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Malcolm Gladwell explores creativity driven by "misjudgment of the task"

In the New Yorker magazine, Malcolm Gladwell reviews a biography of economist Albert O. Hirschman (a name that was new to me), and his paradoxical findings that progress is often an outcome of misjudgment:

Hirschman had studied the enormous Karnaphuli Paper Mills, in what was then East Pakistan. The mill was built to exploit the vast bamboo forests of the Chittagong Hill Tracts. But not long after the mill came online the bamboo unexpectedly flowered and then died, a phenomenon now known to recur every fifty years or so. Dead bamboo was useless for pulping; it fell apart as it was floated down the river. Because of ignorance and bad planning, a new, multimillion-dollar industrial plant was suddenly without the raw material it needed to function.

But what impressed Hirschman was the response to the crisis. The mill’s operators quickly found ways to bring in bamboo from villages throughout East Pakistan, building a new supply chain using the country’s many waterways. They started a research program to find faster-growing species of bamboo to replace the dead forests, and planted an experimental tract. They found other kinds of lumber that worked just as well. The result was that the plant was blessed with a far more diversified base of raw materials than had ever been imagined. If bad planning hadn’t led to the crisis at the Karnaphuli plant, the mill’s operators would never have been forced to be creative. And the plant would not have been nearly as valuable as it became.

“We may be dealing here with a general principle of action,” Hirschman wrote:

Creativity always comes as a surprise to us; therefore we can never count on it and we dare not believe in it until it has happened. In other words, we would not consciously engage upon tasks whose success clearly requires that creativity be forthcoming. Hence, the only way in which we can bring our creative resources fully into play is by misjudging the nature of the task, by presenting it to ourselves as more routine, simple, undemanding of genuine creativity than it will turn out to be.

And from there Hirschman’s analysis took flight. People don’t seek out challenges, he went on. They are “apt to take on and plunge into new tasks because of the erroneously presumed absence of a challenge—because the task looks easier and more manageable than it will turn out to be.” This was the Hiding Hand principle—a play on Adam Smith’s Invisible Hand. The entrepreneur takes risks but does not see himself as a risk-taker, because he operates under the useful delusion that what he’s attempting is not risky. Then, trapped in mid-mountain, people discover the truth—and, because it is too late to turn back, they’re forced to finish the job.

This idea has been explored here many times. Entrepreneurs start companies ignoring the fact that most of them will fail. They make mistakes because of their ignorance that create awesome challenges, and from time to time overcome them. And thank God they do.

Still more on apologies - this time, Kickstarter

A friend passed on word that Kickstarter, under pressure from public interest groups, this week apologized for a campaign featuring a "seduction guide." Here's the apology:

Dear everybody,

On Wednesday morning Kickstarter was sent a blog post quoting disturbing material found on Reddit. The offensive material was part of a draft for a “seduction guide” that someone was using Kickstarter to publish. The posts offended a lot of people — us included — and many asked us to cancel the creator’s project. We didn’t.

We were wrong.

Why didn’t we cancel the project when this material was brought to our attention? Two things influenced our decision:

• The decision had to be made immediately. We had only two hours from when we found out about the material to when the project was ending. We’ve never acted to remove a project that quickly. 
• Our processes, and everyday thinking, bias heavily toward creators. This is deeply ingrained. We feel a duty to our community — and our creators especially — to approach these investigations methodically as there is no margin for error in canceling a project. This thinking made us miss the forest for the trees.

These factors don’t excuse our decision but we hope they add clarity to how we arrived at it.

Let us be 100% clear: Content promoting or glorifying violence against women or anyone else has always been prohibited from Kickstarter. If a project page contains hateful or abusive material we don’t approve it in the first place. If we had seen this material when the project was submitted to Kickstarter (we didn’t), it never would have been approved. Kickstarter is committed to a culture of respect.

Where does this leave us?

First, there is no taking back money from the project or canceling funding after the fact. When the project was funded the backers’ money went directly from them to the creator. We missed the window.

Second, the project page has been removed from Kickstarter. The project has no place on our site. For transparency’s sake, a record of the page is cached here.

Third, we are prohibiting “seduction guides,” or anything similar, effective immediately. This material encourages misogynistic behavior and is inconsistent with our mission of funding creative works. These things do not belong on Kickstarter.

Fourth, today Kickstarter will donate $25,000 to an anti-sexual violence organization called RAINN. It’s an excellent organization that combats exactly the sort of problems our inaction may have encouraged.

We take our role as Kickstarter’s stewards very seriously. Kickstarter is one of the friendliest, most supportive places on the web and we’re committed to keeping it that way. We’re sorry for getting this so wrong.

Thank you,

Kickstarter

Applying Heidi Grant Halvorson's model of apologies to this one, it appears that Kickstarter is touching on two of the three types of apologies:


- the apology to strangers requires compensation; Kickstarter's donation to RAINN qualifies


- the apology to workgroups requires an admission that group norms were violated ("This material encourages misogynistic behavior and is inconsistent with our mission of funding creative works. These things do not belong on Kickstarter").


- there isn't a reference (at least in how I read the apology) to empathy, which is necessary when apologizing to friends, according to Halvorson. Perhaps that's appropriate. Kickstarter's relationship with the public isn't that close, is it? Or should they have included an empathetic note as well?

Fred Wilson apologizes for insulting corporate venture capital funds

In his AVC blog, Fred Wilson took the opportunity to clarify remarks he made in a video interview (below).



What's fascinating is that his remarks about the corporate VCs come in the context of a mistake story. Fred is so passionate about what he learned from his mistakes working with corporate VC partners that he goes a bit over the top when Sarah Lacy, the interviewer, probes:

Fred: I have made, since then, a few mistakes, for example investing with corporate venture capital firms, corporate investors. Never, ever, ever, ever gonna to do that again. Never, ever. Ever. Never!

Sarah: What happened?

Fred: They SUCK! Because they're not interested in the company's success or the entrepreneur's success. Corporations exist to maximize their interests. They could never be mensch-y or magnanimous. It's not in their DNA. And so they SUCK as investors....

He goes on to exempt Intel and Google from this critique, and ends with this: "That's how you should think about a corporation. They're your exit, not your partner."

But the initial emphasis must have caused some blowback, because today's post contains this apology:

I apologize to all of the corporate venture firms that I insulted on Thursday night. I've got a lot of scars, deep and painful, on this topic and I let that come out in a way that was not right. I'm sorry about that.

I say, thanks, Fred, for sharing. I think he's speaking from the heart, honestly and candidly. To me, that doesn't require an apology.

Heidi Grant Halvorson - three types of apologies

Heidi Grant Halvorson posted on the HBR Blog Network about apologies ("The Most Effective Ways to Make It Right When You Screw Up"). She denotes three different constituencies who require different types of apologies:

1. Strangers - they value offers of compensation (Assuming you accidentally knock over someone's coffee cup, say, "So sorry, I'll buy you another cup of coffee.")

2. Friends and Colleagues - they value empathy ("I'm sorry that I hurt you with that careless remark.")

3. Workgroup - they need an acknowledgement that an important norm was violated. ("I'm sorry I didn't make our meeting and didn't let you know beforehand. That's not acceptable. I will plan better next time.")

This is a very useful addition to our growing body of knowledge on apologies (see related posts on the subject).

Read the entire piece here.

Mistake Bank covered in Forbes.com

I met Linda Peia of Ashoka, an organization supporting social entrepreneurs, at the 99u conference last month. She has just published on Forbes.com a synopsis of the conference with some very nice comments about this project. Check it out.

Teacher's mistake: not including all the children in the school performance

This is a story from my aunt Catherine McShane. This was one of my first interviews for The Mistake Bank in 2007, but I never posted the video due to its poor quality (camera and cinematographer not so great). I have always liked this story and it fits perfectly in our Education section.

In the 1950s I was teaching for the first time. I taught in California, and then we didn't have a kindergarten in most places. The children I got had not been to kindergarten. And so it was new for them as it was for me. As we went along, we kind of grew together.

I had 60 children in first grade. One of the activities we did with the children was an end of year program for the parents. This one year the children were doing a dance. They were all involved - all 60. But somewhere along the way - because some of them were so immature - I decided not to include all of them in the final performance.

We had the dance; parents enjoyed it. However, when the dance was over, I had one parent come up to me. He said, "You did not allow my son to dance. I came all the way from Chicago to take his picture."

Now I see the difference in not allowing all the children to participate, whether they could dance or not. It was a poor decision. And I certainly learned a lot from that. I have now retired, but I still remember this clearly. It's very important to get the approval of parents and teachers and classmates, and agree that everybody gets involved.

Jeffrey Katz of Wize Commerce - do what I say, not what I do!

In his Corner Office interview in the New York Times, Katz talks about the usefulness of strategy and recruiting:

To me, it’s all about having a thoughtful strategy and recruiting talent, and if you have those two things, you can really make a lot happen as a leader or as a team. You can make almost anything happen. I don’t think it’s a guarantee, but without them, it’s very hard to thrive and be successful, and frankly to enjoy yourself.

I’ve even had examples when I didn’t follow my own advice. I started my own little company, called Travel Game, and tried to make a go of it for 18 months before I shut it down. I had no team. It was all contractors, and really there was no strategy. I just thought, “Let’s throw it out there and see what happens.” And of course it flopped. I thought: “Wow. What if I had followed my own advice?”

Entrepreneurs to Cornell Tech students: "It's a miracle if a startup gets off the ground"

From the New York Times profile of Cornell NYC Tech, a new university with an introductory class of eight students. The school, which is building a new campus on Roosevelt Island off Manhattan, focuses on combining research and practical work, saying that "business, technology and real-world experience are baked into the coursework."

Not long ago, three young high-tech entrepreneurs sat with the students, talking about failure. They talked about questionable technical, financial or personnel decisions in start-up businesses they had created or worked in, about companies they had seen disintegrate, and about detours into projects they later discarded.

A question was asked about Andrew Mason, co-founder of Groupon, who had been fired a day earlier as the company’s chief executive.

“We should all be so lucky as to build a company that the investors care enough about to fire us,” Tim Novikoff, the C.E.O. of a small company making mobile phone software, said with a wave of his arm around the table, prompting laughter from the students and knowing nods from the Cornell Tech staff. A rail-thin man with the deep-set eyes of someone who could use a little more sleep, Mr. Novikoff is in his early 30s, making him the oldest of the three visitors.

“It’s a miracle if a start-up gets off the ground,” he said. “The last six months I’ve had no income, I have no health insurance. But I got to fly out to a C.E.O. conference and talk with Ashton Kutcher about mobile video for 10 minutes.”

The visitors urged the students to take risks but to expect, at least at first, a precarious existence, riddled with setbacks, that will require obsessiveness and a thick skin — and they made it sound like the grandest of adventures.

Father's Day mistake story

We all learn from mistakes, and in my opinion parenting is the richest source of these types of stories. Despite millions of years of collective experience and innumerable self-help books, there is no way to prepare to become a parent. It's the ultimate example of learning by doing.

As my kids are now twelve and ten, one of the biggest lessons I'm learning is about anger. There's no doubt that kids don't always do what you ask them, that you need to remind them three times to do things, etc. Yet I find that when I lose my patience with the boys, it's at least 80% related to what I'm feeling, rather than what they're doing. If I've had a bad day, or am preoccupied with something, that emerges when I talk to the boys about picking up their room, or finishing their dinner, or putting down the video games. My words are sharper, I react more quickly, and lose my temper more easily.

Day by day, the boys are pretty much the same; my reaction is different. I need to fix that. I need to recognize when something else is going on and separate that from my parenting.

Still working on it.

Startup CEO levels with investors: "I can control the day-to-day, but I don't know what's going to happen in the future"

From Adam Bryant's New York Times interview with Houzz CEO Adi Tatarko. She did not try to dazzle investors with 5-year financial projections that are sure to be misleading. Rather, Tatarko shared the uncertainty of her venture with prospective investors - asking them to embrace her energy, assurance, and love for her work. If I were a VC, her command of the realities of startup life would give me a lot of confidence:

I love what I’m doing, and if somebody wants to join us as investors, they need to understand it without me making a standard pitch. So we would just have coffee with people in an informal environment and talk about what we are doing. We figured they’ll get it, and if they don’t, then they shouldn’t be our investors. This was the way we did it. It was very informal....

It was important for me to say: “Look, I’m not going to try to package it in the way that you are used to. I’m not going to make up numbers for a PowerPoint and show you that the company is going to be worth X and make Y. I don’t have a crystal ball.” Even today, I keep saying to investors that I don’t have a crystal ball and I have no idea what’s going to happen in five years. I know who I am, I know what the company is, I know where we’re going. I have the power to control the day-to-day and what we are doing, but I don’t know what’s going to happen.

Seth Godin: early failure is "merely a step along the way"

Seth Godin posted on his blog about his first public speaking experience, a failure:

Forty years ago today was my first bout of speaking in front of an audience. (And as I remember it, I approached it as a fight, not an opportunity.) I was distracted, nervous and not particularly well received.

It was an epic fail. Friends and relatives agreed that I wasn't engaged or engaging, certainly a performance not to be repeated.

I ignored the part about not repeating it, but I definitely learned some valuable lessons about confidence and engagement.

Just about anything worth doing is worth doing better, which means, of course, that (at least at first) there will be failure. That's not a problem (in the long run), it's merely a step along the way.

This reminds me of the quote from Indiana University's Dean Shepherd: "failure is not the opposite of success."

[Hat tip Elizabeth Sosnow.]

New post on 99u - how golfer Adam Scott bounced back from a disastrous failure

I wanted to take the opportunity to point out a recent article that I wrote for 99u.com. It concerns how golfer Adam Scott was able to overcome his disastrous collapse in last year's British Open.

It may be a good piece to check out as the US Open tournament starts this week. Here's a taste:

After his Masters victory, Scott explained that his British Open experience didn’t shake his confidence. Rather, “it did give me more belief that I could win a major tournament. It proved to me, in fact, that I could.”

When we fail, there’s nothing we can do to erase the past. But we can manage our mindset and actions going forward. How we view the failure has everything to do with our ability to bounce back.

You can read the entire post here.

#TMOxfail - teachers learning from things that didn't work

TeachMeet, a UK-based meetup organization focused on education, announced #TMOxfail, a gathering on July 11 in Oxford, England:

Having run a couple of conventional 'sharing best practice' TeachMeets, we'd like to add a different twist to this one. You are invited to come along to present and share experiences of, rather than what that worked well, activities, lessons, approaches or strategies which you tried, but which didn't work out so well! Why would anyone want to do that? Well, #TMOxfail is offered in the belief that:

- we learn as much, probably more, from reflecting on failure as we do by focusing on success
- sharing best practice can be useful and inspiring; so can the honesty and openness which comes from talking about when things go wrong
- as teachers, we can be too quick to feel bad when things go wrong - by discussing these things openly, we can develop a 'growth mindset' culture in which it's OK to fail, as long as we reflect, renew and build again

We are looking for either 2 minute (nano) presentations, or 7 minute (micro) presentations in which you might talk about:
- An activity, lesson, approach or strategy that you tried and what you were hoping for
- What happened in reality and what you think went wrong
- What you learnt from the experience, and how you would / did do it differently next time

[Note the reference to Carol Dweck's work on the "growth mindset."]

I wish the #TMOxfail folks all success in their venture. I wonder if they might be willing to post some of their presentations and share their stories here?

Quick change of subject: let me take this opportunity to point out a new feature. Now that there are nearly 500 posts on the site, navigation for new readers is an issue. So, I've created a handful of key categories (listed on the right-hand column), which collect posts that relate to that category. If you are interested in learning more about the role of failure and mistakes in startups, click that link. You will be presented with a much smaller set of posts, all of which are related to startups.

Not coincidentally, one of these key categories is Education :)

[Hat tip Tim Harford]

Bill Marriott: "They looked at me, and didn't follow the recipes"

This story is from Bill Marriott, chairman of Marriott International, from Adam Bryant's "Corner Office" series.

I was in the Navy Supply Corps on an aircraft carrier. I eventually took over the officers’ mess. I had worked in my dad’s restaurant when I was in college, and I had all the recipe cards sent to me because I didn’t like the food they were serving on board.

I went to these Navy stewards and said, “I want you guys to follow the recipes.” And they looked at me, they didn’t say much, and they didn’t follow the recipes. I came back a few weeks later and said, “You’ve got to start following these recipes.” And they didn’t follow the recipes. They were all World War II veterans, they’d been everywhere and they had learned not to pay attention to all these green, young ensigns.

In later years, I realized I’d failed to get them on the team. I had walked in and said: “Here, do it. I’m an officer. Salute and do it.” They ignored me and didn’t do it, and we still had lousy food when I left the ship. I realized that I should have sat down with them and said, “What do you think we can do to improve the food?”

From VC Brad Feld - when failure is the best option

On the WSJ.com Accelerators blog, VC Brad Feld recently posted a story about managing failure in a startup. Here's an excerpt:

Over three years, this new company raised a total of $10 million from me and several other investors over several rounds. The first few years were exciting as Mark [the founder] launched a product, scaled the company up to about 40 people, and tried to build a business. But after two years we realized that we weren’t really making any progress — there was a lot of activity but it wasn’t translating into revenue growth.

In year three we tried a completely different approach to the same market with a new product. Mark scaled the business back to a dozen people in an effort to restart the business. Over the course of the year we tried different things, but continued to have very little success.

By the end of the year there was $1 million left. Mark cut the company back again — this time to a half dozen people. He started thinking about how to restart for a third time on the remaining $1 million.

Mark had never failed at anything in his life up to this point. He was proud of this, and the idea that he couldn’t at least make his investors’ money back was devastating to him. But he was stuck and started exploring creating an entirely different business, in a completely different market, with the $1 million he had left.

Mark was newly married and was working 20 hours a day. We were talking at the end of the day during the middle of the week and he was so tense, I thought his brain might explode. I told him that as his largest investor and board member, I wanted him to turn off his cell phone, take his wife out to dinner, have a bottle of wine, and talk about whether it made any sense to spend the next year of his life trying to restart the business with the remaining $1 million.

Mark had a drive to succeed that in this case was blinding him to a reality. His company wasn't succeeding yet, and by draining the business's funds it was becoming less and less likely to succeed. He needed an outside voice (in this case, a patient and trusting investor) to let him know there was another path. By closing the door on this opportunity, he would have time and energy to regroup and start fresh. And his main investor wouldn't crucify him for it.

Undeclared failure is insidious - it erodes our confidence, distracts us from more promising pursuits, and affects those we care about. There are always restarts in life, second chances (Chapter 5 in the book). We often overestimate others' expectations of us.

Feld notes that Mark's next company was highly successful.

Mistake Story from Jill Konrath: "The Temptation of Hot Prospects"

This story is from Jill Konrath and is featured on her blog. Reposted here by permission. There's another story from Jill in the Mistake Bank book.

Sales Mistake: The Temptation of Hot Prospects

A few years ago, my primary business focus was working with large corporations in the Minneapolis/St. Paul area when they were launching new products. My expertise? Helping them shorten time to revenue on new product introductions.

I’d just launched SellingtoBigCompanies.com to help small businesses gain access to my expertise. It was my new baby. I’d invested tons of time and lots of love to get it up and running.

When the phone rang that day, I answered absentmindedly. But when the caller announced that he was from Southwest Airlines, I snapped to attention. He’d been all over my new Web site, was very impressed, and also very interested in my training programs.

The airline was going to be putting its salespeople through training in the not-too-distant future and was evaluating its options. When I asked who else he was looking at, I was delighted to be included with the industry biggies.

Mr. Southwest had dozens of questions about my content, delivery models, remote training options, learning reinforcement and more. I answered every single one of them in glorious detail.

When he requested a proposal, I asked, “How soon?” When he answered that he wanted it in two days, I quickly agreed.

The proposal I sent to him via e-mail covered everything we had talked about in our conversation, plus a full range of pricing options. It was a masterpiece. I had high hopes that this opportunity would take my business to a whole new level.

I never heard from Mr. Southwest again. Even though I contacted him many times, he never called back.

Lesson Learned
It was my own fault. I mistakenly let my own eagerness to land this marquee customer outweigh my common sense.

The truth is I really needed the business at that time. After spending many months and lots of money to create SellingtoBigCompanies.com, I was running short on cash. I should have known better, but I was seduced by the opportunity.

In retrospect, I failed to find out if Mr. Southwest was just exploring his options or actually in the final stages of decision making. It’s highly likely he was just doing the former.

Had I known that, I would never have written a detailed proposal. Instead, I would have focused on helping him determine the business value of making a change. I would have used my expertise to help him sell the concept internally and establish decision criteria favorable to my solution.

Over and over again, I see other sellers make similar mistakes when they have a hot prospect on the line. Like me, they expound on their capabilities and benefits. They willingly provide detailed information and do tons of extra work to create proposals or presentations—anything the prospects want.

While that puts you into the “nice” seller category, it’s not a good business decision to invest tons of time and effort to land a fantasy customer. Nor does it help your prospects make the best decision for their organization.

If Mr. Southwest was actually deciding in a couple days, I should have addressed the fact that I was a small boutique firm that didn’t compete head-on with the larger companies he was looking at.

Doing business with me would have been risky. I knew that. But I didn’t want to bring it up; I was hoping he wouldn’t notice!

I was so blinded by the opportunity that I was willing to do anything that he asked. It was delusional on my part. Wishful thinking. Hopeful. When we feel this seduction, we need to remind ourselves that “hope is not a strategy.”

While hot prospects may hold the promise of big paychecks, there’s often much that still needs to be determine if it’s a good fit for your company.

Don’t be overeager. Instead be ruthlessly realistic. Detach from the fantasy and assess your true chances. Bring up the tough questions.

Why? Because it’s the right thing to do for both you and your prospect.

Anna Wintour: take criticism with grace, and learn from what doesn't work

Vogue Magazine editor Anna Wintour, praising fashion designer Zac Posen, who is now rebounding from a career lull:

He made that move to Paris, which obviously he wanted to do and probably wasn’t the smartest move for him. But he takes criticism with very good grace and he learns from what doesn’t work as well as he learns from what works.

Friday chuckle: Grilled Cheese Mistakes

A photo essay from Rebecca Orchant in the Huffington Post points out things to avoid when making grilled cheese. For example, too thick cheese that doesn't melt before the bread burns (left).

Photo from cogdogblog via Flickr Creative Commons.

Rita Gunther McGrath's "Contract for Intelligent Failure"

Connected with the launch of her book "The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business," Rita Gunther McGrath has published a "Diagnostic Workbook" to identify if your company is ready for the new age of transient competitive advantage. One page in that workbook was a "Contract For Intelligent Failure" - a brief bullet list of criteria to evaluate whether an effort is set up properly to capitalize on failure, if it occurs. There are resonances with the ideas of Sebastian Thrun (in uncertain work, have a very clear objective), and chapter 5 in the book, which covers smart mistakes.

A contract for intelligent failure

• The effort involves genuine uncertainty
• The outcome will be decisive because we planned carefully
• It’s riskier to do nothing - or to conduct further analysis – than to act and fail
• The cost is small
• The underlying assumptions are documented in writing
• There is a plan to test the assumptions
• The risks of failing are understood and to the extent possible, mitigated
• The cost is contained
• Commitments are scaled according to our increasing understanding
• We’ve defined what success would look like – and the opportunity is significant

(c) 2013 Rita Gunther McGrath. All rights reserved. Used by permission.

"The End of Competitive Advantage" - win by skillfully managing the decline of old businesses

"The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business" by Rita Gunther McGrath is the first book I've read that essentially equates strategy and innovation. There are many books on each topic, but only one - this one - that describes what I observe in company after company (especially high-growth startups): strategy is an outgrowth of the ability to sense market need and create, market and manage new offerings. While startups do this instinctively, established companies do not. It's new, therefore, to connect the world of big-company strategy (a la McKinsey) to the innovation process (IDEO), to argue that, rather than being an outlier in the company structure, innovation must be central to current and future success in more and more businesses. Sustainable competitive advantage is disappearing, Rita writes. In its place is a much scarier cousin - transient competitive advantage.

Most pertinent to this site, Rita's striking assertion is that skillfully managing declining businesses is terribly important. In the frame of transient competitive advantage, a declining business isn't a failure or a tragedy; it's a fact of life, and handling decline thoughtfully - resetting expectations, reducing investment, shifting resources to new growth areas, possibly divesting - can in itself create strategic advantage, by enabling more investment and focus on vital new businesses. This is especially important because companies tend to embrace the alternative - investing more to get less, hanging onto old successes too long, isolating and protecting businesses in "strategic business unit" lockboxes.

Metaphorically, a company in the "transient competitive advantage" world is less like an edifice and more like a sports team. We expect buildings to last, unchanged, for decades. We expect sports teams to look different from year to year. A team that's successful for a long time (the New England Patriots or the San Antonio Spurs, for example) will turn over its roster regularly. It will always be looking for new players to plug in and will be wary of relying on too many players past their primes. A less successful team will hold onto its players too long, hoping the poor results from this season are not the signs of a prolonged decline but instead are an aberration.

Trial and error is not random; rather, it requires intelligence and planning

I find this Thomas Edison quote fascinating:

Negative results are just what I want. They’re just as valuable to me as positive results. I can never find the thing that does the job best until I find the ones that don’t.

What feels strange about these words is the equating the value of negative results (failures) to positive results (successes). Why would they be equally valuable? Couldn't you spend your whole life producing negative results? How depressing!

Not if you're like Edison. Because what's not stated in the quote is that, to pull this off, Edison had to work in a certain frame that bounded his search for an answer. Within a bounded frame, each negative result is valuable, because it indicates an area of the frame that is not what you're looking for, making it more likely that the next test, within that boundary, is successful. And so on.

Nassim Nicholas Taleb crystallized this in his book "Antifragile," when he described how to approach trial and error "rationally."

Trial and error has one overriding value people fail to understand: it is not really random, rather, thanks to optionality, it requires some rationality. One needs to be intelligent in recognizing the favorable outcome and knowing what to discard.

And one needs to be rational in not making trial and error completely random. If you are looking for your misplaced wallet in your living room, in a trial and error mode, you exercise rationality by not looking in the same place twice. In many pursuits, every trial, every failure provides additional information, each more valuable than the previous one - if you know what does not work, or where the wallet is not located. With every trial one gets closer to something, assuming an environment in which one knows exactly what one is looking for. We can, from the trial that fails to deliver, figure out progressively where to go.

I can illustrate it best with the modus operandi of Greg Stemm, who specializes in pulling long-lost shipwrecks from the bottom of the sea.... He does an extensive analysis of the general area where the ship could be. That data is synthesized into a map drawn with squares of probability. A search area is then designed, taking into account that they must have certainty that the shipwreck is not in a specific area before moving on to a lower probability area. It looks random but is not. It is the equivalent of looking for a treasure in your house: every search has an incrementally a higher probability of yielding a result, but only if you can be certain that the area you have searched does not hold the treasure.

Stemm first maps the area where the shipwreck could have been, in the same way you focus on the living room to look for your lost wallet. That's the frame of the problem, and it takes intelligence and thought to figure out the appropriate frame (Edison would agree). Within the frame, trial and error becomes a powerful tool, in which each failure incrementally reduces the size of the frame, and gets you closer to your ultimate success.

Are "negative results just what you want"? If you have defined a proper frame for your search, the answer is yes.

[While I have been digesting "Antifragile," Albert Wenger has posted a fantastic and very thoughtful synopsis of the book and its ideas. Highly recommended.]

Story from Fred Wilson: "You Can Do Too Much Due Diligence"

This story is from Fred Wilson, partner in Union Square Ventures and someone who's frequently referenced on this site. For more on due diligence, see this article I wrote for 99u last year, and of course check out the book.

May 132013

You Can Do Too Much Due Diligence

It's Monday, time for another lesson I've learned in the venture capital business. Today I will tell a story that I love telling. It has some of my favorite people in it.

Back in 2004, early in my blogging career, I heard about a service that had just launched called Feedburner. It provided a number of useful services for a blog's RSS feed. So I went and signed up and AVC became one of the first users of the service. I immediately liked the service and the idea. So I contacted the founder/CEO Dick Costolo, who has gone onto bigger and better things. I told Dick that I was interested in making an investment in Feedburner. My friend Brad Feld was also talking to Dick about the same thing so we decided to do the investment together.

As part of our investment process, we do a bunch of fact gathering/checking work that is called Due Diligence in the vernacular of the VC business. So my partner Brad Burnham and I put together a list of leading blogs and online publishers who had popular RSS feeds at the time. I think there were a dozen or so publications on that list. It included Weblogs (Engadget), Gawker (Gawker), NY Times, and a bunch more. We know most everyone who ran those operations so we called them.

What we heard was surprising. Not one of them was willing to hand over their RSS feed to a third party for analytics and monetization. We were very surprised to hear that and thought a bit about it. But, we decided, we could not invest in something that the big publishers would not support. So regrettably, I called Dick and told him we had to pass and why. Brad Feld went ahead with the investment and Feedburner closed their round without USV.

About six months later I ran into Dick at an industry conference. We decided to grab lunch together and during lunch he said to me "you know those dozen publishers you called?" I said "yes, what about them?" He said "every single one of them is on Feedburner now."

I was pissed. How could that be? So I said to Dick, "Would you consider letting us into that last round we walked away from." He said "No, but I will let you invest at a 50% increase in price". We did that and became an investor in Feedburner. And that worked out well when Feedburner was sold to Google a few years later.

So what did I learn from this lesson? First, trust your gut. I was using Feedburner and knew it was a very useful service. I felt that others would see that too. They did, but it took some time. Second, I learned that a service can get traction with the little guys and in time, the big guys will come along. I have seen that happen quite a bit since then. And finally, I learned that you can do too much due diligence. It's important to talk to the market and hear what it is saying. But you have to balance that with other things; the quality of the team, the product, the user experience, etc. You cannot rely alone on due diligence, particularly early on in the development of a company and a market.

I posted the following as a comment to Fred's post:

"Don't overdo due diligence" applies to entrepreneurs as much as investors. If you investigate any idea enough you will find ample reasons it won't work. If you are a strong believer in your idea (or the people behind the idea), better to try some small, cheap steps rather than continue to think about it or back away. The direct evidence you get from those early steps is far more illuminating than any arms-length due diligence you can do.

I liken working with early stage businesses (as investor or founder) to driving at night on an unfamiliar road. There will be curves up ahead which are beyond the reach of your headlights. All you can do is drive under control till what is up ahead becomes visible. But better to drive than wait. If you wait till daytime, you will be late.

Heidi Grant Halvorson - comparing yourself to others is a mistake; to build resilience, track your own improvement

From the HBR Blog Network, which asked their contributors, "What do graduates really need to know about the world of work?" Halvorson's new book, cowritten with E. Tory Higgins, is "Focus: Use Different Ways of Seeing the World for Success and Influence"

There will be obstacles, setbacks, challenges. Many things will be more difficult than you thought they'd be. The key to success (scientifically speaking) is perseverance. You've just got to hang in there — there's no other way to win. But how do you do it? A great way to be more resilient is to stop comparing yourself to other people, and compare yourself to your own past performance — last week, last month, last year. Are you improving? That's the only question that matters.

To jump back in after failure, you need to have, or build, irrational confidence

Interesting post on HBR Blog Network by Art Papas,co-founder and CEO of Bullhorn, a vendor of recruiting software.

Papas declares in his title that "For Entrepreneurs, Failure Isn't Always a Good Teacher" and goes on to write,

Failure makes many of us less confident and less aggressive. We become gun shy. That's not surprising. Unfortunately, the cold reality is that once you've failed as an entrepreneur, you need to have blind confidence and a healthy sense of aggression to prove to people that you actually can succeed. You need to try again, and brace yourself to be criticized, lectured, doubted, and flat-out ignored by investors and sometimes even your own team. If at first you don't succeed, you're in for the fight of your life.

This is a good point, and he backs it up with an amazing story:

When I first started Bullhorn in 1999, our original concept was the product of some brainstorming between me and my co-founder. His idea was, "Why don't we build a platform for people to display their creative work on the internet?" Then I added, "We could make it a marketplace for those people to get jobs." Nobody had ever told us that this was a problem that needed solving, yet we thought it was a great idea. So did our original investors. In fact, when we took the idea to creative professionals, they really liked it as well. Unfortunately, when we took it to the businesses that were making hiring decisions, it was a total flop.

So our first business model failed. After a few months, as our cash dwindled, we thought up yet another problem that we could solve. Our investors loved that idea too. But, much like our previous efforts, we discovered that no one actually suffered from the problem we were out to solve. Our second business model failed, as well. Then the dot-com bubble collapsed. Our early investors quickly turned from loving their investment in Bullhorn to hating it and they shut us off from any additional capital. We decided to forgo salaries to stretch our cash. I was paying my rent by maxing out my credit cards. Then a business dropped in our laps. We met someone with a problem that needed solving and we were uniquely poised to solve it. We realized we had a game-changing idea on our hands: creating the first software-as-a-service applicant tracking system for recruiters. When our new product started to take off, we needed more money to get to the next level. Unfortunately, our investors looked at me like I was the boy who cried wolf and rejected the idea out of hand. The sales traction and momentum was not compelling to them in any way. They told us it would never be a big business. Fortunately, they were dead wrong, but we didn't feel so confident at the time.

I had identified our winning product, but I was late to the game. So what did I do? Did I pick myself up off the floor, dust myself off, and power ahead? Not really. My team and I still had total faith in our concept, but the reality of having failed before made me nervous to take risks. I didn't have the confidence to push my investors to support the idea and decided to essentially bootstrap the business, which worked, but cost us precious time. The business succeeded and the rest is history 13 years later, but we would be three times the size we are now had I been stronger.

Failure is a great teacher, but it's painful and rattles our confidence big time. Who wouldn't be "gun-shy" after the kind of failure Papas describes, especially one (or two) in which investors' money was lost?

And this is the amazing point. Logically, it doesn't make sense to keep going. It would be easier and safer to go in another direction. But entrepreneurs don't think logically at this point. They have, or have built, an irrational self-confidence that allows them to jump back into the fray, maybe to succeed this time, or maybe to fail again. And thank God for the people who do that. They are kind of heroes, aren't they?