[00:00:02] Speaker A: Welcome to Intentional growth, a show that teaches you as a business owner and entrepreneur to view and run your company like a financial asset, which will allow you to enjoy work, create wealth, and make an impact. This mindset will help you focus on building a more valuable business and give you the choices to grow, acquire, reinvest, or exit. Live the life you plan for all with intention.
And now, here's your host, Ryan Tansom.
[00:00:32] Speaker B: Welcome back, everybody. Thanks for tuning in. I've got a very fun topic for the podcast today. It's a little off the Beaten trail, which I think is going to be potentially very interesting for a lot of people tuning in, because I think a lot of people that are entrepreneurs, we struggle with trying to figure out how do we scale our product or service to address the right people who need what we're doing and providing, whether it's a product or a service. And how do we make a bunch of money while doing it profitably so we can generate the cash flow? And how do we predict how people are going to be buying and what price they're going to be buying it at and which features and benefits, et cetera, that we need to include? And our guest today has been focused on this topic his entire life. Doug Horwatt's life weaves through remarkable challenges and groundbreaking discoveries. His journey involves a deep fascination with why certain products succeed and more importantly, why there are so many failures out there and why these companies go busts. And his fascination leads into why people decide to buy something. And he has a big fascination around complex systems. And his whole journey unearthed what he calls hypernomics, which is a field that focuses on uncharted dimensions in market analysis. So essentially saying, hey, there's a little bit more than just supply and demand, on scaling a product and service. There's multiple dimensions. And Doug has figured out a way to actually map out these multiple dimensions. And he uses Elon MuSk and TheN people scaling up big projects that are very expensive. And the reason I'm bringing this up is because think about how much market research you need to do in order to fund a multi million dollar or billion dollar project to make sure it works like what Elon has done. Whatever you think about him, is fascinating because he understands the economics of business, but also these multiple dimensions that Doug is going to be talking about. Fueled by this newfound clarity, Doug birthed hypernomics, crafting innovative software, analyzing markets in four or more dimensions. Industry giants like NASA, Virgin Galactic, Lockheed Martin and more took notice. And he's got a book that just came out hypernomics using hidden dimensions to solve unseed problems, and he promises to revolutionize how we think. And as you're going to see, I'm on a journey of trying to understand this as well. And the whole point of trying to understand this is I want to figure out where people are going to be buying in the future, what products and services that they want, because as entrepreneurs, we have to go meet that need so we can generate the business and the cash flow and meet the market demand in order to succeed over time. And Doug is going to be introducing hypernomics, which is a new way of thinking about market analysis and predicting market demand. Thanks, everybody, for tuning in, and I really hope you enjoy this interview with Doug.
[00:03:07] Speaker A: This episode is brought to you by Arcona's fractional CFO services. Arcona's fractional cfos integrate into your management team and assume the responsibility of the CFO. They become your strategic financial partner to help you run the business, create your value growth plan, and build the financial roadmap to the valuation you want to achieve.
[00:03:29] Speaker B: Doug, how are you?
[00:03:31] Speaker C: Ryan, I'm doing great. Thank you so much for having me on the show. I really appreciate it.
[00:03:34] Speaker B: Yeah, I appreciate you coming on. I'm very excited to jump into this topic. You are pioneering a different way of thinking about economics and value and demand and all these things. I think a lot of people have been resting on a certain set of standards over the years, and I'm very fascinated because I think the topic and how, I think you can unpack this concept of how we are trying to figure, because it's all about making decisions about where are people going? And that's what everybody's tuning into is, like, how do we make good decisions to get our company and to get our lives where we want it to go? But I have some work to do to better understand it, too, even though I'm very fascinated with all this stuff. So why don't you just give everybody just a little bit of a background of you, your background, and then the concept, and we can kind of unpack the concept. In a way, I think people have a pretty good, solid way of understanding it. Yeah.
[00:04:27] Speaker C: So the concept is called hypernomics. And hyper means existing in more than three dimensions. And nomics comes from the root anonymity, meaning a field of study. So hypernomics is a field of study that deals in, in this case, economic phenomena that happen in four or more dimensions. And so while it sounds complicated, and frankly, even having discovered it, I didn't understand when I first saw it. So I got to confess that to your audience. It was a mystery to me for a couple of.
[00:04:58] Speaker B: I can't wait for you to tell them the story about how you figured that out, too.
[00:05:01] Speaker C: Yeah, well, I'll tell them that. So I've been trying to prove the law of supply and demand since I got out of school decades ago and never could do it.
[00:05:12] Speaker B: Why are you so infatuated with it?
[00:05:15] Speaker C: Well, I had a degree in economics, and the law of supply and demand didn't seem to work for anything outside of a commodity like iron ore or gold or oil. And so I kept playing around with it. Playing around with it. So I had this kind of background problem floating in my head for decades. And then one day, some seemingly mundane event happened. The mundane event was that my wife and I went off to our local best buy after we had traipsed a bunch of other stores and looking for a washing machine, of all things. So my wife said, you know, I like this machine right here. She says it's got more capacity than we have at home. And I thought, capacity versus price, it's a two dimensional problem right there.
[00:05:59] Speaker B: I can handle that.
[00:06:01] Speaker C: And then she said, you know, I only got one delicate cycle at home, and I really need to have two or three. And I like this machine. It's got multiple delicate cycles. And I thought, cycles versus price, she got cycles, and she's got capacity. She's working a 3d problem. So I really like the machine we were looking at. And there was another one, same brand, next model up, more capacity, more cycles, also more dollars. And I said to her, well, what about this one? She says, it's too expensive. We can't afford it. And in that instant, I realized that any purchase we were making was going to add to the total quantity that was going to be purchased of that model, and that was going to be a quantity versus price element.
So she was looking at capacity, cycles, price, and we were part of the quantity thing. That was part of a four dimensional problem that she was working on in her head. And so I raced home and had a vision of a four dimensional system, which basically looks like a big t. If you have one wall that intersects another wall, where the wall t's in, if you can see on either side of that wall, that's what this four dimensional system looks like.
[00:07:12] Speaker B: I want to unpack that more. Keep going. I want to unpack it more because I think you're.
[00:07:15] Speaker C: Yeah, so it turns out that the way people value things can be expressed in a three dimensional system, and then you can work it out more features if you need it. So, for example, with electric cars, if you add range, people understand, if you go from a car that's got 100 miles range, you go with the one that's got 300. Well, you're going to be paying more for the 300 miles range. And similarly, if you got a car that's got 200, you're going up to one that's got 500 hp, you're going to pay more for that. And so what everybody understands intuitively is that you're paying more for range ANd you're paying more for horsepower. And so range, horsepower, and price, that's this three dimensional system that you already know. You already know this in your head. And then you also know that Tesla makes these things called Model S's that were one of the first real popular cars out there, and you can get them with up to a thousand horsepower in them. But as you start to go to a thousand horsepower, the number sold starts to fall compared to, say, something like the lesser powered TEsla S and then the TEsla three ANd the TEsla y, and all the way down to something like the NISSAN Leaf. ANd so you already know that as the price falls, people will buy more. Conversely, if the price rises, people buy fewer. And so you already know all the stuff intuitively. And so the breakthrough, such as it was, was to figure out that these things all meet up at the same axis, the same price axis, the intersection.
[00:08:44] Speaker B: Of that t of the wall, like you said.
[00:08:46] Speaker C: Yes, it's the intersection of the t and the wall. That's exactly where everything meets up. So on the right hand side, if you were facing it, you've only got this plane, which is demand. And so you would have little points on this plane. That would. Quantity would be the horizontal axis and price would be the vertical axis. And so you'd see points that would be further to the right as the QuAnTiTY increases, for the low price THIngs that are low and far to the right. And then as the price increases, you'd have fewer and fewer. You'd be moving to the left towards the t intersection. And then for you, on the OthER side of the t intersection, if you're.
[00:09:19] Speaker B: You want to hold one of those up for the people that are watching, you're doing a good job. And I think we can unpack this, because I wanted to make sure people understand, because I think people understand this stuff, Doug, in their head, because they've been buying stuff like this forever. And I ThinK people know that.
[00:09:33] Speaker C: That's the important point, RYan, you've ACtUalLY hit the nail on the proverbial Head There. So in this red, what we usually call it, right hand plane, the reason we coded it red is that demand has a limit to it. And so this white line, through these white dots for people that are seeing here, we have a white line that depicts the demand for the, in this.
[00:09:57] Speaker B: Case, traditional xy axis of the demand.
[00:09:59] Speaker C: Yeah. So in this case, the horizontal axis going to the right is quantity, and the vertical axis going up is price. And so as the price decreases, people buy more. So this dot down here at the bottom, that's the Nissan leaf. And these guys up at the top, these are their first.
And so that's their demand over here on this side. Then on this side, on the green side, we have what's known as their value. So the two Teslas had more horsepower than anybody else over here, and they had more range than anybody else over here. And so this forms this diagonal plane. Almost a diagonal plane. Yeah. That actually intersects all these points. And so points that are above this plane, again, these points represent the range, horsepower, and then price. So it's a in space. And if that sounds complicated, every one of you has got a in space right now that says where you are relative to latitude, longitude, and altitude. Honestly.
[00:11:11] Speaker B: Sorry to interrupt, but let me know if I'm thinking about this right, because I'm in my office right now that's got four walls, and there's this three dimensional space. It's the space inside the walls. And if I look over into my bottom right hand corner, the walls are different variables. And then you would be placing these dots inside the room, like almost like hanging planets.
[00:11:33] Speaker C: Yes, exactly.
[00:11:35] Speaker B: And then you're going more from one bottom right hand corner to the top left hand corner.
[00:11:40] Speaker C: Exactly.
[00:11:40] Speaker B: Different variables. And the intersection is where all those variables come together.
[00:11:46] Speaker C: Exactly. Yeah. In fact, one of the things I've used as a mnemonic to help me out when I first came up with this, and some people found this useful in some of my conferences, is I'd look for a famous two room house. And for those of your listeners that are into rock and roll, they probably think a famous two room house. I know what he's going to go to. Well, yes. Going to Tupelo, Mississippi, for the house of Elvis, where he was born. So Elvis was born in a little, what they call a shotgun shack, which is a two room house. It's rectangular, and it's kind of split down the middle into basically two cubes. And if you can imagine a rectangle, a rectangular house split into two cubes. And one cube contains the value parameters and another cube contains the demand parameters. Now you've got the basic idea of how this 4D system works. And then every point on the demand side has a paired point on the value side all the time, so they're always paired.
[00:12:45] Speaker B: Is that also when we cast a shadow onto the ground? Right, exactly. We're three dimensional and then the sun is cast in the shadow. So you've got.
[00:12:56] Speaker C: Excellent. I like that.
[00:12:57] Speaker B: That is two dimensional, right. Which is the demand. So you're two dimensional, which is your shadow, and then the value is the three dimensional person.
[00:13:06] Speaker C: Well, that's great. I'm going to have to cite you in a conference or two. I'm going to have to use that.
[00:13:11] Speaker B: This is just me trying to understand this shit, man.
[00:13:16] Speaker C: I'm still trying to explain it to myself.
I really am.
There's a lot of ways to explain this, and I've got some words that explain this, but it's the kind of thing that you want to keep refineing the explanation so that you get to the point where more and more people can grasp it.
[00:13:36] Speaker B: Why does it. Right now, I don't know if I'm just too dense, where it's like I just want to make good decisions, right? So I'm trying to figure out how to make good decisions. I think a lot of people tuning in are the same way. So when I look at for the people thinking about this, you got the two dimensional, but then there's the three dimensional where you can see spatially. Like, I want to make more of that. That's in that area. Right? And then you're just choosing, because when you think about it, the business owners listening and are going, okay, well, what features and benefits do I have? My product or service?
[00:14:08] Speaker C: Right.
[00:14:09] Speaker B: You know what the whole, what's the whole, I can't remember what it's like low cost, I don't know. There's the three things, you can't have all three. I can't remember what it was. Jim Collins talks about it. But low cost, high value and value cost, this is probably tied into what you're saying. But anyways, people are making decisions of where to deploy their time, capital, energy. Those are the three things that we have limitations of. And so they're trying to figure out where to invest in their business through acquiring companies or building out products or services companies. And if you're just looking at the two dimensional, you're just missing an entire dimension, no pun intended.
[00:14:47] Speaker C: Yes, we're entire two dimensions, in fact. So the other thing that's great about this, Ryan, is it forms a series of maps. And so on this demand side here, this white line, shows you what we call the demand frontier. And there's different kinds of that form. And so this is what's known as an upper demand frontier, which means that the market was price limited to how much it could buy. Now, if you were to plot the stocks, the S and P 500 every day, you would find that they have an upper boundary, and you'd also find that they have an outer boundary, and you'd find that they have a lower boundary and an inner boundary.
[00:15:23] Speaker B: Which we did that with those boundaries. Would those boundaries be the room that we're talking about?
[00:15:28] Speaker C: Yes, exactly. Right. Yeah. Well, they'd be the marks on the wall in the room where their limits are.
[00:15:34] Speaker B: Got it.
[00:15:35] Speaker C: And so the limits need to be drawn and understood and see how they move over time. So, for example, if you look at this red side again, you see that there's nobody playing in this particular point in time between 60 and 80k for the listeners.
[00:15:52] Speaker B: What I'm looking at is you've got the top of the quantity. You have high price. So that'd be like the Tesla, right? And then there you go, the bottom.
[00:16:00] Speaker C: What?
[00:16:00] Speaker B: You said, what is the leafs or the lower price?
[00:16:03] Speaker C: Nissan Leaf. So back in 2013, when this model was built, you had a couple of real high end Teslas, and then you had Nissan Leaf and a bunch of other cars that were $30 to $60,000, but there was nothing between 60 and $80,000.
So you can imagine, like if you go into your local best buy and just take some zeros away, imagine there's a whole bunch of $300 tvs and there's a whole bunch of $600 tvs, but your budget might be $500. And you'd say, well, where are the $500 tvs? And then the proprietor might say to you, well, we don't have any $500 tvs just like this, right?
And if you in the business of making tvs, you'd say to yourself, well, I bet you there's a market for $500 tvs because there's a market for the stuff on the top and stuff on the bottom. And so by interpolation, you can find out that there's what we call a price gap over here on the demand side. Nobody's playing in that zone. Now, if you go over here onto the value side, you see that big plane here? You see how there's a lot of people with low horsepower and low range back in the day. And there's just a couple of points, basically the Tesla points that are out there that have range and horsepower, but you see how there's nobody playing in between.
Well, Tesla solved that, too. They put a bunch of models in there. They came up with the Y and the three, and they put various combinations of horsepower into this gap, and they basically did intuitively, which somebody like me had to do by geometry, try to figure out where should I place my next product?
[00:17:37] Speaker B: And that's what I think is very fascinating, Doug, is like, I have just this absolute faith in the scrappy entrepreneurs that have started their companies, where they're intuitively figuring this out by listening to their customers and having conversations and coming back and saying, well, we didn't sell any of this. We tried this marketing camp.
I think there's a lot of sound intuition. And then you go back to the two or three dimensional people are like, well, I know they're missing some variables in.
[00:18:05] Speaker C: So the caution will be within intuition. Like, for think Elon Musk has got intuition in droves. But very famously, as far as we're concerned, there's a, like, demand frontier that's formed for business jets, and that frontier is actually moving outward. So there's more and more jets being sold year over year. And so in 2014, I plotted where the last ten years the frontier was at $120,000,000, and there were 47 vehicles that could have been sold at $120,000,000. And then five years later, it was growing. You could have sold maybe 63 units at that price. Now, while this stuff is going on in the broad market, a Texas billionaire named Robert Bass, one of the bass brothers out of Fort Worth, well, he decides he's going to build himself a supersonic business jet. And so you're talking about what Collins was talking about, what you need to have, correct? So, in our vernacular, you need to have cost, value, and demand all figured out correctly. And so the bass team came up with a cost estimate to develop this aircraft, and it had the right number of zeros. They guessed it was going to take them $4 billion. And that was about what we would have predicted. It was pretty close. So we said, hey, cost, you got a thumbs up here. And then we did some analysis about what the thing was worth. Well, it turns out, at the real high end of the business market, people are paying a whole big premium to go from mach zero nine to mach 91 to mach point 92. There's a big difference between going mach point 92 to 9.25. And so people have paid a big premium, actually, that little zero five, that's 3 mph faster. But these guys want to have bragging rights and so they're actually willing to pay more for that. But crucially, only so many people can pay for that. So if you go out and you poll your customers and you say, we're going to build this business jet, and you ask people how know if we build it, will you come? And so people did that back in the days of the Concord. They say, if we build this, will you buy it? So for those of you who may not remember, the Concord was a supersonic business airliner that the french consortium, along with the Brits decided to build back in the went mach two across the Atlantic. And the preliminary calculations for the number of sales were between 250 and 350. Well, they sold 20. Oh, no, right, they sold 20. Now, some people say, well, the thing made money. Well, it made money for the operators after the operators had it. But the people that invested in building it, they lost just about everything because they didn't recoup their prices.
Enter Robert Bass into this supersonic business aircraft market. So he comes in, he says, well, we're going to make this plane. We're going to sell it for $120,000,000. Wire analysis said it was worth 160. So you got that right. So it's even priced below that. So 120, sustainable. Said we're going to spend $4 billion to make it. That's sustainable, too. And then he said, crucially, he said, well, we're going to sell 300 of these guys in a decade and 500 overall. Now, recall, I told you what I said was when you're starting out, the limit was 47.
Five years later it was 63. So now what happens in commercial aircraft markets, like those for the Boeing products and the Airbus products, like the, all those things when they launch a new model, like there's a seven, seven, seven big nine. Now, they usually launch it with several hundred orders. And so Boeing or Airbus, depending on who's got the new product, they're basically guaranteed hitting the break even point if they can make the plane fly right.
So bass takes off instead of having several hundred orders. Recall that he wanted to have 300 to 500. He takes off with 20 orders in 2014. And so time marches on. And I'm tracking this the whole while, and it comes 2019, still got just the 20 orders. So I write a piece on LinkedIn in December 2020, said, worth every penny, not enough pennies. And in this little LinkedIn post, I said the analytics say that this plane is worth 120 or more. Even more than that, your cost is fine, but there aren't enough dollars in the world for you to make your sales target. And so I get this angry from a guy a few days after this turned out, after I said that they claimed they had an order. What it was in the aerospace world is what they call an option order. Basically, it said that if you build it, it can fly.
We'll exercise our option and buy it, but it's not a firm order to buy. So they came in with a bunch of option orders, said, well, we came in with this big option order and we're going to make it. And so they went from 20 potential orders to, I think it was maybe if you put all the dollars into this, it might have been 93, but there was some training involved and some offsets. So 93 is kind of pushing it. But recalled again, they wanted to have 300. So I said, well, that's great. I'm happy you did that. You're still not going to make your number. So fast forward six months, the whole company went bankrupt, and they blamed Covid on it. And interestingly, what happened during COVID for those of you that follow business aviation, well, business aviation rose because people didn't want to fly. The people that could afford to didn't want to fly commercial anymore because it was hard to fly commercial.
[00:23:48] Speaker B: So they went, tough pill to swallow when it actually increased your demand.
Right?
[00:23:55] Speaker C: Precisely. So the thing was that they hadn't paid attention to that frontier. Now, the same kind of thing can happen when it gets to the value analysis. You can value something too highly or value something too low. So in aerospace, again, I'll switch over to automotive here in a second. But in aerospace, in the early 2000s, there was this guy from this company called Microsoft. He was the number seven employee at Microsoft, a guy named Vern Rayburn. Vern Rayburn came down to Albuquerque, New Mexico, said, I'm going to build a small business jet and I'm going to make them like computers. Just say, I'm going to just stamp amount. So he came up with this design, which he had to do twice because he didn't power it up enough the first time. And even though his engineers told him that he was too close to the edge, he built a jet that didn't take off in the required field thing. So he had to basically redo the whole thing. He says, I'm going to make this five place or six place jet. It's going to go 410 miles an hour. It's going to have a range of 1300 miles, and I'm going to charge people $775,000 for this. Now you got to go out and study to see, well, what do you think thing ought to be worth based on what the other features, what the other jets are fetching? When you do that, which I did, when you do that, it turns out the thing was worth closer to two and a half million dollars.
Basically, there was about a 5% chance that his price was right, or there could have been lower, basically a 95% chance that he had missed it.
Now, imagine if you had sold now. So imagine the real price. I guess let's just call it 2 million, I think $2 million. Imagine if you took your $2 million house, if you had one, and you put it on the market for $775,000. Well, you'd have all these orders come in.
[00:25:46] Speaker B: To use the analogy, you have guaranteed a nosedive right into the ground. Right.
[00:25:52] Speaker C: What you wouldn't do is probably sell it at that price. But imagine all these orders came in.
So in aerospace, there's no just one of these things. There's as many as you want. Care to produce. So he gets all these orders, and he gets 2600 orders. Now, to put that in context, the biggest selling business jet over the course of a decade only sells about 500 to 600. And he gets five times this, right? Well, he starts to make it and build a jet, and it costs more than he's selling for. Not what he could sell it for, what he was selling it for. And they gradually try to raise the price, but by that time, he'd already sunk himself.
[00:26:32] Speaker B: So is Elon Musk doing this kind of analysis? You think he's doing it intuitively because of how he's launching these products in such a unique fashion like you're talking about.
[00:26:43] Speaker C: I think he's just got uncommon tuition. I mean, he kind of silently. Well, for him, he kind of silently set up this thing called Starlink several years ago, where he's shooting up 80 or 90 satellites at a time. And now if you look at the starlink map, he's covering the world with these things. He's got guys that are going with their earth's orbit. He's got other ones that are going in polar orbits. I had a friend of mine that he's got a fly in fishing lodge in Manitoba. He's right on the edge of where all of.
And he can get Internet now in an area in the world that didn't have Internet before.
So Musk just has this knack for figuring out what the open space in the market is.
[00:27:27] Speaker B: Well, I just think about the cyber trucks or all these different products that he's launching, because why I think all of this topic is so fascinating, Doug, is because one of my passions is just understanding why people make certain decisions and why they work or don't work. And I just watch over the years, I think a lot of the dumb money exacerbated, the dumb money multiplied by vanity metrics, just kind of got everything disoriented. And it's like, because at some point, the name of the game is cash flow and equity growth. That's the entire point, is we all care about cash flow and equity growth. But there's been this noise that's masked the underlying fundamentals of what you're talking about. You can't ignore the examples that you talk about selling a jet for 775 when it cost 2 million.
It just doesn't work.
[00:28:20] Speaker C: Right. Right.
Yeah. Now, I told you I had promised you an automotive example. So for your younger viewers in the audience and listeners, there's this film called Back to the Future. Maybe you heard of it.
I love back to the future, in which the lead character has a friend, an older friend named Doc Brown. And Doc Brown decides to take a car called a DeLorean and turn it into a time machine. And when Marty confronts Doc about. You built a time machine out of a Delorean? Yes. All astonished. And to which Doc Brown says, well, the way I figure it, you're going to build a time machine. Why don't you do it with some style? Well, that's actually a telling story right there, because John DeLorean banked on the fact that this thing had a lot of style. So, for those of you who don't recall what this was, it was a stainless steel sport car that had gull wings. So its primary features were these gull wings for the doors and stainless steel. And he priced this at about $25,000, roughly. In an age in which the $25,000 cars had 100 more horsepower than he was offering. He was offering about 138, about the equivalent of a 2006 Civic, which I have out in the garage here. I got one of those cut. You take a 2006 Civic and match it up to a DeLorean. They got about the same horsepower. Right? So he expected people to buy the DeLorean based on the style, and some people did, but he messed up the value of this thing. So instead of being worth $25,000, it was worth more like $15,000. And so instead of hitting the target at $25,000 for demand, he was past that frontier just like Ariane was. And so he didn't sell the required number of units and it was overpriced. I mean, a few people could afford it and they did, and he went bankrupt. So this is real world analytics. So I basically reconstructed what the car market looked like as he was entering it to be able to figure out those parameters. And it turns out that he exceeded the demand parameter. He exceeded the value parameter. In fact, he messed up on cost, too. So he messed up basically any way you could make an error economically. He did, and that sunk him.
[00:30:51] Speaker B: Pardon the brief interruption. I really hope you're enjoying the conversation with Doug. It's probably a little bit of mind bending. It's a different type of topic and a different type of thinking that most of us are used to. But I think he's really onto something because I think we all understand that our customers buy for a lot of different reasons. And at the end of the day, in order to scale our company and make enough cash flow for us, we need to be able to anticipate why they're buying and then how to scale our company. And we can't always predict the future. And I think a lot of the stuff that Doug's talking about is fascinating, but it's very difficult for us to access how to actually implement some of the things he's talking about. But I do know that if we have a roadmap from where we're at right now, our point a to point b with our financials, we have a lens to make decisions so we can start to place bets that are calculated to say we have an x amount of excess cash, that we can place a bet into a market or service or product or person that can hopefully get us to where we want to go faster if we have that financial lens and a dashboard in order to see that visibility to enhance our decision making. So there's two things that you can do if you're interested in having that kind of visibility. One is use the link in the show notes below to have a discovery call with me to talk about our coaching that is backed by the academy to level up your education if you want to learn more about how that kind of visibility works and how valuations and how the financial strategies work to make better bets. Or two, you can schedule a discovery call with myself to tee yourself up to have a complimentary financial assessment with my team at Arcona, where we're going to plug in our dashboard, analyze your numbers, and come back on a call to walk you through how your numbers look in a different way. Kind of like, let's start with three dimensional, which I can see into the future three dimensionally with my financials, because all three statements are organized together and connected to your target valuation. And I think that that helps change your mindset and help you view and run the company as a financial asset. So if you're interested in scheduling a call, use the show notes and the link below. Thanks, everybody, and I hope you enjoy the rest of the interview with Doug. Doug, I think about the business owners that we work with, because there's kind of two big buckets that I think about in business. It's the people that are going for the moonshots that are going public that are, I mean, the definition of unicorns. It's rare, and I think we're going to see a lot more of, hey, that is actually rare that someone figures this out like what Elon does, and it takes a shitload of time and money to get over. But, like, I think that people are thinking like this as owners and consumers, naturally. But then we're using kind of antiquated resources or tools to make the decisions on this. And I think about product or think about services. I think about one of the big challenges with professional services companies or even manufacturers. What features and benefits do we put into our product offering?
[00:33:47] Speaker C: Right.
[00:33:48] Speaker B: And they should be able to map out what is it that people are caring about, and is this going to work or not? Versus the sheer trial and error? Because I think about the Pareto principle. How many privately held companies get over 5 million in revenue? Like 94% of all privately held companies, it's 5.6 million are below 5 million in revenue. And I think that there's a lot of factors that go into that. They tap out from the cash flow, the ability to reinvest, but they don't know how to place their bets to get the company over, which is the cash flow. Is the oxygen to get over that perspective or over that hump?
[00:34:21] Speaker C: Sure.
[00:34:23] Speaker B: It's about how to figure out the product Pricing fit and what features and benefits to include with the constraints you have. I mean, that's the biggest challenge people have.
[00:34:33] Speaker C: Yeah, I have a book on my shelf. I think it was written by Christensen, entitled back to your point, the Innovator's dilemma.
What I would argue is there's no dilemma at all. The market will tell you this is our key phrase. The market will tell you what it wants. Doesn't have and can afford. There are spaces in the market that are bounded by other products. So if you interpolate in between that there are products, that there's a space in the market for a new product that is not identical to another product that's got a certain number of features that are guaranteed to fit based on somebody buying more of a given feature and less of it for this feature and more and less of it and this other feature. In fact, it can be up to six or seven features that you could identify. At a certain point, though, the statistics start to merge down and there's nothing else you can add, but you can take various cuts at it. So you could take a bunch of different cuts and show how the market should behave based on how it's behaved to date. And so the other thing we like to say is we like to take a look at the, when we're looking at MarketS, we like to look at the distant past, the near past and the present to predict the near Future. So again, the distant past, the near past and the present to predict the near Future. So the way I like to look at it is, I love that you have kids, Ryan, do you have a kid?
[00:36:15] Speaker B: Twin girls that are seven.
[00:36:16] Speaker C: Oh, great. Oh, cool. Well, that's like soccer ball kid age, right?
[00:36:20] Speaker B: Yeah, that's it. They're all chasing.
[00:36:23] Speaker C: Imagine if one of the girls is kicking a ball to the other girl, and so she kicks it, and a second out, you say, that's the distant past. And so you know where it is a second out and then say you go another 2 seconds and you say, well, that's the near past because it's going to come to me pretty soon. And that two and a half seconds is going past you. It's going right there, that's the Present. And so you can say, based on the distant past, 2 seconds ago and a second ago, and now, right now, I predict in a half a second it's going to be over here.
And so basically, this sphere that's moving from the distant past to the near past to the present to the future, there's actually an area in a market where the value is greater than the cost and there's sufficient demand and you've got enough room to make it. So that if you can imagine the top side of the ball, if you will, being the value of something and the bottom side of the ball being the cost of something, there is an area in between in which you can make a profit. And so this ThIng is moving OveR time. Now, these things shift in economics. They shift just like a ball, if you instantly hit it would be squished and then it might have a rebound effect. The market is going to have a certain shape to it. It's going to take in the distant past to the near past, to the present. You move forward. We call this area that's open here that we call this the financial opportunity space.
Sorry, it's a little long winded, but he had to name it. No, no, but the movement over time is pretty simple. So we call that economic trajectory analysis. Economic trajectory analysis, or ETA. So the space that was here, that was there then is here right now. And as you observe it going by, you should be over here in the nazi disappear.
[00:38:17] Speaker B: You know what I think about, too, and I think about going back to. Because I think in spatial.
Well, that's why I think about this room. If the room is like. And you have all these balls in the room based on where it is in the plot, like you're talking about, you're trying to go to the space that's open, and then the market will fill up the room eventually, right? You want the whole room.
As long as the market's healthy, it will fill the room with different companies that meet it. And going back to then your ball example. And this is. I don't know if this is totally crazy, but how I think Doug is the cash flow is the oxygen that has to take the ball from the distant past to the recent past, to the present, to the future, to the near future. And the moment you run out of freaking cash flow, it's done. The game is over.
[00:39:11] Speaker C: Right.
[00:39:12] Speaker B: When I think about it, that's a needle that has to be threaded.
What I have been fascinated with is you can't ignore that. It's a law of nature. Like the income statement, the balance sheet and the cash flow statement is what it is, and you can't avoid that. And so you have to extrapolate what you just said and then manage that cash flow, or what I've seen over the last four years or so is the abundance of private, or the abundance of private equity, venture capital and free money has ignored the fundamentals of that shit.
[00:39:51] Speaker C: Oh, yeah.
[00:39:52] Speaker B: Right. And it's just so like then, therefore, then you can't extrapolate the reality.
[00:39:58] Speaker C: No, no, yeah, that's exactly true. Now, what's interesting here, the other point that maybe I didn't emphasize enough here, Ryan, is that the reason this stuff all works is that people self aggregate their behaviors.
That boundary that I showed you there, I didn't draw that boundary in the case of electric cars, the several thousands of people that were buying electric cars self aggregated that boundary. And as more people came into the market, that boundary would change. If you pull up the stock market, you just pull up the s and P 500. After we're done here, pull up the s and P 500 and plot prices, or I should say stock volume, on the horizontal axis and then plot stock prices on the vertical axis. And what you will see is that there is what we call a huddle forming across the top of the huddle. You're going to see, you could actually draw a line across the top of the huddle, and you're going to see companies like Facebook and Microsoft. Amazon's actually beyond that.
There's an outlier. But there's going to be several companies that form the top of this huddle. There's some companies that form the outer boundary, and then there's a lower boundary and an inner boundary. What's happened here is the market is self aggregated relative to its limit. So that looks a lot like this.
[00:41:23] Speaker B: It's the room. You're stuck in the room.
[00:41:26] Speaker C: Yeah. This is the Dow 30 industrials on June 20, 2019. So what I have here on the demand side is I've got some stocks that form this black demand frontier. So back then, it included Boeing, Microsoft, Apple, and Pfizer.
And you see there's an upper boundary that's formed here and then over.
[00:41:49] Speaker B: What's fascinating while you're thinking about that is when I started getting fascinated by money was after we sold our business. And then I literally didn't even understand compound interest ten years ago. And then I started learning about all this stuff, and then I was like, the trickle down demand side or supply side economics? And I'm like, wait a second. So at the end of the day, people have to wake up, earn enough money to buy enough shit to keep us all in business?
[00:42:15] Speaker C: Yes.
[00:42:16] Speaker B: Isn't that the demand frontier? If they don't have any money, none of it works. And all you and I are doing with money is exchanging trust, which is according to the income statement of balance sheet. We're just having these ious back and forth. And so one of us has to have money to trade something with each other. So the demand frontier is just like, to, you say that to your point of the aggregation because you can't have it, you need the more people, the bigger the room gets.
[00:42:45] Speaker C: Right.
[00:42:46] Speaker B: Because they have more money.
I just don't know how we can avoid these laws of nature, which I think a lot of economies and central governments have tried to ignore. And so I'm sitting here going like, I don't know how you get around this.
[00:43:01] Speaker C: Well, that's kind of the whole point, Ryan. I mean, you're really grabbing what's going on here, frankly, much faster than I did when I came up with this idea. A little embarrassed. But the central point about.
[00:43:11] Speaker B: I've been thinking about this nonstop for, like, a decade, Doug, for whatever it's worth.
[00:43:16] Speaker C: Well, the point about that is that these behaviors are mappable and predictable, and you can map and find exactly what's going on at any point in time, so you don't have to guess. So Clayton Christensen, the professor at Harvard, once stated that he believes, I think, through some data, that 95% of all new product ideas fail. So what our big hope is here, I mean, globally, as I put out the book and form our company, but globally, what I hope happens is that people start to adopt this for themselves. And so what would happen if the failure rate went from 95% to 94%? Well, that's not too big, is it? Well, you flip that around, you say, well, what he's also saying is that 5% of new products succeed. Well, what if we went from 5% to 6%? Well, 1% of 5% is 20%. That's a 20% improvement.
And so what our hope is.
Our hope is that people will start to adopt this and start to have more frequent successes in markets so that the money that's lost in endeavors like the DeLorean, the eclipse 500, the Ariane jet, that stuff doesn't happen as frequently. That's kind of our big hope is that that doesn't happen nearly as often as it might.
[00:44:49] Speaker B: Well, right on. Because also, the ramifications of that is just not like, oh, we don't have more jets, which I get the analogy, or not the analogy, but the use case. But it's also like, yes, we can have better products and services. We can actually more effectively use the asset class of venture capital.
I don't know. I just have an issue with. I'm sorry. I don't know how you can scale some of the stuff that people have been trying to scale. It's like. It's just. It doesn't make any sense to me. And they're getting the money from pension funds for teachers that need the $2,500 a month.
Right.
The ripple effect of the inefficiency of this crap is actually a big deal when you have pension funds and all this money that's been thrown at ideas that are probably mappable to be failed right off the bat, if you thought about it this way.
[00:45:43] Speaker C: Now, very interestingly, too, some of you people might, listeners might say, well, what about governments? Well, governments must be different. And it turns out that's exactly incorrect. Governments have demand limits, too, and governments have response surfaces. So, for example, there's a principle that an economist back in the Ronald Reagan area era, still alive, a guy named Arthur Laffer, came up with what's known as the Laffer curve. And the Laffer curve basically says that if you tax people at 0%, you get zero revenue. If you tax people 100%, you get zero revenue. And somewhere in between, there's a peak. Well, in 2014, the state of Colorado and the state of Washington both decided to legalize recreational marijuana. And they want to get taxes on it they make illegal so they don't have to bust people for it. And then the other benefit would be that you're going to get taxes on it. So at the end of the year, Colorado with fewer people than Washington state, Colorado had $375,000,000 in recreational tax, recreational marijuana tax revenue, and Washington had 50.
[00:47:00] Speaker B: Whoa, I never knew that.
[00:47:01] Speaker C: So they had seven times the revenue, even though they were a smaller state. Now, why did that happen? Well, Colorado was taxing at about 28 or 30%. And Washington state, I'm not making this up, was taxing at 108%.
Now, who told them that was a good idea? I didn't.
They eventually dropped it, and the revenues, surprise, surprise, shot up. And of course, the government, being a government, nobody they named ever got fired for that. But the point is, you could have figured this out prior to that by figuring out what the tax rate is. What happens when you start to hit, to adjust taxes to a rate that's so high people can't stand it. So here I'm just outside of the city of Los Angeles, California, and Los Angeles decided to enact what they call a mansion tax. And so if you had a house that's worth $5 million now, after the certain cut off, I forgot when it is, I think it's February next year. But if you had a house that's worth $5 million or more, not only do you get to pay the regular property tax as you leave, you get to pay this additional penalty tax. Now, what do you suppose happens in a situation like that? Well, you get people like Mark Wahlberg, an LA resident. He's got a nice piece of property. He's got his own little three hole golf course on the property. People love Mark Wahlberg. Mark Wahlberg loved LA, but he didn't love it enough to stay here when you're going to tax him through the nose. So he lit out, just like a whole bunch of people lit out. Now, the state, to its detriment, could have done this demand analysis, they could have done this frontier analysis for tax revenues. And what they would find is that if the demand curve has a certain shape to it, you will actually get fewer dollars if you raise the rates than if you were to drop the rate. And so some people might take from.
[00:49:04] Speaker B: That two dimensional view to saying, where in the space you can start to see. I mean, you see what the ramifications would be.
[00:49:12] Speaker C: Exactly.
Doug, exactly.
[00:49:15] Speaker B: How did you get so passionate about this?
Because this is a topic where, when you're going after conventional thinking, what's been the response? And why have you stuck with this for so long?
[00:49:31] Speaker C: Well, my first initial foray into this, besides trying to prove the law of supply and demand, was I said, well, why do projects keep failing?
[00:49:40] Speaker B: Besides trying to buy the right washer for your wife?
[00:49:43] Speaker C: Yeah.
Why do things fail?
[00:49:46] Speaker B: Okay.
[00:49:47] Speaker C: And then I said, well, maybe I could start to plot things. And then I started plotting a lot of two dimensional stuff. And I started plotting a bunch of three dimensional stuff. And what I didn't realize until I came through with this breakthrough is that you can actually plot everything in. And this is key. I mean, if you take Renee Descartes, came up with the cartesian coordinate systems that you're taught in high school, where you've got a 2d plotting system and you've got four sectors and three of them are negative, and they came up with the 3d plotting system where you've got these octants, or I guess is what you call it, quadrants. There's not quadrants. You have eight of them. There's eight regions, and seven of them entertain negative numbers. And the breakthrough, mentally, was that, well, in business, there's no absolute negative number. If you have more cost, you've got revenue. You're comparing one non negative number to another non negative number. And so the insight was to jam everything together and have everything positive going from zero.
And so what drove me to that was, why do things fail? Why does the economy have to be sputtering when it could be booming at all times? Why do people overvalue stocks? We get these big run ups in the stock market, and we get these crashes. Why did the 2008 stock market crash happen? Well, I mean, it was all around housing. Well, why did that happen? Well, if you read the big Short see the movie? I did both.
You'll find that they started to package these mortgages together.
[00:51:22] Speaker B: Shit wrapped in shit. Sold to people.
[00:51:24] Speaker C: Yes, exactly.
You have two or three problems there. One is that people who were being granted loans should never have had them. And two, they weren't being fully told everything that was going to happen there. And then three, they were packaging these to. Back to your point, they're packaging these crappy products together and rating them more highly than they should have been. Well, had a fair broker come in and rated them properly, and the loans that were made that shouldn't have been made, this run up, artificial run up, wouldn't have happened. And so one of the things I think will happen going forward is that the stock market run ups and collapses.
[00:52:06] Speaker B: The ten year cycles that you're talking about.
[00:52:08] Speaker C: Yeah, the ten year cycles. I think they're going to do two things. One is the amplitudes are going to dampen over time. I predict ten to 20 to 30 years out, the amplitude will go down by half, a third to half, and the frequency will go down.
[00:52:23] Speaker B: This is probably above and beyond for the listeners here, but I'm big into macroeconomics and the monetary policy and fiat currency and the quantitative easing and printing of money kind of changes the paradigm shift.
We'll leave that for a different conversation.
[00:52:38] Speaker C: I know a little bit about that. I just griped. For those of you haven't followed it much as Ryan has. When we hit this 2020 Covid incident, the fed kind of silently, and they actually took it off their website. So if you look at the St. Louis Fed, which is known as, for whatever reason, as the Fred, well, they're controllers of what's known as the m one money supply. And what they did is that one money supply been coasting along, growing by a few percentage points every year until the beginning of 2020. And then in two quarters, Ryan, you can tell them probably what happened. Do you remember what happened?
[00:53:14] Speaker B: It was like, what is it, $5 trillion over the last.
[00:53:17] Speaker C: Yeah, it went up by 400% in two quarters.
[00:53:20] Speaker B: I know.
It changes the dynamic. Yeah, we can park that over there because I love this stuff so much. But as far as I want to go back to when you're talking about the business cycle. So if we were to assume that we were in the paradigm that logic resides in, which, again, that's.
[00:53:41] Speaker C: Maybe that's a bit of reach sometimes, but.
[00:53:43] Speaker B: Yeah, I know. And more so every single day, Doug. But what I think is fascinating is pulling the thread on these business cycles. It's these booms and busts because you have credit availability and money available. And then people get extended. And then I think part of the problem is they get overconfident and they're not making good bets is really what ends up happening. And if cash flow is the name of the game for oxygen to keep things going, what I'm hearing is that there's a higher probability of having that prediction of where the ball is going to go while cash flowing and not just guessing, therefore decreasing the failure rate and increasing the success rate, increasing the cash flow and making that booms and bust less volatile, maybe less dramatic. And I think it'd be fascinating, as we get into the world of AI, of how AI can help us make some of these predictions and some of these multidimensional decisions.
[00:54:44] Speaker C: The other thing, when we talk about the ball analogy, what's kind of cool about that is that you're seeing the existing momentum. So from the distant past, the near past to the present, you're supposing that momentum is going to carry forward. It'll probably carry forward pretty reasonably well for a short period of time. But to use the physical analogy again, well, what happens if there's a gust of wind or a puddle or a puddle or another player?
What happens then? I haven't studied that near the depths that I hope to, and I hope some people will take up the mantle of this and start to run with it to model that so that we have fewer massive failures of the economy as we've had in the past, because most of these failures were preventable. I mean, 911, you can't stop a 911 from affecting the financial markets or world War II or World War I, but you can prevent somebody from overreacting the next time there's a Covid outbreak or something like that, don't take the money supply up by 400%, maybe take it up by 50%.
Don't leave people on what amounts to extended unemployment for two and three years when you could basically get them back into the workforce after a year, year and a half, cut that outflow down and get people working more quickly. And there just wasn't any thought given to that.
We have a problem. We want to fix it. Let's fix it.
[00:56:15] Speaker B: It's data. It's data. The wrong answer for the listeners tuning in. I know. I want to give them a place where they can find the book, your website and all that stuff. But before that, Doug, if you're running a private health business and you're trying to think about value creation, and also they're trying to predict where the ball is going. They've got their ball is the company. And what are some ways that are actionable that people can think about things differently or start to apply some of these thoughts while they're running a company.
[00:56:43] Speaker C: Private health.
[00:56:43] Speaker B: You said privately held companies, business owners, ceos that are listening and going, okay, I'm trying to create value, and I'm grasping some of these concepts, but how should they start thinking or acting differently based on what we're talking about?
[00:56:59] Speaker C: Well, they should think of it this way. Is, know if you're standing as I am here in just a little bit inland in California, and you want to get to a port, you could kind of keep walking towards the ocean. And when you see seagulls, you say, I'm getting close to the ocean. I'm probably getting close to the ports. But ports are certain little enclaves of dirt that are formed in the landscape. And just getting to the coastline isn't enough. You want to get to the port. Well, imagine if you had this thing called a map.
[00:57:33] Speaker B: You speak my language.
[00:57:34] Speaker C: Some of you have heard of these things called maps.
[00:57:36] Speaker B: I actually just interviewed the founder of MapQuest.
[00:57:40] Speaker C: Right.
When you take all this stuff down, I explained the book. If you wanted to take the book down to two words, those two words are dot plots, where you're sitting right now, I could plot it as a dot on a map. Same thing with me. And basically, where all these products are sitting out in a market can also be plotted the same way. And people aggregate these dots, these purchases for products, in ways in which you can characterize it and then use it to your own benefit. So rather than going storming off and building a supersonic business jet that'll fail, or a microjet that'll fail, or a new sports car that will fail, why don't you go out and those two aircraft stories I told you, those are billion dollar plus losses.
DeLorean lost at least 100 million, maybe a quarter billion in his venture. This only takes once you get into it. I wouldn't say it's trivial. I mean, there's some learning involved here, but for several tens of thousands to low, hundreds of thousands, you can actually understand your market in a way in which your competitors don't. And if you're selling something that's got any kind of quantities or any kind of price points to it that merit that you should go off and do that. Now, having said that, this works for the corner restaurant, too.
During COVID we went down to a corner restaurant, and they only could see people outside here in California. And so it was February, March, April in 2020, and it was cool outside, but we were sitting outside under some heaters on this small patio, and this place had a big inside seating area. And so all the people that used to come sit inside, well, now they're stringing out the door because they have the small patio area. And I told the manager of this place, I said, kayla, you want to make some more money? She says, well, of course I do. I said, well, here's what you need to do. Well, what they had was they had three tables of six in this little area and three tables of four and only had a couple tables of two. And I had noticed from when I came in, and I eventually found this to be true nationwide, that the average party size in the United States is one, and then the next most populous one is two. And there are over twice as many parties of two as there are parties of four. So I said, what you need to do, because you have a lot of parties of one or two, is to get rid of the party, the tables of six, get rid of two of them, get rid of one of the two of the parties, the tables of four, and put in tables of two. Well, they did that, and the revenue shot up 25% in two months.
[01:00:30] Speaker B: Holy shit.
I think also, Doug, the people that are listening in that are looking to acquire a company, what product and service and what marketplace. I mean, if you're going to go make a big acquisition, a big purchase, making sure that they do this kind of analysis so that it's the right product pricing, value fit.
[01:00:52] Speaker C: Oh, yeah, same thing. It's easier to do it, actually, for an existing company. If you're like, if you're picking an automotive company, you wanted to, for example, absorb, say you're a big company, you wanted to absorb Volkswagen, for example, you could actually go out and do all the analytics of all the auto companies and figure out what Volkswagen is worth based on all the financial attributes that that company has and all the other ones that have.
[01:01:19] Speaker B: Yeah.
[01:01:20] Speaker C: And all that data in that arena, that data is easily retrievable from existing 401 ks and things like that, whatever their statements are.
[01:01:31] Speaker B: Well, I just think about how much work people go through in due diligence when they're going to buy a company. And this is probably worth exploring.
Where can people find you, your book, the material?
[01:01:44] Speaker C: Okay. Yeah. Well, thanks for, appreciate that. I have my own personal website. It's Doug Howarth. That's doughowarth.com. I also am heading up my own company, Hypernomics so you can find
[email protected] hypernomics.com and my book is entitled Hypernomics using hidden dimensions to solve unseen problems. It's coming out through Wiley on the 29 January. You can find it on Wiley's site, or you can also find it on Amazon or Barnes and Noble. So if you just type in Doug Howarth or hypernomics in either of those sites, the book will come up and it's available for presale now.
[01:02:29] Speaker B: Awesome. And I believe by the time this goes out, it'll be right around that time. So thank you so much for coming on the show. This was an absolute blast.
[01:02:36] Speaker C: Well, I had a lot of fun too, Ryan, and you've got some really nice guests on your show and I feel honored and privileged to be part of it. So thank you so much for having me. I have fun with it today. Thank you.
[01:02:49] Speaker B: Thanks for listening into that conversation. I hope you found the time valuable. If you enjoyed the conversation, please leave the show. A review on your podcast player we're constantly trying to up those reviews. It helps a lot with the visibility and if you didn't catch the commercial in the middle of that episode, there's two different ways that we can help you. One is if you want that kind of clarity. We have a coaching program that is based on the five intention growth principles and uses the material to help you get that kind of clarity on your target equity valuation and income that you need on the way towards that valuation, what you want from the business long term and why, and then how to get aligned with your leadership and your partners. So that way everybody's working in the right direction to get you what you want. And the second way is if you want to jump right into the data and you want to actually build out your financial roadmap with your three statements and tie your financials and your operational data to that target equity valuation. My team offers a complimentary financial assessment. Either way, all you have to do is go use the link in the show notes below, schedule a discovery call with me. We can walk through your situation, figure out if there's a fit or not, and if not, I can point you in the right direction. Thanks everybody for tuning in and I hope you enjoyed this episode and I will see you next weekend.
