What makes for increased efficiency?

"Increased efficiency", is a glib term. What does it mean in a new and as yet relatively unexplored environment? How do you recognise it? How do you measure it?

In the context of any business situation, efficiency is easily recognised and measured. It is the amount of wealth that is being created or lost. In competitive environments the biggest winners are usually those who can achieve goals more efficiently.

This begs the question: "How can you tell whether or not a business venture is going to be profitable and create wealth?" Reading through the obituaries of the many e-businesses that failed during the dotcom bubble, the conclusion seems to be that predicting future profitability is impossible. Even with the survivors, the difference between expectations and actual results, make a poor case for the ability to predict future profitability in an e-business environment.

It seems reasonable then, if most companies can't predict the likelihood or extent of e-business profitability, to assume that profitability is unpredictable. This gives rise to a second rule:

2) The business should not rely upon an ability to determine future profitability.

At first, this seems ridiculous. Surely no business venture should be started without having some estimate as to future profitability. However, this is far less ridiculous than estimating future profitability when there is clear evidence that it is impossible to do so.

The resolution of this paradoxical situation is to think in terms of strategies rather than plans. If you start with a lot of capital you are compelled to estimate future profitability to make sure you don't lose the money. This automatically puts you on the slippery slope of trying to use human reasoning, planning and forecasting the future, rather than taking advantage of a system's natural tendency to move towards efficiency by itself.

Conceptually, the idea of working without calculating future probability is difficult to appreciate. The trick is to think in terms of starting with a very small amount of money, where a mistake can see you knocked out of the game. This forces you to progress only in directions where you can reasonably expect to earn enough money to continue. In other words, all activity is confined to small steps that bring immediate rewards.

Using this simple strategy, progress is dictated by inputs of revenue rather than an amount of capital. Although this may seem nonsense to those who have been brain-washed by the stories of business angels and Venture Capital largesse, the undeniable fact is that a business that is restrained by income cannot do anything other than progress in the direction of profitability.

This provides a third rule:

3) The business must be capable of starting with a small amount of capital and be able to generate enough of an immediate revenue stream to make further progress.