Understand Entropy if You Want Your Startup to Succeed

Entropy is one of the concepts in physics that can be difficult to grasp. I attribute this fuzziness primarily to the way it's conventionally explained. Defining it in dictionaries as a lack of order or predictability, essentially equating it to chaos, obfuscates its nature even more.

You're being suggested to picture two liquids of different colours mixing in a glass, heat escaping your coffee mug, or how you presumably can't put the toothpaste back into the tube. The bottom line is that the universe becomes more chaotic over time, and this metamorphosis is a one-way ticket. But that doesn't help us understand the phenomenon and why it's happening. Would you be able to give your kid a clear answer if he asked you why that is? I think there's a better way to explain.

Entropy is About Probabilities

Let's use a classic Rubik's Cube as an example. Such a cube has 43 quintillion, 252 quadrillion, 3 trillion, 274 billion, 489 million, and 856 thousand possible permutations. That’s enough to cover the surface of the Earth with 300 layers of such cubes.

Only one of its states represents a solution; a handful can be considered “almost solved”, and everything else is simply rubbish.

That singular state representing a solution can be called the lowest entropy. The “almost solved”, less chaotic patterns can be considered low entropy levels, and everything else would have a higher entropy to various degrees.

Imagine trying to solve the puzzle by randomly fiddling with the Cube. Can you get lucky that way? Theoretically, yes. However, even getting to "an almost solved" pattern is so unlikely that we can safely claim it is impossible, let alone solving it. Not in a million lifetimes, at least.

Alternatively, the probability of arriving at a chaotic Rubik’s Cube pattern after a few turns is almost inevitable. Chaos is the most probable state of any system that evolves. This is why everything converges towards it with every change.

In other words, milk and coffee could eventually autonomously separate into two distinct layers in your mug, but it's so improbable that we consider it a lunacy.

Here's an old joke that depicts the kind of probability that is characteristic of entropy:

A few buddies got paid at the beginning of the month and struggled to decide how to spend this money best. They decide to flip a coin.

• Heads: A strip club.
• Tails: Bar.
• Stands on its side: Invest.
• Hangs in the air: Buy gifts for significant others.

The Definition of a Business

With the understanding of entropy, let's see how it relates to building a business.

“Startups have an inherent flaw: they mostly fail.” *

–Walker Deibel

A business is nothing other than an institution to make money.

We can rephrase the "making money" part as a conversion from a more chaotic high entropy state where the money is dispersed in potential customers' pockets to the coveted grouped low entropy state where this resource is condensed in the company's bank account. That is the ultimate goal of any business and the property most investors are ready to pay for. The more centralised this resource is, the more they value the company's share.

To make it happen, a business should provide value to its customers, which we can also express in terms of varying entropy levels.

Think about it: Anything worth paying for has a low enough entropy level. In other words, it's a concentrated resource.

You buy energy from a utility supplier, but you can't sell that same energy once it has dissipated inside your home to warm you up. You pay someone to mow your lawn, not to let it grow wild. You buy toothpaste only if it's still in its tube.

Remember the universal law of energy conservation? The amount of energy in the universe is constant. It doesn't appear out of nowhere or disappear into the void. All it does is turn from one form to another. Most probably, it changes states from low entropy to high entropy.

A business is an institution that provides value to its customers as a low-entropy resource.

This is precisely why building and running a business is so tough.

An Up-Hill Battle Against Entropy

Entropy is challenging to keep a lid on, let alone lower. Doing so requires energy and time. Sometimes, there's enough economic incentive to do so regardless. Sometimes, businesses run out of money because it takes more energy to create value than what you can expect to be paid for it. History contains examples of investors' money being thrown at scaling businesses with awful unit economics. So, you actually can put the toothpaste back into the tube, but is it worth the squeeze?

So few people succeed at cracking this nut because, as we've seen in the case of the Rubik's Cube, there's only one absolute solution, a few "almost good" ones and an astronomical number of permutations representing a failure.

Building a company is like trying to solve a massive Rubik's Cube for which we only have parts of the formulas that could potentially lead to something that resembles a solved cube if lucky.

That cube is also shuffled when you're not holding it, looking at it and actively trying to solve it. The world does its thing, so you're back to a messier state after a while. But that's what people are ready to pay for: a resource you provide in a concentrated, low-entropy form.

Most famous super-investors agree that only a handful of excellent businesses exist. Yet, they aren't perfect, and I'd argue that they resemble a system with a low level of entropy, but it's not even close to a Rubik's Cube unique solution. If such a business existed, it'd simply attract all the money in the market to become a business equivalent of a "Perpetuum Mobile" (perpetual movement/engine). This is as good as it gets in a world with many moving parts.

Conclusion

So, a business is about reducing the entropy of a given resource by converting energy from its non-condensed to the condensed state, which is more valuable to the consumer.

Nature's accounting system always balances out at the end of the quarter: energy in = energy out. Companies merely act as functions with inputs and outputs, converting energy from a high to a low entropy form. The difference in entropy level is referred to as the value proposition.

Such conversion requires much external energy. Although it could make sense, in most cases, the power needed to do so exceeds the practical low-entropy value put out. Most businesses chew through a lot of money and human resources to release energy whose entropy level is not low enough for customers to care. In other words, they fail to find a product-market fit.

The balance should be positive for a power plant (a business) to have a real-life application—less energy in than energy out. The higher the delta, the more efficient the power plant; if this ratio is high enough, you can even turn it into a bomb (a unicorn) because the difference between a nuclear plant and a nuclear bomb is simply the amount of energy released in a unit of time.

Entropy is a powerful and scary phenomenon, but no life would exist without it. The same applies to economic and technological progress. The bitter truth is that most of us will fail at building companies. But, some of us will become business Oppenheimers and make a dent in the universe. One thing's for sure: you won't get an even minuscule chance if you don't try.

Special Thanks

No article's ever written in a vacuum. Special thanks go to Lilian T. and Jason Collins for reading the drafts, attacking with sharp pencils and being unapologetically honest.

If you like this article, you might also like my website.

* Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game, Walker Deibel.