What I learned in capital allocation
And Tomorrowland Winter's festival, Jason Fried, Cillian Murphy, and being present
Last week I spent almost all of my time doing these two things in conjunction
Tomorrowland Winter 2024 is Novelty Fun
For four days Tuesday through Friday, you could ski the 5000 square miles of Alpe d'Huez from 9am to 5pm, party with DJs in gorgeous mountain views in the late afternoon on top of various chairlifts, and eat and party again in the festival area in town for the evening shows.
Realistically my friends and I would wake up late morning, ski for 1 to 2 hours, and attend one show before going home and taking a fat nap and then going out at 10pm later.
Snow is icy AF in the mornings. By the afternoon some runs were slushier. But I could not fathom how some people could do it all, especially since the average crowd looked older than a typical festival.
Needless to say - I’m almost positive Coachella Winter at Mammoth will exist in the next 5 years given Tomorrowland has proven this concept works and likely makes boatloads of money.
I desperately need a break from travel, partying, and skiing. So I’ve given myself a new directive for April.
That’s right - maybe you’ve heard of Month to Mastery. Well I’m introducing Month to Monk. Take one month of the year and act like a monk in the best way possible. This means:
Meditate at least 10 minutes a day in the morning.
No alcohol, weed, or any kind of party drugs
Drinking solely water and tea → no coffee (yikes)
Plan to intermittent fast - but it's not strict because life.
Adittionally try to avoid processed foods → which means cooking at home more.
No social media → just delete all of the apps.
Motivation will get me past the first week. We’ll see what happens after that! Lmk if you’d like to join and keep everyone accountable.
Growth vs Maintenance Cashflows
One thing I read last year that made me completely re-think my business was this piece on maintainable cashflows. The whole article is worth a great read and a primer on finance 101 if you didn’t go to business school like me.
But what it opened my eyes to was the applications of capital allocation. I’ve read books from Warren Buffett and The Outsiders two years ago, but never thought about how it would apply to my business.
Looking back - I was probably running Interview Query financially blind for a few years. When you’re just starting out and trying to find areas of product market fit (PMF) - it’s like you’re navigating the room in the dark trying to find the bathroom. But once your business has some notion of PMF then suddenly it makes sense to think about capital allocation decisions.
For example, here’s one section I recently tried applying on allocating capital expenditures:
Capex should get classified into one of two buckets:
Maintenance Capex = recurring capital expenditures required to maintain the current level of operating, and market position. Included in MFCF
Growth Capex = capital expenditure to increase its operating cashflow, or grow the business. Excluded from MFCF…..
Let’s use a coffee shop example again.
We have 10,000 coffee shops, each with 2 machines. 20,000 machines in total (quick math 😎).
Those coffee machines get replaced on a 5 cycle. I.e. we need to replace 4,000 machines per year.
We are opening 1,000 new shops per year. We need to buy 2,000 machines to fit new stores per year.
We are buying 6,000 coffee machines per year, 4,000 replacements, and 2,000 for new stores.
The 4,000 replacements are a Maintenance capex. That spend is needed to maintain the existing asset base. And current operating cashflow.
The 2,000 machines needed for new stores, are a Growth Capex. Expanding the asset base, and future cash generating capacity of the business.
Any spend to repair or maintain existing equipment, is NOT capex at all. That’s an expense in the income statement.
At Interview Query we’ve always had budgets allocated for different departments. Makes sense for bare minimum work.
But what I tried last year was actually dividing capital into growth vs maintenance expenditures allocated within each department.
Product / Engineering
Maintenance: What percent of prod / engineering time is spent on fixing bugs, badly written questions, technical debt, and anything to make sure the current state of the website is functioning?
Growth: How much does it cost to build new features for revenue opportunities and attempt new A/B tests to improve conversion metrics?
SEO and Content
Maintenance: While SEO is termed organic traffic that lasts forever, competitors try all the time to steal keywords. So we have to set aside budget to make sure to shore up our existing blog posts in keyword defense.
Growth: Similarly then - how do we make sure that we’re investing in new content that is actually growing the traffic pie and market cap for interview prep?
Youtube
Maintenance: There is some cadence in which Youtube’s algorithm needs you to generate content to prove that you desire a certain amount of viewers. Once you can grow your channel there - it’s all about maintaining that coverage level.
Growth: What viral content can you generate that will actually push your Youtube channel into another daily view count level?
With that in mind - I then estimated the cost of maintaining the existing “state of the world” of the business that would enable it to make the same amount of money it currently makes per year. This gave me the total amount that I was expecting in maintenance expenses.
Now I can understand how much I’m investing back into the business for a dollar return back. And it’s a lot more money than I thought!
This framework can make your head hurt though and it’s not all financially straightforward. For example, let’s say you want to cut the growth budget next year on engineering. You estimate you employ an engineer full time and they spend 25% of their time fixing bugs. You can’t really tell them you want to cut their pay in half or to a quarter if you want to test dropping quarterly product growth without risk of them leaving. Turnover costs are high and so most capital allocation bets must be done with some nuance across how a business works.
This also means that you now have a timeframe where you should be able to evaluate performance based on capital allocations and adjust accordingly. For example, is this incremental $1K we’re investing in Youtube actually giving us more views / results?
The good thing about learning this was that it was a forcing function to finally be at par with analytics. If I’m understanding how much money I’m investing in every year, I now really do care about measuring ROI.
So yes, I am happy to say that as a former data scientist, after 5 years I’m finally sitting down and figuring out how to use Google Analytics 4.
Lastly, just one more tangential rant. The hardest part of this business is doing analytics with external factors and dependency on the overarching job market of tech. For something that is more volatile - it’s hard to see whether your efforts are working or external factors are at play. For example, let’s say we run an A/B test on the sign up funnel to improve customer conversions. We see that the new variant wins and is statistically significant, but during that time overall conversion rates for both variants went down at a higher significance from the month prior. What actually happened? Did we break something in the A/B test? Did the job market crater?
Things to Share
In line with the capital allocation piece above - I listened to the My First Million podcast with Jason Friedman about his methodology for running his business. He has a different way of viewing capital allocation: by probably not thinking about it too much. He instead employs smart people to try new bets all the time. His main priority is that his existing business makes tons of money in profit so he doesn’t worry about employing too many of them or having to run layoffs.
You can read This Moment is Your Life by Nat Eliason which will take 10 minutes or Four Thousand Weeks by Oliver Burkeman which will take 4 hours to get the same reminder that being present is mostly what matters. It was helpful to me sometimes when at Tomorrowland EDM shows last week. Your mind can wander when you’re just staring at a stage, your feet hurt, you’re tired of sleeping in a shitty bed, etc… but it’s good to remember that this might be the last show you might ever see in your life with the same group of friends.
On a similar thread, this profile on Cillian Murphy (who recently won Best Actor for Oppenheimer) highlights a life that is also very focused on the present. I’m always interested in those actors that don’t live like stereotypical Hollywood. He takes time to vacation, not act all the time, live life, and then do a movie, hates selfies and doing press tours because he’d rather be home. A quote from the article…
Here, then, was another thing Murphy had seemingly figured out—consciously or not. Almost all religions, coaches, gurus, and enlightened friends tend to offer the same advice: Don’t lose yourself in the past, don’t fixate on the future, but rather focus six inches in front of your nose, and on the Now that you can control. “I really am kind of, like, pathologically unsentimental about things,” he said. “I just move forward very quickly.” The past wasn’t a problem because he couldn’t remember it—or wouldn’t romanticize it. The future wasn’t a concern because he didn’t like to plan too far out. And so: the one film on the horizon; the one song on the radio or the one painting on the wall. He was, in this way, an authentic presentist. Or, less abstractly, just a good listener, a good see-er, a good scene partner, a good person to have dinner with.