DRILLING FOR GOLD?

DRILLING FOR GOLD…or the Greek sin of hubris

It’s time for a little self-disclosure.  These lessons about planning, strategy and thinking before doing that I have written about here in Linked In and elsewhere were not conceived by the author in the theoretical vacuum of a business school campus. They were learning painfully in the laboratory of experience…in the school of hard knocks, as they say.

Many years ago, I tried my hand at entrepreneurship in one of the most unpredictable and risky businesses known to mankind, drilling for oil and gas.  This experience taught many important lessons, some of which demonstrate how the 80/20 rule mixed with the sin of hubris can really hurt a business big time.

I wrote a bit about the "80/20 Rule" in my piece posted here on Linked In last September. As I stated in that post, one of the most common versions of what some call the Pareto Principle, attributed to 19th century economist Vilfredo Pareto, is that we get 80% of our sales volume from 20% of our customers. Now hubris can be defined as excessive pride, and this ladies and gentlemen is a dangerous way to go in your personal affairs.  Mix some hubris in with your professional pursuits, and this cocktail is a recipe for business disaster.

Let me explain…

When oil was a mere $12 a barrel, I joined up with some other risk-takers and invested in drilling for crude oil in Pennsylvania, Ohio and New York.  Now in the oil and gas business, the rule of thumb to a successful venture is about 80% exploration and about 20% extraction.  In other words, the most difficult and time-consuming process is to just find the oil.  Once discovered, getting it out of the ground with economic success is a less difficult and much smaller part of the equation.   These oil and gas projects were quite successful as oil was found, over 90% of the wells came in and pumping was flourishing at a brisk pace.

Now here’s where hubris comes in.

Your esteemed author and my business partners watched the price of gold start to jump and thought, “hey this is easy… let’s duplicate our drilling success with precious metals”.   So we opened up mining operations in the state of Nevada.

Well, folks, first the good news: the 80/20 rule does apply beautifully to gold mining, too.  Now the bad news, it applies in the reverse proportions.   You see, gold and silver are actually quite plentiful in North America, and the western United States in particular.  Thus, it’s about 20% exploration-finding the gold and silver is not very difficult at all in comparison to finding oil and gas.  So you’ve probably done the math and put two and two together and figured out the rest of the equation: 80% extraction!

No rocket scientists required…Bad planning, mixed with a large of dose of HUBRIS, and a mis-application of Senior Pareto’s Rule..spelled an entreprenuerial D-I-S-A-S-T-E-R!   Smiley face? 

As always, your questions, comments or critiques are most welcome!