immediate connections if they log-in.||A+|
|Visibility/Predictability||This is fairly strong as well, simply because there is no lumpiness. There is a small dependency on Zynga that could cause variability. Also, a premium product would offer more consistency than pure ads. That said, this is not an issue.||A|
|Customer Lock-In / Switching Costs||Leaving Facebook is possible, but finding an alternative with all your friends on it is not really possible. Obviously, the inclusion of Timeline works to increase this even more by creating a permanent dependence on past content. Also, Facebook’s DAU number is staggering. Over half of all users check-in daily. That is uber lock-in.||A+|
|Gross Margin Levels||Gross margin has hovered between 75-80% for the last several quarters. This is a fantastic overall gross margin. It would be great to think they have more leverage here, but as the largest Internet site in the world, this probably represents peak margins.||A|
|Marginal Profitability Calculation||On this one Facebook doesn’t score so well. Peak profitability (on a margin % basis) was in Q4 of 2010, and since then spending has kept pace with revenue growth. It is likley that the team would argue they are “investing for the long-term,” but if the long term is forever, than EPS growth is permanently tied to revenue growth.||B-|
|Customer Concentration||Zynga is 12% of revenues, but this is fairly low and they are the only company over 10%. Plus, if Zynga stopped competing for these ad purchases, there are many, many Zynga look-alikes that would rush to fill that void. So even if they left tomorrow (which they won’t) the number would not go away completely.||A|
|Partner Dependency||Facebook has grown to be the largest site in the world with the help of no one. No partners. No dependency.||A+|
|Organic Demand||All of Facebook’s customers are organic. This is as good as it gets. The pure stuff.||A+|
|Growth||Facebook grew the top line 88% in 2011. That’s quite amazing. Q4 of 2011, however, was only 55%. People will definitely be watching this number in Q1. If growth rate hurts the company, then it’s a direct result of waiting too long to go public – past peak growth.||B|
The bottom line is that these scores are fantastic. Facebook is a shoe-in for the 10X+ revenue club. Perhaps the only question is which years’ revenue you consider. If the company grows 50-60% in 2012, you end up with roughly $5.5-6B in revenue. With all the hype, assume a 12x multiple on the $6, and you end up right at $72B. You can double-check this with earnings. As operating margin is stable, 60% growth would result in $1.6B in after-tax earnings. At $72B, this is a 45 PE ratio for a company growing at 60%. At a 60 PE, you would have a $96B market capitalization. The bottom line is that the banker range looks right to me. Of course, overt and ecstatic demand for the hottest IPO of the past 10 years could easily lead to much higher speculative valuations. But it’s hard to argue that the $70-100B range is wrong. Feels quite right to me.
Here are a few other interesting things from the S-1:
- Tax Rate. Warren Buffet’s secretary would be happy. Facebook’s tax rate is already north of 40%. Other multi-national companies typically have found a way to reduce this. Facebook is paying full-boat.
- Model appears set. With gross margin relatively fixed, and peak operating margins over 5 quarter ago, investors should get comfortable that bottom-line growth is limited by top line growth. Management could change their attitude later, but experience suggests that founders like Zuckenburg want to invest for the long term. As a result, one shouldn’t expect these super healthy margins to go any higher.
- Sales > R&D. It is somewhat surprising that sales expense is greater than R&D expense. The ad units clearly are not self-serve. Interestingly, this ratio is very similar for Google.
- Seasonality. The company has more seasonality than I would have expected (geared towards Q4). The prospectus says this is tied to traditional advertising seasonality.
- Facebook’s unique RSU program. In an effort to avoid the restrictions of 409A, Facebook long ago created an RSU structure whose shares vest on a liquidity event. As a result, a large amount of stock (close to $1B in value) will all “vest” on the IPO. This will result in an enormous one-time, non-cash charge. What I still can’t figure out, is how this will effect the overall share count. If you know let me know, and I will append the post. If auditors and the SEC are happy with this RSU structure, I would expect to see other startups adopt it, as it avoids the restrictions of 409A.
- Cash. Over $3.9B in cash already. And they will raise $5B more. That’s a lot of cash.
Each January, being the season of New Year’s resolutions, it is common to find people you know discussing the pros and cons of various dietary pursuits. Individuals across the globe are eager to turn over a new leaf, get on a new bandwagon, make a new start. Yet, even with a strong will, its not at all obvious what the right recipe should be. Pick almost any diet, and you will find several experts and PHDs praising it, and an equal number panning it. You would think that with all our technology and understanding of the human body, there would be more consistency in our approach. I saw a tweet yesterday that said, “Diet guides are the political blogs of personal improvement.” This feels right. But why do discussions about something that is supposed to be scientific, feel like religious or political arguments?
I happend to “consume” three interesting pieces of content this past year on the subject of nutrition (two of these come via my partner @peterfenton). For reasons which I will disclose later, I recommend you “consume” each of them, regardless of whether you have a strong pro or con bias after hearing the descriptions.
- Most recently I just finished Gary Taubes new book, Why We Get Fat. For those in the know, this book is a toned down, more reader friendly, less technical version of Taubes 2008 New York Times best seller, Good Calories, Bad Calories. Taubes, a successful science journalist and researcher, obliterates the past 30-40 years of medical rhetoric when it comes to diet and nutrition. He not only explains the physiology behind why the perspectives of the past are misguided, but also highlights the rather obvious point that “it ain’t working.” Obesity rates are exploding. If we knew what to do, wouldn’t that be contained?
- The second piece of content is a video lecture titled Sugar: The Bitter Truth, by Robert H. Lustig, a MD and professor at UCSF. Most 89 minute professorial lectures in medicine fall way short of two million views on YouTube, but Robert’s lecture is nearly at that milestone. Lustig pulls no punches in pointing directly at sugar (specifically high fructose corn syrup – HFCS) as the clear cause of the obesity epidemic we now face — not red meat, not fat, not the lack of a balanced diet, and not too little exercise. Moreover, he notes that food processors increasingly inject HFCS into a large majority of the packaged foods we feed ourselves and our children. This lecture is very compelling. As an added bonus, here is a lengthy article of Taubes reviewing Lustig: Is Sugar Toxic?
- Lastly, a briefer entry. This past July, Jane Brody of the New York Times, penned Counting Calories? Your Weight Loss Plan May Be Outdated. This article is a summary of a detailed 20-year research effort from five experts at Harvard that looked into the specific diets of 120,000 individuals. The main point of Brody’s title is that, based on these results, not all calories are created equal. In fact, this study found that potato chips, french fries, and sweetened beverages have a high correlation with weight gain, whereas other foods actually had correlation with weight loss. If you want to see the full study it can be found here: Changes in Diet and Lifestyle and Long-Term Weight Gain in Women and Men.
- The real enemy are sugars and carbohydrates. Taubes and Lustig make this explicitly clear. Our body is quite efficient with processing excess fat andprotein that we eat, but excess carbohydrates covert into fat on our bodies. Remember the argument that excess fats cause obesity and heart disease? Complete bullshit according to Taubea. Our physicians, our government, and our schools all rallied behind a 30-year movement to lower fat intake. As Lustig notes, it worked…we did lower fat intake…yet we kept getting fatter.
- Carbohydrates and sugars are addictive. Addictive the way cigarettes are. If you become a slave to massive carbohydrate intake, your body will actually crave more carbohydrates. And the bigger you are, the more you will crave. It’s hard to lose weight if you are consuming an addictive food.
- The calorie-in, calorie out ideal is a complete farce. How many times have you heard someone say, “all you have to do is burn more calories than you consume.” This notion that a calorie is a calorie is a calorie suggest that our bodies process each of these food types the same. Taubes and Lustig say absolutely not. Moreover, the Harvard project highlights the dangerous impact of potatoes, a seemingly harmless food that is present in every child’s school cafeteria. All food is certainly not created equal.
- You can’t exercise your way to thin. Simply put, you cannot burn enough calories to make yourself thin (with the exception of extreme amounts of exercise). However, with the right diet, you can lose weight without even exercising. How often do you hear that from a doctor?
Now despite what you may think, my point is not to convince you that these guys have it right. I don’t actually have a horse in this race. What I find amazing is that very educated and well reasoned experts can come to a conclusion that runs so counter to the conventional wisdom of our entire healthcare profession and our government health agencies. Moreover, despite whether you agree with their conclusion, they make a remarkably cogent arguments. Should it be this easy to prove everyone (i.e. the majority) wrong? And once again, why didn’t we have it right in the first place? And why are people so emotionally driven when it comes to their perspectives on topics such as this? (I am certain people will post comments to this blog post along the lines of “Taubes’ an idiot!”)
The human body is a complex system. Complex systems, such as stock markets, weather patterns, ant colonies, and large governments, all behave in ways that make specific prediction extremely difficult. This is because these systems involve millions of variables that are interconnected in non-linear ways that may be dynamic and dependent on potential initial states that could number in the billions. Such systems, which are well studied, are known for being unpredictable, difficult to understand, and are easy to underestimate. [One of the most influential books I have ever read is Complexity, a 1993 work by Mitchell Waldrop.]
One of the primary issues with complex systems is that people draw misleading conclusions regarding cause and effect of certain variables and how they relate to the overall system. As an example, one might note that 9 times out of 10 when variable X is set to 1, the sun is out, and so they proclaim that variable X causes the sun to come out. But the truth is they have no idea whether the sun drives the variable or the variable drives the sun. Or perhaps an entirely different variable that we are not looking at drives the sun, and all we are witnessing is ten random data points that happen to have 9-1 organization. One doesn’t really know.
But we still assume. And we try. Humans like answers and patterns. The truth is we always have. The Greek and Norse gods were early human attempts at understanding the sky, stars, and oceans. If we don’t have a specific answer we think up the best one we have, and we all glom onto it; it is better than the alternative of admitting to everyone that we don’t have a clue. Then we teach it to everyone else, and they all believe it too. Ironically, the more you come to know something through this passing of memes or ideas, the more argumentative, fanatical, or “religious” you might be. The lack of a fundamental understanding opens the door for a spiritual one. No one has an uber-passionate view on how gravity works. But politics, stock prices, and diets are a different matter. In these complex worlds, people “believe” what they cannot know.
Can we all get it wrong? When it comes to understanding complex systems, we can and we do. If you are looking for one more piece of content to consume, I recommend you watch this lecture from the late Michael Crichton: States of Fear: Science or Politics? Chrichton shows numerous examples from history where the majority misread and misunderstood complex systems. Additionally, he highlights how the mass opinion can lead to action that has well-intended but negative implications on the system. Perhaps it should go without saying, but it is particularly hard to influence a system you don’t fully understand.
By now, you may be wondering “what is my point?” Here it is. When it comes to not fully understood complex systems, it is easy to get things wrong. In fact, its easy for everyone to get them wrong. Don’t fear the new idea or the fresh perspective, and don’t believe something just because everyone else does. But watch out for the preacher with certainty — the ones that are spewing hellfire and brimstone. They are the ones most certainly to be wrong.
[Spencer Rascoff of Zillow pointed out this great New York Times article highlighting how all the smart powers that be completely missed the housing crisis, despite all the signs being there. Another example of everyone (including the experts) getting it wrong.]
In addition to inspiring others and building breakthrough new products, he also lit up the biggest scoreboard in business…the company’s market capitalization…(courtesy of Forbes):Read Full Post | Make a Comment ( 2 so far )
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