Fewer Failures do not mean More Winners! (for Start Ups)

One line summary:

Today the start-up world is slave to a financial system seeking to reduce their failure rate, but not necessarily increasing the rate of real winners (home-runs)……..how do we stop this insanity?

Clue:

Change the focus (and techniques) from failure avoidance, to success creation!!!

The Detail

Most of the attention in the early-stage venturing and investment world, is aimed at reducing the rate of failure, while very little is aimed at creating more home-runs. When you set your objective, you also set the limit to what you can achieve. In other words, when you set the objective to reduce the probability of failure, it does not automatically translate into creating more winners.

A number of home-runs (those reaching a billion $ valuation in a very short period of time) fuels a state of euphoria. Just the thought of it, draws the attention of many around the globe. With more and more money flowing towards this fountain of potential, more and more, people want to test the odds. The downside is plain and simple – you lose your money!

With an ever-growing level of attention, it was just a matter of time for the system to recognise its own limitation, as the extremely poor odds of picking winners. There are just too many external factors affecting the outcome, for anyone to pick only winners.

The next step was unavoidable. Along with this realisation, came the rules of the game. Naturally, the first objective was to find a way to reduce the downside, to ensure you can stay in the race for a little longer. This objective primarily came from those with the money, and less from those with the ideas, consequently, like the old saying teaches– “The one who holds the gold, makes the rules”.

The objective was quickly turned into a practical mechanism to reduce the failure rates, and over a relative short period of time, the system adopted the new rules. Every possible technique and method, which could assist turning the objective into a practical mechanism, was evaluated and tested, and the best practices were adopted.

Today, the main driving force comes from concepts like LEAN, Agile, Boot camps, Bootstrap, etc. These concepts were further popularised by support from the main educational intuitions, by adding them, and adjusting their curriculums accordingly.

The end result is a system reducing the failure rate, but not increasing the rate of real winners. The system is now a slave to its own objective, and blind to the true potential.

To quote one of the main LEAN thought leaders, Steve Blank; “While some adherents claim that the lean process can make individual start-ups more successful, I believe that claim is too grandiose…I can make a more important claim: Using lean methods across a portfolio of start-ups will result in fewer failures than using traditional methods.”

Should inventors and entrepreneurs be slaves to an investor-based objective and subordination rule? Should entrepreneurs lose their own identify for the sake of extending their runway, and keeping their hopes alive? Nothing is solved, by having an objective that does not focus on removing the limitation of the system, but accepting it and thus casting it in concrete, by getting the system to adopt local optimisation rules, through creating false expectations and general popularisation.

To make the point: Ask anybody in favour of these concepts, if they would guarantee anything, and if so, what? You will get one long lecture, but no substance and certainly no guarantee!

How do we stop this wave of insanity? How do we get back on track, and set the objective towards creating more winners? Just remember there are too many factors influencing the outcome, to be able to always pick a winner. This problem is only applicable to an investor who does not understand what the entrepreneur is creating, and the value it will contribute, to its market. Do entrepreneurs have to accept the same fact, that there are too many factors influencing the outcome?

Getting back to the objective of creation (to improve the probability of creating more winners). This is the right objective – it focuses on global optima, and not local optima, like the current one. In the world of global optima, there is no room for lack of understanding the underlying principles, or what Elon Musk calls – first principles. The following is an attempt to bring together the few principles that will enable us to not just explain the world of the inventor and entrepreneur, but also to understand how to leverage it towards improved probabilities.

Where everybody aims to create less start up failures, the following two principles aim to create more winners! These principles originate from both the Theory of Constraints, and the Theory of Evolution.

Principle 1 = Innovation (Technology) can bring benefits for a market, if and only if, it removes a significant limitation for the market.

Note: Please do appreciate the unique FOCUS that is brought by the word limitation (if a significant limitation is removed, it will bring substantial second order benefits – uncontested market space), and at the same time, it nullifies the local optima that are associated with trying to solve known problems or satisfy known needs for the market (small insignificant first order benefits – competitive market space)! Every single major invention in the history of our world, removed a significant limitation for this world – a limitation previously accepted as a fact of life. There is an infinite source of limitations hiding behind people accepting it as a fact of life.

Principle 2 = Innovation (technology) is necessary but not sufficient, the market must adopt new rules to realise the full benefits that emanates from the removed limitation.

Note: Evolution taught us that it is those that can adapt by adopting the new rules the fastest, that survive – same for any market for which you have removed a significant limitation – the market will have to adapt by adopting new rules, before it will be able to realise the full benefits. Very few new inventions come with the new rules. Too many neglected to change the old rules, causing the people or market, to behave as if the limitation still exists!

In combination, these two principles can logically explain, virtually everything in the start-up and innovation space, and provide a real base for reasoning upwards! This is potentially taking what Peter Thiel is saying, one step further (the creation of zero to one)!

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