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The Pareto Principle for Careers

1 October 2008 10,282 views 12 Comments

My good friend Dan and I were talking shop about our recent business challenges. He works for Omniture (OMTR), the leading Web analytics software company, and is one of the top sales guys there. As an aside, we were both at the University Venture Fund when I sourced our Omniture deal and we had the privilege to co-invest with Hummer Winblad Venture Partners and Scale Venture Partners in one of Utah’s shining technology successes. Every quarter, my friend handily beats his quotas and makes good money doing so. Life ought to be pretty sweet but he’s getting bored.

So I asked Dan if he thought the Pareto Principle, also known as the 80-20 Rule, might apply to his personal situation. The Pareto Principle states that for many events or outcomes, 80% of the effects come from 20% of the causes. Economist Vilfredo Pareto observed many years ago that 80% of the national income in Italy went to 20% of the population. I shared with Dan my belief that the Pareto Principle might apply not only to theories concerning the distribution of wealth in nations but also to jobs, learning curves, and career growth.

Pareto Principle

I’ve long believed that, especially in the case of naturally motivated and high-performance individuals, it only takes 20% of X amount of time to learn 80% of the job. The remaining 20% of job-specific development requires the other 80% of time investment to learn what I like to think of as the nuances of the job.

Some jobs allow fast individuals to excel almost immediately out of the gate and other jobs take a long time to master. Salespeople can fairly quickly learn the key attributes of the products they are selling, the markets that most need those products, and the selling techniques that work best. The rest of the time is spent prospecting, qualifying, and closing. Medical professionals spend years in school and residency to perfect their knowledge and skill because they cannot afford to make mistakes; patients’ lives depend on their near-flawless execution.

Sprinters Racing

Mark Bonham at Ray Quinney & Nebeker, one of the top venture and securities lawyers in the country, once shared with me that he needed to “bat 1.000″ in his job everyday. Every legal document that he crafts must be perfect because the negative ramifications of a poorly written contract are extreme. Attorneys spend years in law school and as junior associates to become adept in the law. That’s why any entrepreneur who thinks he can just take a legal document template off the Internet and write his own contracts is playing with fire.

Since we’re on the topic of batting averages, baseball has long been considered the hardest sport. A professional baseball player can fail to get a base hit 70% of the time and still be considered for the Baseball Hall of Fame. If a quarterback failed to complete 70% of his pass attempts, he would soon find himself out of a job.

By that logic, venture capitalists have one of the toughest jobs of all. The success ratios of typical VCs are abysmal when compared to baseball hitters. The average venture firm’s portfolio will witness failure rates between 70% and 90% in its investments in startups. Only about 10% of investments will succeed meaningfully. That dynamic brings decision-making pressure most people are not wired to handle.

Cartoon - Venture Capital and Square Wheel

The venture capital model is one example of a real world phenomenon where the 80-20 Rule cannot be taken literally. The 10% of successful ventures that provide an exit account for probably 90% of the profits. In fact, batting average isn’t nearly as important as slugging average. The 10% of successful ventures need to be homeruns and not just singles and doubles in order to compensate for the frequent failures in the portfolio.

Peer Venture PartnersMy friends Jared Hutchings and Mark Campbell at Peer Venture Partners understand the Pareto Principle well. Since I first worked with them years ago at the University Venture Fund, I’ve observed that they excel at the 20% of the job that bring about 80% of the rewards. They are maestros at networking for good deal flow, judging the character and appropriateness of management teams, and connecting the dots that help their portfolio companies find the right partners, investors, suppliers, board members, advisers, customers, and business models.

Since personalities and passionate entrepreneurs are involved, venture investment is more art than science. Jared and Mark don’t get bogged down by the mental masturbation that is building complex and inevitably inaccurate financial projections and other time drains that some contemporary venture analysts are apt to giddily do. An old-school focus on the basics also allows them to make quicker, and no less accurate, decisions. This speed is something entrepreneurs appreciate, whether Peer’s answer is yes or no.

Charlie MungerI subscribe to Charlie Munger’s Latticework Model of looking at the world. Charlie Munger is Vice-Chairman of Berkshire Hathaway (BRK-A) and Warren Buffett’s long time business partner. The Latticework Model is essentially about approaching life, investing, and problem-solving by weaving multidisciplinary models of knowledge. I don’t want to be an expert in any one specialty or field. If I aspire to be an expert at anything, it would be to master connecting the dots in many different fields of knowledge to bring about new innovations and solutions. That’s why the Pareto Principle works well for me as a way to approach the world and allocate my time. I can take intense deep dives in relatively short bursts of time to learn about the bulk of different subjects and challenges. Perhaps we’ll see a rise of the generalists – people who can straddle the right brain and the left brain with aplomb, people who are “whole-brainers.”

Back to my friend Dan who has hit the diminishing returns part of the Pareto Principle. I told him that if the money is not good enough to compensate for his boredom, he should find another challenge. Life is too short.

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12 Comments »

  • Tech Tips said:

    Well said and a good read, especially on Munger’s model.

  • JP Adams said:

    Allan, thanks for your comment on my blog. Interesting post on the 80%/20% rule. Practicing Munger’s Latticework Model, while a long road, is fulfilling and good one. A nice bet on how to get yourself into the top 20% of VC investors.

    You probably read Andreessen’s post like everyone else…but if you haven’t picked up a copy of “Poor Charlie’s Almanack” (http://tinyurl.com/4jp5sk) I highly recommend it. Best $100 I ever spent (http://tinyurl.com/4vovp6).

  • cyza said:

    It has been a long time since I heard about Pareto principal. If only we can do that 20% and get 80% of the positive financial impact, that will be superbly fantastic.

    What about pareto chart?

  • Pat said:

    I would go farther. Every single day look for new challenges. Every single day look for hills (+ an occasional mountain).

    Why? To keep the interest and excitement up. To keep at the top of the game. To find a new game.

    A question to ask Dan — “For the last three years, do you have three years of experiences or a year of experience three times?”.

    Notice I say “experiences” not “experience” life is more than jobs and paychecks.

    We should look at our off-hour “careers” as hard as we look at our job careers.

  • John said:

    Allan, thanks for stopping by!

    Great stuff here… you’ve obviously had some great experiences.

    The pareto principle is something that I’ve recently been thinking about more and more in regards to my work. great thoughts here.

  • Sani Moyo said:

    A great read, first time I am hearing about the Pareto Principle, every time I pass through your blog it reignites that feeling that I should have studied economics.

  • Jeff Widman said:

    Worthwhile read/links… balancing generalist/specialist is particularly hard when networking, as everyone likes to stick people into buckets for who they should introduce to each other.

  • Jon Kepler said:

    I’ve also seen the 80/20 principle applied to sales. 20% of your customers sometimes provide 80% of your profits. If that’s the case, it’s worth your time to consider working with that 20% on a more intimate basis to see how you can create even better solutions for them since they’re the majority of your business.

  • Thread Pool said:

    Thanks for providing a link to this interesting article on my blog.
    Very relevant and prescient career advice.
    I especially liked your quote:

    If I aspire to be an expert at anything, it would be to master connecting the dots in many different fields of knowledge to bring about new innovations and solutions.”

    This is particularly relevant in my experience working in the tech field in Silicon Valley. There are essentially two career tracks for technical people in Silicon Valley: technical and management.

    In the technical track you can rise to being an industry wide expert on a specific field, the end goal being a chief architect or CTO.

    In the management track, which embodies the ideals of the quote, you can rise to being VP of Engineering.

  • Joseph Joel Sherman said:

    I like your point about the slugging average: “In fact, batting average isn’t nearly as important as slugging average. The 10% of successful ventures need to be homeruns and not just singles and doubles in order to compensate for the frequent failures in the portfolio.” The VC case also shows that we do not always know what will work until the end – there will always be surprises.

  • How to Survive a Social Media Guru Explosion said:

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  • How to Survive a Social Media Guru Explosion | Dodging Spiderwebs said:

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