The Bottoms-Up Method
Ludwig von Mises, but for entrepreneurs
Over the holidays, I got a little obsessed with the economist Ludwig von Mises.
Why? I realized that a lot of what I’ve been writing about in entrepreneurship is a poor-man’s reinvention what Mises was talking about in the early 20th century. (Also, I was procrastinating on finishing my book.)
I don’t recommend reading all 900-something pages of his treatise Human Action right now1, but there are two REALLY COOL concepts that are worth knowing from Mises if you’re building something:
Praxeology: The Study of Human Action
The hardest part about early-stage startups is constructing a concept of a business that works in practice, from the infinite things that sound right.
We can come at this conceptualization task from a variety of different directions: We can map out an audacious 50-year vision, we can do a business model canvas, we can build some cool new technology, we can go on an Ayahuasca retreat with Aaron Rogers, we can write a pitch deck.
But for a business to work in practice, we have to understand demand: Why do buyers need to change, and what do they need to achieve?
If our product fits into demand, people buy and we have a business. If not, they don’t and we feel stupid. If we don’t understand demand, we’re flying blind. Simple as that.
Praxeology is the study of human action; it puts human purposeful action as the foundation of the social sciences. To my simple mind, praxeology = the study of demand.
This is, I think, the most important thing: Ground truth is found in the customer’s world, why they need to act, what they need to achieve, how they choose action. This is the foundation of business; we can generate every other concept based on this.
Why should you care about demand? Because there are a million different things you could focus on, none of which matter if you don’t first have a theory of demand. And we find demand from studying real humans’ real action, *not* by theorizing on a whiteboard. (And we test action by selling!)
Methodological Individualism: Individuals vs. Abstractions
Demand only exists at the individual level. Individual buyers have demand - niches, personas, companies don’t. These abstractions can’t buy anything, because they’re not real things.
When we try to figure out demand, we have to first figure it out from the “n of 1” level - from real people. If we don’t do this, and try to articulate demand and our business from the perspective of anything other than this, we wind up writing a bunch of MBA-speak nonsense.
I came up with the concept of the One-Customer Rule forever ago: If we don’t figure out our business (or messaging, or whatever) based on one REAL customer with REAL demand, what we come up with won’t make sense for anyone.
This is a point that Mises made, too. Not about startups obviously, but about the practice of social science: His term, “methodological individualism”, is a fancy way to say - Study real, individual actors, not abstractions and aggregates. Purposeful action only happens at the individual level.
SO WHAT? Study individual buyers’ demand. This is the starting point. Everything else is based off of this. A radical simplification, made to sound academically rigorous with help from a long-gone Austrian economist.
Praxeology and Methodological Individualism form what I believe to be the two foundational mental models behind the bottoms-up method to entrepreneurship. (The one that actually works.)
If you want more on Mises, the Mises Institute’s YouTube videos are good, and you can watch at 2x speed.
A very smart CMO once told me that to be a good marketer, you need to be "a student of human response." This is great way to think about the kind of work you have to do to become that kind of student.
Good stuff as always sir.