Permanent Equity: Investing in Companies that Care What Happens Next

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The Point is Constraints

It’s not officially a new season of Unqualified Opinions until I tell a story about helping coach u12 girls soccer, so I figured I’d get it out of the way sooner rather than later…

There we all were at the field the other night (yes, the team practices through the winter) playing 7v7 where each side had to complete five consecutive passes before they could shoot on goal. I noticed, though, that the head coach hadn’t set up any boundaries and offered to do so.

“No,” she replied. “I’d like to see what they do with all the space.”

After about 15 minutes you could barely see the girls off by the parking lot, our goalie was bored to death, and I was frowning. The coach looked at me.

“You think there should be boundaries,” she observed.

“I mean, it’s not even mowed over there” I answered. 

And so we set up boundaries.

The point here isn’t to impugn the drill; it turned out to be a good one once we established a finite, but still large, field of play. Rather, it’s to note that there is an interesting relationship between freedom, constraints, and achievement. Given unlimited space in which to operate, the u12 girls literally lost sight of the goal.

Our COO Mark spins this a little differently. Talking to a group at last year’s Main Street Summit, he said that creating boundaries for employees is paradoxically what gives them the freedom to succeed. The reason that’s so is because knowing where one can’t go instills the confidence to fully explore where one can.

Morgan Housel provides another take on this topic in his new book Same as Ever. He observes that “the most important innovations don’t happen when everyone is happy…[but] when the consequences of not acting quickly are too painful to bear,” citing among other things improvements factories had to make during The Great Depression in order to increase efficiency to survive the downturn. Morgan further points out that those gains in efficiency, necessitated by operational constraints, are ultimately what helped the U.S. later win World War II.

This is interesting to me because a question we’ve historically liked to ask operators is “What’s one thing you would do if you had access to unlimited capital?” The point of asking it is to try to suss out strategic opportunities that would be no-brainers absent constraints.

But I’m starting to wonder if that’s not the only question. Maybe we also need to know about what they would do if there were more constraints. 

For example, what if you lost access to capital? Or if your biggest supplier went bust? Or couldn’t hire anyone for a decade and then had to fight and win a world war?

Those questions would yield some pretty interesting answers too. Because whether you’re removing them or succeeding despite them, the point is constraints.

-Tim


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