Patrick McKenzie+ Your Authors @patio11 I work for the Internet, at @stripe, mostly on accelerating startups. Opinions here are my own. Sep. 02, 2020 1 min read + Your Authors

There are a lot of companies which manage towards being variance minimization machines, with eyes open and very intentionally.

A very small number of companies manage towards being variance understanding machines, also with eyes open and very intentionally.

There's often a mutual misunderstanding between these two types of organizations, and also the broader culture, which might consider one or the other normative.

e.g. A feature of a variance minimization company is consistent profits calculated very precisely.

Whereas a variance understanding company will often be structured as a portfolio of independent bets, and the steady state for them should probably look like it is losing a lot of money in a lot of places.

Which will predictably be characterized as imprudence and mismanagement.

Interestingly people often accuse companies in one or the other of being excessively financialized, but that's sort of like being excessively software-ized. It's a technology, and both use technology pretty heavily.

A variance minimization machine should certainly have their prudent, risk-averse managers discuss optimal capital structures and levels of leverage.

A variance understanding machine probably gets most of the leverage internally but certainly cares about capital structure.


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