The Necessity of Constraints

Anyone who knows me knows that one of my favorite things in life is sharing a good bottle of wine with friends. For my birthday last year, my now wife Montana set us up with a wine tasting hosted by a local sommelier. We got to try a bunch of different wines and learn what made each one different from the rest. One of the things that stuck with me from that night was the sommelier explaining that grapes need four things to grow - water, sunlight, good soil, and moderate temperatures - but a grape grown in perfect conditions across all four categories will not produce a good wine. It's more likely that the vine produces a large yield of pretty bland fruit. In order to produce a high quality wine, the grapes need to “struggle” in one way or another.

The grapes grown in Napa Valley are often on hillsides where the water runs off easily. This means the vines need deep roots in order to get water. The vines that have developed deep roots though, have consistent access to water, even in a drought, and to a more nutrient dense soil. These vines yield large, juicy, sweet grapes, ready to be made into a cabernet.

The grapes of the Oregon coast grow in a cooler climate, which leads to a slower ripening process and produces grapes with lower sugar content, higher acidity, and thinner skin - a perfect grape for a bottle of Pinot Noir.

As the saying goes, struggling vines make better wines. Wherever the grapes that make up your favorite bottle of wine come from, chances are the vines they grow on had to adapt to some condition that would typically be considered less than ideal.

I could probably write a lot more about wine, but this isn’t supposed to be a post about wine. What’s true of the grapes that make our wine is true of most things in life and business - constraint is necessary for growth.

Necessity breeds innovation

If we adapt our wine analogy to business, we can say that a business needs a few things to grow as well - resources, talent, and time. Theoretically, almost anything could be accomplished with an abundance of those three things.

In reality though, the companies that seem to win have a constraint.

DeepSeek, a Chinese AI startup announced recently that they had developed a large language model that not only outperforms ChatGPT, but does it at a fraction of the cost.

The company was founded in 2023 and was severely cash constrained compared to the U.S. companies spending billions of dollars per year to develop, tweak, and improve their models. On top of that, the U.S. has placed export restrictions on the number of AI chips Nvidia can export to China. These constraints forced DeepSeek to think differently about how to train a model, creating a totally different type of algorithm (GRPO) to accomplish reinforcement learning than had been used in all previous models (PPO). The new algorithm was more efficient and required less compute, and therefore less GPUs, than prior algorithms. They reportedly spent only $6 million to train their model, a fraction of the $100 million Open AI spent to train GPT 4.

In the tech boom of 2021 we saw startups raise large amounts of capital at high valuations. There are surely some success stories from this group, but for so many of those companies, that raise was a lethal blow. Rather than the scrappy, hungry founders incentivizing key employees with equity and finding creative ways to develop their product and get it to market, these companies now had the funds to pay market or above market salaries to themselves and their teams while running paid ads to acquire users.

Rather than building the key relationships needed to break into an industry and create sustainable growth, many companies grew through paid marketing. When the money ran out, they were left with overpaid employees and no real organic distribution channels to drive revenue. What looked like all the makings for a disruptive startup ended up being nothing more than a blip on the radar of the industries they were aiming at.

Alternatively, startups that were founded in 2022, after the bubble burst, were more cash constrained and had to get creative to acquire early users and employees. I’ve seen multiple examples of companies that grew to $1 million of annual recurring revenue without spending a dollar in paid marketing. Those companies have honed their product market fit, know their users, and know the key players in their target market. They’ll raise and spend eventually, but they are set up significantly better for not having done so early on. They’ve grown deep roots, and found more fertile soil, to go back to our wine analogy.

When Jamie and I started Knuula, we had several constraints to deal with. One of which was a lack of abundant talent. Jamie had a vision for how Knuula would work from an engineering perspective, but needed a large team of software engineers to build it. When we decided to go it alone, Jamie realized the time required to follow his original plan would be too much. He went looking for a shortcut. What he discovered ended up being significantly better and more scalable than our original plan, and remains Knuula’s biggest competitive technical advantage today. There’s a good chance Knuula would have failed if we would have succeeded in raising money right out of the gate.

A 2,000 year old truth

The book of James in the Bible spoke to this concept 2,000 years ago. James, the half brother of Jesus, told his readers to consider it a joy when you encounter constraints.

“Consider it pure joy, my brothers and sisters, whenever you face trials of many kinds, because you know that the testing of your faith produces perseverance. Let perseverance finish its work so that you may be mature and complete, not lacking anything.”

James is telling us that the trials we face in life, the situations that are less than ideal, create perseverance. They mature us and make us strong, better than before and more able to withstand all that life throws our way. And for that, not only should we avoid groaning, we should even rejoice!