To be able to distinguish the truly extraordinary from the merely great — that is, to be able to separate the 99.99th percentile from the 99.9th — is to have discernment at the tail. When evaluating the talent of young people, the best way to discern at the tail is to assess their first and second derivatives.
Their first derivative is how quickly they're improving. The biggest sign of a high slope in a young person is evidence of magic. Magic is something they've done in their past that no matter how high your bar for talent is, you simply can't understand how they were able to do it. That may be a product they engineered or a creative work they produced whose quality far exceeds their age. Or it could look like a valuable personal relationship or network they built without familial connections. Many talented young people have notable accomplishments, but few have produced magic.
The second derivative is how their slope will change over time. If the first derivative is about capability, the second is about desire. Their second derivative is determined by their scale of ambition, and the earnestness with which they pursue it. Often, talented people quickly hit diminishing returns as they age because they adopt priorities or responsibilities other than developing their talent further; they decelerate. Like the Peter Principle, people rise no higher than their level of ambition. Over time, those with lower slopes but high second derivatives surpass them.
I sometimes hear investors talk about how their investing is partly guided by beauty. But they rarely explain what they mean. What does a beautiful business look like, and why does beauty matter?
It's easier to give an extensional definition of beauty than an intensional one. That is, it's easier to point at beauty than to define it. There's also no single measure of a business's beauty; there are many aspects to a business, each of which contribute to how beautiful it is.
Here are some of those characteristics:
Selling high-quality products is beautiful.
Quality does not equal luxury or price. A Supreme Brick is not beautiful just because it says "Supreme" and has a 100x markup (in many ways, the high price makes it less beautiful).
A sandwich made with love from an excellent local sandwich shop can be more beautiful than a $50 steak.
A company's visual assets shape its beauty, like its logo and website.
While beautiful businesses may have pricing power, they don't gauge their customers, instead preferring symbiotic, long-term relationships. They are long-term greedy rather than short-term greedy.
Representing a product completely and honestly is beautiful; exaggerating or misleading customers about a product is not.
Artificially creating barriers to exit isn't beautiful. This includes creating unnecessarily complex integration processes or making it difficult to unsubscribe.
Similarly, hidden costs are not beautiful.
It's beautiful when a customer loves a product. Businesses with high levels of customer satisfaction are therefore more beautiful.
Simply having customers at all makes a business more beautiful. If you take a startup 1 week before finding PMF and 1 week after, the latter is more beautiful.
Product-led growth is more beautiful than sales-led or marketing-led growth, largely because the former is more pure.
Organic growth is more beautiful than incentivized growth for the same reason.
Just as John Stuart Mill argued that there are higher and lower pleasures for the Utilitarian, markets have higher and lower "wants" that businesses can satisfy. There's more beauty in adding depth or quality to people's lives – perhaps by selling them a memorable vacation, nutritious food, or life saving healthcare – than there is in selling into their vices, even if the 7 deadly sins are the 7 core motivators. Casinos and porn sites aren't beautiful businesses.
Manufactured demand, created by marketing or manipulation, is less beautiful than "authentic" demand.
Businesses that operate with long-term objectives are more beautiful. This is true monotonically: the longer the business's time horizons, the more beautiful.
Similarly, history and lindyness are both beautiful.
In Japanese, "Dō" means the "way" or "path". It's used to describe a certain approach to a craft like "the way of the sword" or "the way of writing".
The most beautiful businesses have their own Dō – a unique approach or philosophy that, while not necessarily the only valid approach, is successful for them. These businesses have a distinct style or way of working which may be supported by unique knowledge that other businesses cannot easily replicate.
Excellence in one's Dō is beautiful.
Being efficient is beautiful, for both the product and the business.
So is having a "rightness-of-size". The understaffed restaurant loses beauty just as an overstaffed corporation does.
The overfunded startup and oversized fund both lose beauty.
Companies that are what they say they are are more beautiful. Those that are honest to their shareholders and customers, whose founders have and express good intentions are more beautiful.
They do not have to be gentle or nice; in many instances their success will depend on their not being. But if they resort to deceit, they lose some of their beauty.
A company that wouldn't exist if its founders hadn't started it is more beautiful. For example, moonshot tech startups are more beautiful than commodity businesses, all else equal.
Some moats are more beautiful than others. "Fairly earned" moats like economies of scale are more beautiful than "dirty moats" like regulatory capture.
Training up talent internally is more beautiful than hiring outsiders.
Employee retention is beautiful. Shared economics are beautiful.
Employees having high satisfaction rates and seeking to advance the company over pursuing personal advancement is beautiful.
Businesses with positive externalities or those that internalize their externalities are more beautiful. Pollution is obviously not beautiful.
Different businesses prioritize different metrics. But irrespective of what metrics they prioritize, the shape of those metrics affect their beauty. "Smooth" metrics are those that are changing at a consistent rate.
Consistent growth is more beautiful than inconsistent growth. Volatility is not beautiful.
Customers are people, and people like beautiful things. Having beautiful branding, marketing, or products can have a large impact on a business's success. But the beauty of a business goes far beyond its branding and product, as I've described above.
Indeed, almost everything I've described as beautiful is also an attribute of a good business. Why is that? Am I saying that a beautiful business is just a good business, or is there some underlying reason that beautiful businesses and good businesses are so similar?
Succinctly, good businesses are often beautiful because there's beauty in the good. To the extent that a strong business is not beautiful, it's largely because there's something about them that is not good.
That attribute that lacks goodness could be extreme, like selling illegal weapons, or it could be extremely minor, like having a poorly designed logo.
Because of the relationship between beauty and the good, using beauty as a lens to understand a business is one way to see it more clearly.