Repeatable Leverage
/Leverage Technology to Empower Humanity.
Not the other way around.
Introduction
“There is a severe lack of institutional-grade investment sophistication being deployed into the crypto asset space and that looked a lot like opportunity to us.”
As the catalyst in deciding to create Ikigai, those words are core to our narrative and have been repeated thousands of times throughout the past year. Let’s take a more in-depth, under-the-hood look at what is required from operations and business perspectives to build an institutional-grade asset management firm, specifically in the volatile, emerging Byzantine Fault Tolerant Distributed Ledger Technologies (BFT DLT) and crypto asset class.
Ikigai is a crypto asset management firm investing at the intersection of what we are good at, what we like to do, and what the world needs for the purpose of ethically delivering superior risk-adjusted returns.
We have the privilege of deploying capital on behalf of our investors into a new technology and asset class that we believe will fundamentally change the world. Through this, we have the opportunity to serve as shepherds, leaders, and teachers guiding ethical build out and adoption for the betterment of humanity.
Much of our firm's brand and cultural inspiration are rooted in Japanese concepts, so naming the manifestation of that opportunity Kana & Katana -- the Japanese writing system and sword -- seemed apt.
We firmly believe that we are early in the development and adoption of this technology and asset class. The internet brought forth nearly frictionless data mobility, creating global interconnectedness and trillions of dollars in value. Byzantine Fault Tolerant Distributed Ledger Technologies (BFT DLT) bring forth diverse opportunities for value creation, value mobility, and value ownership. This fundamentally alters current dynamics, re-architects a foundational layer of the internet, and creates abundant opportunities for self-sovereignty across identity, value, and data.
BFT DLT and crypto assets present a transformational opportunity to leverage technology to empower humanity -- not the other way around. The potential for positive societal change is unrivaled.
Repeatable
Asset managers are fiduciaries of their investors’ capital – they are obligated to act on behalf of and in the best interest of their clients. Subsequently, the best managers ethically create attractive risk-adjusted returns on a repeatable basis. Placing equal importance on minimizing errors and mistakes as maximizing profitable investment decisions has long been a prudent strategy. The greatest returns in wealth are often borne from compounding. Compound the largest base possible over the longest time period possible. The same is true in knowledge, relationships, culture, brand, scalable products... Build a foundation through repeated processes utilizing varying tools and frameworks. Consistently invest in that foundation, making it stronger. Leverage that foundation to increase earnings, make wiser decisions, better understand others, be more understood, and strengthen impact on your team and customers. Repeat.
At a glance this seems simple, almost elementary, in fact. However, if you’ve ever tried to start or stop a habit, you know firsthand how difficult process is for humans.
Humans are naturally, innately, astonishingly poor at process. Left to our own devices, we naturally regress toward entropy and the equivalent of neurological low-hanging fruit. This is why so many of us struggle with unhealthy addictions. Food. Gambling. Smoking. Social media. Alcohol. Video games. Sex. Consumerism. Drugs.
Interestingly, once a behavior is repeatedly accomplished enough times in a relatively consistent fashion and environment, the basal ganglia (the habit center of the human brain) picks up the routine and makes it seemingly automatic. This is why you can wake up in the morning, get dressed, make coffee, tie your shoes, drive to work, login to your computer, and pull up your email all while seemingly devoting your mental energy elsewhere. You may be familiar with pulling out your phone to Google something yet instinctively navigating to Facebook, Twitter, or text messages for a moment only to forget why you opened your phone in the first place. Analogous to sorting algorithms, our brain divides complex activities into smaller chunks to process the most repeated chunks in increasingly more automated, efficient fashion. More repetition means less active thought and decision-making invested in that activity. It’s energy conservation for one of our most energy-hungry organs. It becomes a path of less resistance.
Our propensity for paths of least resistance (neurological, social, ethical, and more) is amplified in groups. Culture is foundational in determining if these weaknesses ultimately manifest themselves in a profoundly negative way. Chernobyl, one of humanity’s worst nuclear accidents, was a result of poor design, violation of operating procedures, and the absence of a safety culture. 2008 Financial Crisis. Space Shuttle Challenger. Y2K. Deepwater Horizon. Enron. Facebook and Cambridge Analytica. #MeToo. Equifax Data Breach. Cultures of safety, compliance, respect, security, integrity, quality, process, and more were all woefully absent in each of these.
We are social, tribal animals. We want to belong and feel needed and appreciated. A significant part of that is adapting, fitting in, and following the behaviors, the social norms, the orders, the culture of the tribe. Stanley Milgram’s famous obedience experiment shed light on the plausibility that everyday individuals in a small, controlled environment can perform dreadful acts. Extrapolate that weakness to a group, to a global company, and we can start to understand that cultures, not checklists, have immense power. The checklists, the operating procedures at Chernobyl were established. A culture of safety, a group social norm to follow the checklists, was not.
Across all of this, each small detail, interaction, expense, decision, email, and process rolls up into individual routines. A system of routines represents behavior. Numerous individual behaviors interacting and impacting one another establishes culture. A team of five has 10 unique relationships. A team of 25 has 300. 250 has 31,125. An organization should be purposeful in leveraging our nature as individuals and as groups. More activities adopted into the habit centers of our brain directly translates to increased brain power to dedicate to complex, novel tasks and decisions. Cornerstone principles adopted as the tribe’s social norms lead and incent individuals to consistently make aligned decisions. Focus on the details and build a strong foundation from which each individual through the organization as a whole may consistently reference, build, and grow. That foundation and cornerstone principles will serve as the basis for all compounding returns, positive or negative.
Leverage
“Give me a lever long enough, and a place to stand, and I will move the earth.”
Leverage amplifies returns. In business, leverage exists in diverse forms of capital: financial, human, culture, brand, and scalable products.
Financial Capital
Financial capital is money to fund business operations, R&D, and growth. Money up and down the capital structure, from debt through equity, has diverse prerequisites to be secured. Simply, to be secured, debt capital requires increased security (prior years’ returns, contractual recurring revenues, assets to collateralize) and equity capital requires increased future growth potential (founder with a previous successful venture, large addressable market, early proof of product-market fit). Financial capital is required to keep a business alive; however, an overabundance can prove fatal to mission success as well.
Human Capital
FIGURE 1: IS IT WORTH THE TIME. SOURCE: XKCD
Human capital leverage is labor. Historically, many wars have been fought over labor leverage. Presently, in the U.S. and other first-world countries, this is employees working for you. The Law of Comparative Advantage should govern labor leverage. Increasingly procedural business functions should be accomplished by the most cost effective, qualified labor (or improved/automated processes; see Figure 1). Conversely, the most value accretive business functions requiring the greatest specific knowledge (knowledge that is not easily trained or taught) should be completed by those uniquely suited to do so and subsequently incur comparatively high financial capital costs.
Keep in mind this is not on an absolute basis, but rather comparative. A CTO may be more effective on an absolute basis in coding relative to a development team member; however, that CTO should have higher value activities that only they are uniquely suited to accomplish and should be investing a maximum amount of their effort in doing so. In this way, individuals uniquely suited to drive value accretion in excess of their absolute contributions should be lifted up and empowered by their teams. Apply this equation throughout an organization to every individual to maximize effort focused on their specific knowledge.
Culture
Culture is the engine to any organization and a stronger culture directly translates to increased horsepower to drive progress. Culture is a team working with you. Managing people is not leadership or culture. Management is inherently transactional, reactionary, and linear. Leadership earns respect, inspires ownership, and drives impact. Targeting team member alignment with a common mission and deliberate principles in how to work together in accomplishing that mission are imperative. Results from the subsequent sense of individual responsibility, proactivity, and ownership are transformational. Every shift, regardless of how minute, in the transactional/transformational balance in favor of the latter, is exponentially powerful. At the individual level, you see increased stamina, effort, passion, and care for their role and contributions to the team. Multiplied across an entire team and organization, the increase in organizational horsepower (or decrease, in the case of toxic, poor leadership) through a stronger culture is clearly compounding. If you haven’t read it already, here is our culture manifesto ikigai & Ikigai: A Guide to a Concept and Our Culture.
Brand
Brand leverage is customer stickiness in an increasingly undifferentiated market. Proprietary is a concept trending toward diminishing significance. Well-honed go-to-market strategies coupled with disciplined execution trumps all in an open-source ecosystem where technology and products are consistently iterated and improved upon at an accelerating pace. Owning this subsequently necessitates a focus on developing and growing your firm’s downstream assets and capabilities. The importance of building and maintaining a trustworthy, credible brand that truthfully exists to serve and delight their customers cannot be overstated.
Brand equity and customer loyalty is founded on trust – not transactions. Brand is becoming the most differentiable, valuable asset and strongest source of competitive advantage in which a company can invest. Strong brands have a gravitational pull, keeping customers loyal despite competition beating the brand on price or quality. Invest in authentic understanding and follow-through to promote customer loyalty and long-term value creation. Brand battles occur within customers’ minds. Brand loyalty occurs within customers’ hearts. Win their hearts. Win their minds.
Scalable Products
Scalable Products, like code and content, are unique leverage in that they possess minimal, if any, marginal cost of replication. The marginal cost of serving a web application or blog post to 100 people versus 100,000 is minimal. Scalable products are also highly residual in that they can continue to drive value without linear time input or management. They work for you while you sleep. Automated or improved processes are also an excellent example (see Figure 1). Per unit storage and compute power costs will continue to decline and overall capacity increase. Internal or external, an active focus on leveraging these resources pays significant dividends.
Each of these leverage types has necessary permissions. For example, money, labor, culture, and brand are permissioned leverage types. You may want money, but someone needs to vet and approve you and its use. You may want to employ labor, but someone needs to agree to work for you. You may want to develop and lead a strong culture, but someone needs to buy-in and follow you.
You may want a strong brand, but you need to positively impact someone. Alternatively, scalable products like code and content may be closer to permissionless leverage. Free hosting, storage, tutorials, applications are abundant. You can create a web application (code) or blog (media) and distribute asynchronously to 100 people or 100,000 with minimal cost increase. Consider permissions carefully.
Repeatable Leverage
“Moral excellence comes about as a result of habit. We become just by doing just acts, temperate by doing temperate acts, brave by doing brave acts.”
— Aristotle
Leverage amplifies returns in both directions, positively and negatively. It acts as a megaphone for wise decision-making, or lack thereof. Leverage increases the force applied to the subject foundation by a multiple of the original mass. As such, the foundation must be without cracks, fissures, or gaps to safely support the increased stress. Deployed unsustainably, leverage can be existentially destructive. Financially, see Lehman Brothers. Code-wise: Mt. Gox. Brand: Ratner Group jewelry.
Analogous to establishing and maintaining personal fitness, so too goes an organization’s foundation and cornerstone principles. Beginning to work out after being mostly sedentary (as many of us are in our office and home lives) for months or years requires significant effort to establish an initial foundation. During this, there are many days of being so sore that routine daily activities are suddenly painful, requiring effort and thought. As the months progress, the repetition strengthens and conditions our muscles, allowing us to accomplish previously difficult activities with increasing ease. Our bodies literally repair the cracks (called “micro-tears”) in muscle tissue from the stress of working out to help prevent damage from similar activity in the future. The repeated routine and behavior reinforces the foundation, repairs cracks, and allows us to move onto activities incurring more stress, like lifting more weight or increasingly specific, difficult, or athletic movement. Alternatively, many of us have likely struggled with a lack of consistency, resulting in this foundation beginning to decay. Not surprisingly, we often make better, more consistent health and fitness decisions when surrounding others with similar goals. Classes, teams, and partners help to hold us accountable, challenge us, and keep us on the right track.
In terms of Maslow’s hierarchy of needs, physical health and fitness is a cornerstone principle, a basic need. Adequate physical health is one of several foundational prerequisites needed to target achieving self-actualization after fulfilling all of our basic needs and psychological needs. In an organization, equivalents could be integrity, work ethic, selfless service, intellect, communication, and merit. Without one or two, the organization may survive, but any increase of leverage is subsequently a multiplicative force across fewer support structures, fewer cornerstones. The probability of a critical failure is materially increased.
Consistent routines, communication, and behaviors reinforce the foundation and cornerstone principles, filling and strengthening cracks and fissures. Further repetition still increases the complexity of activities capable of being systematized. Iterated through time, prudent decisions through disciplined deployment of diverse mental models, quality considerations, integrity, attention to detail, and compliance become increasingly instinctive. Ethical and compliance considerations don’t require willpower. Communication and organization require minimal management. Team members ultimately internalize and own the well-founded framework from which to operate and make decisions.
Repeatable leverage is enabled through the effective combination of these repeatable and leverage principles. Executed properly, the power of repeatable leverage is sustainable, attractive risk-adjusted value creation, which is consistently maximizing the amount of return per unit of total risk over a long time horizon. Operationally, cracks or fissures in an organization’s cornerstone principles represent a portion of the total risk. As the greatest returns result from consistent compounding and adding in forms of leverage to amplify those returns, minimizing weakness or decay in an organization’s foundation is absolutely imperative to maximizing the long-term risk-adjusted value creation equation.
Specifically as an investment manager, operational weakness creates an unnecessary addition to total risk. This is not risk that has an accompanying higher potential or range of returns.
For example, lacking in functional areas like regulatory compliance, cash management policies, legal infrastructure, IT operations, or independent service provider infrastructure for fund audit, admin, and custody creates zero (legal) potential increase in returns while subsequently increasing total risk. Sustainability and systematization in a single process combine with other processes to create routines. Multiple routines roll up into functions. Sustainable and systematized functions across the organization interdependently support and strengthen the overall foundation and cornerstones, consistently filling cracks and fissures. Particularly over a long time horizon, exhaustively minimizing operational weaknesses results in dividing each unit of return by a smaller quantity of total risk and contributes exponentially to overall risk-adjusted return.
Humans aren’t inherently motivated by numbers, so – to be clear – this isn’t process for process’ sake. The military may train discipline and attention to detail through white glove room inspections, but the lesson isn’t actually that a hyper-clean room saves lives. The lesson is that when attention to detail is practiced enough, repetition helps systematize the behavior, leaving less up to individual willpower. When the time comes and the stakes are high, the default is thoroughness, accuracy, and zero cut corners. The brain and group culture has built this standard as a path of less resistance. It may actually require willpower and active decision making to be uninformed or careless. Consequently, not cutting corners becomes low-hanging fruit.
The fundamental ‘Why’ behind process and routine is to empower individuals to spend less of their willpower on processes (things we are intrinsically poor at) and invest more time on developing specific knowledge, relationships, and complex functions not yet adopted into our habit centers.
This also creates a willpower multiplier effect. Individuals tend to wake up with finite willpower and mental energy battery. If we assume that this battery starts each day at 100% and anything requiring active thought or decision-making acts as a drain on this battery, procedural and routine tasks not adopted into the energy-saving habit centers of our brain are inefficient. As processes, routines, and disciplines of increasing complexity shift to the basal ganglia, the battery stays charged longer, affording more investment into more value-creating activities. As with a retirement account, an early, up-front investment pays immense dividends in the future, only in this instance the time horizon for iterative, material improvement is substantively shorter. Organizational habits can free-up substantive time for more value-creating activities. They can lift team members up out of the energy-draining muck of mundane processes.
You may have heard stories of successful individuals eating exactly the same thing for breakfast or lunch each day. Or, wearing one of only a few clothing outfits. Reducing the amount of decisions like this each day leaves more in the battery to focus. BFT DLT and crypto assets are a multi-disciplinary space. Knowledge across computer science, data structures, cryptography, distributed systems, networking, economics, game theory, microeconomics, macroeconomics, politics, governance, incentive frameworks, valuation frameworks, and so on are all active topics. Success requires maximizing deep and orthogonal thinking, not excess decision making or management of processes and people. With thoroughness, accuracy, integrity, and more as the standard paths of least resistance, significantly more thought and effort may be invested in value creation.
AMPHITHEATER OF EL JEM
Ultimately, repeatable leverage is about systematizing active thought and decisions rooted in interdependent foundational principles to empower maximum focus in thoughtful and sustainable utilization of leverage. If leverage alone is a megaphone for wise decision-making, repeatable leverage is an amphitheater. Acoustically resonant and not built from plastic or requiring batteries, an amphitheater is exponentially more sustainable (and bearable). It’s also worth noting the singular points of failure and relative difficulty in an individual destroying a megaphone versus an amphitheater.
Philosophies to Live By
Thus far, this is all understandably philosophical. Pragmatically-speaking, how does an organization execute on this? With Figure 1 as a frame of reference, it is clear that significant up-front effort is worthwhile, particularly over a multi-year time horizon. Knowing that, the simplest of processes and habits prove valuable.
SOURCE: JAMES CLEAR
A favorite conversation we have with prospective team members revolves around the applications in which they spent the most time in their prior role(s) and their favorite shortcuts and hotkeys for those applications. We find this insightful not only into truly understanding someone’s prior responsibilities and skills, but also an introduction to how they value their time. Many of us operate a computer for a significant portion of our day. For those that do, someone failing to assign enough gravity to their time to compel them to invest in operating their most used applications or computer more efficiently causes pause. Switching between applications (email, Excel, Word, internet, Slack, Asana, Sublime Text…) is a fantastic example. Users that do not know the Mac shortcut Command + Tab or Windows shortcut Control + Tab spend seconds more each time they swap applications compared to those that use the shortcut. Multiply those seconds by tens or hundreds of times per day over a multi-year period and the time saved is multiple standard workweeks. This doesn’t take into account the willpower and energy savings from the reduced active brain workload. Compound this with numerous other shortcuts and consider how this alone catalyzes more time invested in creating value instead of navigating a computer.
Simple processes, organization, discipline, and hyper-communication at the simplest and lowest levels creates exponential time and willpower leverage at each successively higher level. Make specific note that these are not intrinsically for individual benefit only; in fact, quite the contrary. When an individual creates a file, writes a note, sends a message, or creates a process, they naturally know where it is, what they meant, or how it should work. Failing to invest the time into thoroughly and accurately synthesizing thoughts or organizing work leaves others in the dark. It requires selflessness and recognizing that these actions affect others. Consider how difficult it is to pull together disorganized accounting books and receipts a year or more after transactions occur. Also, consider how difficult it is to find a specific file among a shared drive containing thousands without descriptive filenames, or worse, default filenames like Document1 and Book1. Habits at these simplest and lowest levels compound, resulting in slightly higher-level activities like effective, well-planned meetings and hyper-communicative project guidance as the owned standard. Through an organization selflessly communicating, especially asynchronously, a fully-searchable knowledge repository is created – an efficient, reliable source of truth.
As the simple compounds to the complex, focus on iteration and constantly find better, more efficient ways to accomplish an activity. This not a one-time focus. Remain vigilant and flexible, always questioning if there may be a better way. It is a never-ending pursuit to iterate and improve. Strive to invest more time in real work, building and creating value and spending less time on work about work (the scheduling, planning, and coordinating that is just about keeping everyone on the same page). Allowing stasis, policy-driven operations, politics, ego, command-and-control management, laziness, disempowerment, or inflexibility to creep in is distracting at best and destructive at worst.
Build
Discipline and attention to detail, quality, and not cutting corners bleeds into every functional area and requirement. Building a compliant, institutional-grade crypto asset management firm necessitates this. The space has experienced charlatans, scammers, a lack of regulatory certainty, volatility, hacks, price manipulation, and more. Valuation frameworks and methods or technology utility aren’t even included there. Adoption of this technology has not yet hit stride. Traditional asset classes have scores of decades-old valuation methods to determine whether you could be overpaying or underpaying for an asset. In addition to those factors, note many of the business considerations for institutional asset managers in traditional spaces: legal structuring and offering, compliance, custody, fund administration, tax, operational banking, prime brokerage, order and execution management systems (OEMS), portfolio management systems (PMS), IT operations, security, governance, team…
While these all present challenges, they are surmountable. Institutional-grade infrastructure, regulatory clarity, custody, price manipulation, reliable valuation frameworks, and talent all continue to make significant progress. As a general rule, we overestimate change in the next two years and underestimate the next ten years. As we kick off 2019, ten years ago 4G LTE, Uber, Instagram, WhatsApp, Kickstarter, Slack, and GPS with turn-by-turn navigation on mobile devices all had yet to be effective or created. Note that Bitcoin is older than all of these. BFT DLT empowers a vast spectrum of opportunities to design programmable economic value. Do not mistakenly apply judgment of one crypto asset’s design to the space as a whole. We, builders, continuously innovate new and improve existing designs – irrespective of bad actors or price action.
Building functionality across a business in this new space is not simple. There is no standard to follow. There is no playbook for this. This is a highly dynamic landscape. The ground we are standing on is moving around in real time. That environment demands flexibility and openness. It demands hyper-communication and performance. Repeatable leverage is the framework of mental models to not only keep balance on dynamic ground, but also build a foundation on which to stand and thrive through shocks, shifts, and stressors. Repeatable leverage systematizes habits, establishes principles, lifts team members up, inspires ownership, empowers more collective thought, and affords amplification to those with the best judgment, the best decision-making. However, this doesn’t centralize on the individual with the megaphone. As with an amphitheater, those that deserve to be on stage, take the stage, presenting a concerted performance.
Repeatable Leverage in Action at Ikigai
The screenshot above is a Slack message I sent to the team prior to on-site operational due diligence with Duff & Phelps, the third-party advisor hired by a potential investor with Ikigai. We can't yet share the official results, but I can say that the feedback received has trended overwhelmingly positive. I am profoundly proud of our team at Ikigai, what we've built and accomplished thus far, and am grateful for the opportunity to help lead and serve such an elite group. This journey will change all of our lives, and we are all lucky to have it rooted in purpose and impact.
Respectfully,
Anthony Emtman
CEO
