The “Law of Unintended Consequences” typically refers to actions of people or the government that result in outcomes that were unanticipated, or, as the law states: unintended. Economists Steven Levitt and Stephen Dubner highlight various situations in which unintended consequences come into play in their book Freakonomics, which I recommend to all entrepreneurs. Levitt and Dubner argue that economics is essentially about incentives and how people respond to them. One entertaining example in the book that highlights incentives tries to the answer the question: “What do school teachers and sumo wrestlers have in common?”
At S3, we are constantly looking for underlying incentives both within our portfolio companies and also while evaluating new investments. How is the sales team incentivized? Why would a strategic buyer be incentivized to buy your company? Why is your customer incentivized to buy your product? As we dig into these questions and others, we sometimes find that incentives are misaligned, leading to some unintended consequences. Levitt and Dubner attempt to “discover the hidden side of everything” in this entertaining and thought provoking book that will surely have you rethinking some previous assumptions about your business.