Do Ideas Matter?

Chris Dixon writes today of a metaphor that helps us get beyond the untruth that ideas do not matter in startup innovation.

Ideas are more than the Eureka moment — they are working out that initial Eureka moment through the idea maze:

In other words: a good idea means a bird’s eye view of the idea maze, understanding all the
permutations of the idea and the branching of the decision tree, gaming things out to the end
of each scenario. Anyone can point out the entrance to the maze, but few can think through
all the branches. If you can verbally and then graphically diagram a complex decision tree
with many alternatives, explaining why your particular plan to navigate the maze is superior
to the ten past companies that fell into pits and twenty current competitors lost in the maze,
you’ll have gone a long way towards proving that you actually have a good idea that others
did not and do not have. This is where the historical perspective and market research is key;
a strong new plan for navigating the idea maze usually requires an obsession with the market,
a unique insight from deep thought that others did not see, a hidden door.

That is from the work of Balaji Srinivasan.  Ideas are process rather than point in time.  Chris’s post talks about using analogy, history, academic thought, and direct experience to work one through the idea maze.  Complement this process by wrestling with Elon Musk’s notion that identifying too closely with history, analogy, and current thinking kills creative thought.

The Curious Life of A Turkey

Another of what is becoming periodic posts with wisdom from Taleb’s Antifragile:

This one involves seeing opportunity: being a turkey in reverse:

“A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So with the butcher surprising it, the turkey will have a revision of belief — right when its confidence in the statement that the butcher loves turkeys is maximal and “it is very quiet” and soothingly predictable in the life of the turkey. This example builds on an adaptation of a metaphor by Bertrand Russell. The key here is that such a surprise will be a Black Swan event; but just for the turkey, not for the butcher.

“We can also see from the turkey story the mother of all harmful mistakes: mistaking absence of evidence (of harm) for evidence of absence, a mistake that we will see tends to prevail in intellectual circles and one that is grounded in the social sciences.

“So our mission in life becomes simply “how not to be a turkey,” or, if possible, how to be a turkey in reverse — antifragile, that is. “Not being a turkey” starts with figuring out the difference between true and manufactured stability.”

Being a turkey in reverse is about seeing beyond stability in life and markets, stability that is usually manufactured, but that has terror and disorder lurking right under the surface.  That’s where the opportunity might be.

The Tinkerers, the Hobbyists, and the Risk-Takers

This is from an interview with Nassim Talib on his anti-fragility thesis:

How would you make something antifragile?

If antifragility is the property of all these natural complex systems that have survived, then depriving them of volatility,randomness and stressors will harm them. Just as spending a month in bed leads to muscle atrophy, complex systems are weakened or even killed when  deprived of stressors.

If you want to move away from fragility, you must avoid centralisation and debt and foster aggressive risk-takers who are willing to fail seven times in a lifetime. The economy of the west was initiated through trial and error. We still have a pocket of that in California, where there are small costs of failure and big gains once in a while. The top-down approach blocks antifragility and growth, whereas everything bottom-up thrives under the right amount of stress and disorder.

Are you saying that capitalism is good, but that 21st-century capitalism has gone too far?

What we do today has nothing to do with capitalism or socialism. It is a crony type of system that transfers money to the coffers of bureaucrats. The largest “fragiliser” of society is a lack of skin in the game. If you are mayor of a small town, you are penalised for your mistakes because you are made accountable when you go to church. But we are witnessing the rise of a new class of inverse heroes – bureaucrats, bankers, and academics with too much power.

They game the system while citizens pay the price. I want the entrepreneur to be respected, not the CEO of a company who has all the upsides and none of the downsides.

There are plenty of open-minded individuals who weren’t upset by what I said. This coming book will upset bureaucrats and academics – academics because I suggest trial and error is superior to knowledge. The process of discovery, innovation, or technological progress depends on antifragile tinkering and aggressive risk-bearing, rather than education. A country’s assets reside in the tinkerers, the hobbyists and the risk-takers.

It is important to think of the consequences of a society where the rewards go those without skin in the game in some way.

Conjuring Bridges (To Leap Off)

Storytelling is the tool to bridge the chasm of risk between vision, on one side, and reality, on the other side, as Professor Eisenmann suggests below:

“Storytelling” by entrepreneurs—conjuring a vision of a better world that could be brought about by their venture—can encourage resource owners to downplay risks and in the process commit more resources than they would if they had not been inspired. Steve Jobs, for example, was famous for his mesmerizing “reality distortion field,” through which he impelled employees, partners, and investors to go to extraordinary lengths to help fulfill his dreams.

Reality-distortion is, perhaps, making people see that the bridge exists.

The Stoic Entrepreneur School

This view on pursuing and achieving a vision comes from an essay by Oliver Burkeman in the WSJ recently:

He rediscovered a key insight of the Stoic philosophers of ancient Greece and Rome: that sometimes the best way to address an uncertain future is to focus not on the best-case scenario but on the worst.

Seneca the Stoic was a radical on this matter. If you feared losing your wealth, he once advised, “set aside a certain number of days, during which you shall be content with the scantiest and cheapest fare, with coarse and rough dress, saying to yourself the while: ‘Is this the condition that I feared?’ ”

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Research by Saras Sarasvathy, an associate professor of business administration at the University of Virginia, suggests that learning to accommodate feelings of uncertainty is not just the key to a more balanced life but often leads to prosperity as well. For one project, she interviewed 45 successful entrepreneurs, all of whom had taken at least one business public. Almost none embraced the idea of writing comprehensive business plans or conducting extensive market research.

They practiced instead what Prof. Sarasvathy calls “effectuation.” Rather than choosing a goal and then making a plan to achieve it, they took stock of the means and materials at their disposal, then imagined the possible ends. Effectuation also includes what she calls the “affordable loss principle.” Instead of focusing on the possibility of spectacular rewards from a venture, ask how great the loss would be if it failed. If the potential loss seems tolerable, take the next step.

Bill Gurley II: The Advantage of Being the Small Fish In A Big Pond

Here is the second Bill Gurley post.  This corresponds to the second video on the GigoOM link:

Too often, we think about outside money as being a validator, but Bill illustrates that the opportunities to have a meaningful exit become far more constrained by taking money.  The most obvious point is through the dilution, but the important related point is that the entrepreneur needs to build value beyond the sweet spot of many acquirers.  The dpreview example that Bill gives is particularly compelling.  Here is a rough transcript, but listen to the entire video:

The number one type of acquisition that the big companies like to do is $20 to $70 million.  The minute you take venture…and all of a sudden everyone’s expectation is its got to be $150 [million] or more or we are not saying yes…and that frustrates the buyers…and so if you have a killer product that might elicit a $30 million exit and you can bootstrap and hustle your way and own 80% of it…80% of $30 million is $24 million and that’s a lot of money for an entrepreneur…and I think a lot of people get caught up in the game of venture…

I love this story of dpreview which is a website for digital camera reviews. 1 guy. 1 founder. and Amazon reportedly…I have heard anywhere from $40 to $70 million for a single guy…it wasn’t a venture-backed deal…it worked out very well for that entrepreneur.

Bill Gurley and the Dilemma of Rules

Bill Gurley — the very sage Benchmark partner and incidentally perhaps the tallest VC in the game (6’9”) — was interviewed by Om Malik recently.  I encourage you to watch them, but two clips in particular, about thinking about risk that I want to particularly highlight in adjacent posts:

First, he notes that a venture capitalist’s reputation might be created by just one investment.  That creates a tension, since you need experience – a period of developing pattern recognition and “rules” – but then the one investment that defines your career might be one that defies those and other rules.  Listen to the first clip on the link above and then here is an excerpt of my rough transcript:

Waiting around to hit the one out of 10,000 pitches and getting it right; that’s a tough game to play and it’s really easy to miss…and a lot of the ones that become the breakout players break any rule set that you have created…

So, you have a rule set through experience, discussion, learning, but then you also need the wisdom, instinct, and courage to break those rules in order to truly hit the grand slam.  This strikes me as the tension in truly doing anything great — knowing the rules, but also knowing that you need to break certain of them sometimes because ultimately it’s not a formula.

Avoiding Lean As Ideology

We’re all familiar with the Shakespearean phrase “Too much of a good thing…”  Like great things, great ideas have their limits. Last week, Marc Andreessen noted some of the limits on the Lean Startup method.  Two of Andreessen’s points really stuck out:

First, some ideas cannot be done in a small-scale or they just need to work in their entirety.  Andreessen says:

“I would serve this as a challenge for the Lean Startup community. Especially the ones with the really audacious goals. Sometimes they start audacious because otherwise the product will never get to market. The Macintosh, that product had to exist in its entirety for people to wrap their heads around it,” he said, pointing to modern entrepreneurs like Elon Musk’s ventures as ones that can’t be done on a small-scale at first. “You got to get the rocket into space.

Second, if you have a vision, it can take some persistence to figure out how to implement it.  Andreessen says:

“The pivot. It used to be called, ‘the fuck-up.’ Taking the stigma out of failure is very exciting,” he said. “But we see founders who give up too quickly. It’s permission to give up very fast. Are they really going to do the heavy lifting over time?…

We joke around the office that the worst is the fetish for failure,” he said. “You want to preserve the good of the idea when it comes to pivoting, but you don’t want people to be intentionally encouraged to fail. Maybe it’s time to add a bit more stigma. The entrepreneurs I admire, I admire the ones who pivot but I really admire the ones who have persisted.”

Paul Graham: Start With Something A Small Number of People Want A Large Amount

Paul Graham charts an epic trail to where good ideas and bad ideas emerge and diverge.

I hope to expand on some of his points over the next few weeks, but in the meanwhile here are some excerpts.  It’s definitely worth going back to the original piece, because different parts are relevant to different potential founders.  These excerpts are most relevant to me:

The very best startup ideas tend to have three things in common: they’re something the founders themselves want, that they themselves can build, and that few others realize are worth doing. Microsoft, Apple, Yahoo, Google, and Facebook all began this way.

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Why do so many founders build things no one wants? Because they begin by trying to think of startup ideas. That m.o. is doubly dangerous: it doesn’t merely yield few good ideas; it yields bad ideas that sound plausible enough to fool you into working on them.

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When a startup launches, there have to be at least some users who really need what they’re making—not just people who could see themselves using it one day, but who want it urgently. Usually this initial group of users is small, or the simple reason that if there were something that large numbers of people urgently needed and that could be built with the amount of effort a startup usually puts into a version one, it would probably already exist. Which means you have to compromise on one dimension: you can either build something a large number of people want a small amount, or something a small number of people want a large amount. Choose the latter. Not all ideas of that type are good startup ideas, but nearly all good startup ideas are of that type.

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Nearly all good startup ideas are of the second type. Microsoft was a well when they made Altair Basic. There were only a couple thousand Altair owners, but without this software they were programming in machine language. Thirty years later Facebook had the same shape. Their first site was exclusively for Harvard students, of which there are only a few thousand, but those few thousand users wanted it a lot.

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But while demand shaped like a well is almost a necessary condition for a good startup idea, it’s not a sufficient one. If Mark Zuckerberg had built something that could only ever have appealed to Harvard students, it would not have been a good startup idea. Facebook was a good idea because it started with a small market there was a fast path out of. Colleges are similar enough that if you build a facebook that works at Harvard, it will work at any college. So you spread rapidly through all the colleges. Once you have all the college students, you get everyone else simply by letting them in.

Similarly for Microsoft: Basic for the Altair; Basic for other machines; other languages besides Basic; operating systems; applications; IPO.

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So if you can’t predict whether there’s a path out of an idea, how do you choose between ideas? The truth is disappointing but interesting: if you’re the right sort of person, you have the right sort of hunches. If you’re at the leading edge of a field that’s changing fast, when you have a hunch that something is worth doing, you’re more likely to be right.

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Being at the leading edge of a field doesn’t mean you have to be one of the people pushing it forward. You can also be at the leading edge as a user. It was not so much because he was a programmer that Facebook seemed a good idea to Mark Zuckerberg as because he used computers so much. If you’d asked most 40 year olds in 2004 whether they’d like to publish their lives semi-publicly on the Internet, they’d have been horrified at the idea. But Mark already lived online; to him it seemed natural.Paul Buchheit says that people at the leading edge of a rapidly changing field “live in the future.” Combine that with Pirsig and you get:

Live in the future, then build what’s missing.

That describes the way many if not most of the biggest startups got started. Neither Apple nor Yahoo nor Google nor Facebook were even supposed to be companies at first. They grew out of things their founders built because there seemed a gap in the world.

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And when these problems get solved, they will probably seem flamingly obvious in retrospect. What you need to do is turn off the filters that usually prevent you from seeing them. The most powerful is simply taking the current state of the world for granted. Even the most radically open-minded of us mostly do that. You couldn’t get from your bed to the front door if you stopped to question everything.

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Just as trying to think up startup ideas tends to produce bad ones, working on things that could be dismissed as “toys” often produces good ones. When something is described as a toy, that means it has everything an idea needs except being important. It’s cool; users love it; it just doesn’t matter. But if you’re living in the future and you build something cool that users love, it may matter more than outsiders think. Microcomputers seemed like toys when Apple and Microsoft started working on them. I’m old enough to remember that era; the usual term for people with their own microcomputers was “hobbyists.” BackRub seemed like an inconsequential science project. The Facebook was just a way for undergrads to stalk one another.

At YC we’re excited when we meet startups working on things that we could imagine know-it-alls on forums dismissing as toys. To us that’s positive evidence an idea is good.

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The clash of domains is a particularly fruitful source of ideas. If you know a lot about programming and you start learning about some other field, you’ll probably see problems that software could solve. In fact, you’re doubly likely to find good problems in another domain: (a) the inhabitants of that domain are not as likely as software people to have already solved their problems with software, and (b) since you come into the new domain totally ignorant, you don’t even know what the status quo is to take it for granted.

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Because a good idea should seem obvious, when you have one you’ll tend to feel that you’re late. Don’t let that deter you. Worrying that you’re late is one of the signs of a good idea. Ten minutes of searching the web will usually settle the question. Even if you find someone else working on the same thing, you’re probably not too late. It’s exceptionally rare for startups to be killed by competitors—so rare that you can almost discount the possibility. So unless you discover a competitor with the sort of lock-in that would prevent users from choosing you, don’t discard the idea.

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You don’t need to worry about entering a “crowded market” so long as you have a thesis about what everyone else in it is overlooking. In fact that’s a very promising starting point. Google was that type of idea. Your thesis has to be more precise than “we’re going to make an x that doesn’t suck” though. You have to be able to phrase it in terms of something the incumbents are overlooking. Best of all is when you can say that they didn’t have the courage of their convictions, and that your plan is what they’d have done if they’d followed through on their own insights. Google was that type of idea too. The search engines that preceded them shied away from the most radical implications of what they were doing—particularly that the better a job they did, the faster users would leave.

A crowded market is actually a good sign, because it means both that there’s demand and that none of the existing solutions are good enough. A startup can’t hope to enter a market that’s obviously big and yet in which they have no competitors. So any startup that succeeds is either going to be entering a market with existing competitors, but armed with some secret weapon that will get them all the users (like Google), or entering a market that looks small but which will turn out to be big (like Microsoft).

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Finding startup ideas is a subtle business, and that’s why most people who try fail so miserably. It doesn’t work well simply to try to think of startup ideas. If you do that, you get bad ones that sound dangerously plausible. The best approach is more indirect: if you have the right sort of background, good startup ideas will seem obvious to you. But even then, not immediately. It takes time to come across situations where you notice something missing. And often these gaps won’t seem to be ideas for companies, just things that would be interesting to build. Which is why it’s good to have the time and the inclination to build things just because they’re interesting.

Live in the future and build what seems interesting. Strange as it sounds, that’s the real recipe.

Expecting the Black Swan

Black swan events are extreme outlier (on a probability curve) events that play an outsize and consequential role in history or our personal lives because of their extreme magnitude.  Because they are outlier events, they are generally “unexpected.”  The idea was popularized by Nassim Taleb in discussing trading models on Wall Street.

We have lived through more than a decade of life-destroying tsunamis, once-in-a-century super-storms, stranger-than-fiction terrorist events and confidence-shattering flash crashes.  Since the turn of the millennium we have experienced 9/11, Sandy, Katrina, nuclear meltdowns.  We can go on.

The black swan is no longer unexpected.  It is the expected.

Why is that?

First, there are a number of fuses today to set off events that would have been truly unexpected in recent decades.  Climate change seems to have brought on more extreme weather events.  Terrorism and cyber-warfare are present and future threats.

Second, when these fuses are lit, there is an increased chance of big effects due to some factors.  We have shoddy, not-up-to-snuff infrastructure, yet we do not make adequate public investment to shore them up.  We live in a networked world that concentrates and can spread risk, increasingly proving itself as the flip-side to the usual expectation that networks distributed risk to create more resilient systems.  In the Western world, we expect a certain level of comfort and order to carry on.  Hurricane Sandy showed how fragile “order” is and how quickly it could devolve when basic necessities such as power and water are lost.

This requires a big change in orientation.  So what do we do?

As the worst case seems to become more likely, and its power to devastate us increases in the event of a worst case, we need a different orientation.  We have to take more of a black swan approach to planning in our personal, public, and business lives.

In our personal lives, that might be a permanent, on-the ready stock of backups to deal — an emergency storage locker — for when necessities disappear.

In our public lives, we need more investment in better and more secure infrastructure that withstands the specific threats above.

In business, “disaster recovery” has been a big market for decades whereby IT systems are backed up to be recovered quickly when things on.  Given for how long many businesses shut down in the Financial District, there is a big opportunity to deal with more frequent, regular, and longer disruptions that is more tailored to the disruptions such as climate disaster and cyber-warfare that we should expect to see going forward.