Decide To Do Something That Will Probably Fail, Then Convince Yourself And Everyone Else That Success is Certain

I’ve
been thinking a lot about entrepreneurship and innovation lately. First, I gave
a talk about innovation, based on Weird
Ideas That Work, to a group of about 50 Korean executives from SK Telecom, who
were visiting  Silicon Valley to learn about
how entrepreneurship and innovation works around here. They were given a very
high-end experience, spending a day at IDEO learning about their creative
process, hearing from CEO Tim Brown and
the amazing Diego Rodriguez,
getting a speech from innovation guru Clay Christensen, and after my
talk, getting on the bus for lunch at Google and a talk from Marissa
Mayer. I also have been thinking about entrepreneurship because, as you can
see from my last post, I spent a fair amount of time poking around the updated version
of the Stanford Technology Ventures Program’s new Educator’s Corner.

As
I was preparing – and giving – my weird ideas talk to the SK Telecom
executives, I kept thinking, after spending 20+ years in the Stanford  Engineering School and studying
innovation for a long time, about which single lesson matters most, at least
given my biased view and experience. Weird Ideas That Work came out in 2002, but it was based on a talk that
I’ve been giving – and tinkering with — since about 1995.  It has 12 weird ideas for sparking
innovation. But I’ve come to believe
that one of these weird ideas is more important, more empirically valid, and
more troubling than the rest: 

Step 1: Decide to Do Something the
Will Probably Fail

Step 2: Then Convince Yourself and
Everyone Else That Success is Certain

Consider
the evidence. Most new ideas fail. Most new companies fail, most products fail,
and most new technologies fail. Darwinian
concepts apply to innovation, as hundreds of careful studies show. The only way
to do something that will probably succeed is to replicate the past, especially
to make your own future as perfect a replication as the past as possible. When Toyota makes another
Camry, McDonald’s sells another Big Mac, or P&G makes and sells another box
of Tide, the odds of success are pretty high.

Once
you enter the world of innovation, where you are doing something new, despite
all the hype, all those consultants with sure fire methods, the fact is that –
even if you have Kleiner Perkins funding, an
experienced CEO, Wilson Sonsini
as your law firm, and a bevy of hot young Stanford engineers developing your
product — odds are you will fail.  Those
are the hard facts, and although most innovators believe that they are better
than the rest, that the odds don’t apply to them, that is a delusion. Google
and its founders are worshipped, but at the time they were was funded, local
venture capitalists seemed to be just as excited about the Segway (which still may make it,
who knows), Zaplet (I
think they dropped over 100 million on that one), Guru
(another 60 million or so), and the infamous Webvan
(over 800 million!).

The
investors at top venture capitalist firms and the people who run R&D at
places like 3M, P&G, and BMW are very smart people and have a great overall
internal rate of return, but as they know so well, in the world of new ideas,
they must accept a high failure rate. They also know – and sometimes even admit — that so-called experts have
a terrible record when it comes to predicting which new ideas will survive and
which will not. Stanford’s James
March, perhaps the most renowned living organizational theorist, summarized
this state of affairs elegantly (this quote is in the last chapter of Weird Ideas That Work):

Most fantasies
lead us astray, and most of the consequences of imagination for individuals and
individual organizations are disastrous. Most deviants end up on the scrap pile of failed mutations, not as
heroes of organizational transformation. . . . There is, as a result, much that
can be viewed as unjust in a system that induces imagination among individuals
and individual organizations in order to allow a larger system to choose among
alternative experiments. By glorifying
imagination, we entice the innocent into unwitting self-destruction (or if you
prefer, altruism).

Yet,
the fact remains that, if you are in the innovation business, developing new
products, compounds, or services, starting or funding new companies, you don’t
make a cent if you don’t place your bets on something or someone: Nothing
ventured, nothing gained, is both a cliché and a dangerous half-truth. It is a
cliché because, after all, those VC’s wouldn’t have those nice new houses and
airplanes courtesy of Google if they hadn’t made their bets. And it is a
dangerous half-truth because, well, nothing ventured, nothing lost (think
Webvan).

Once
you put your money down on something (that will probably fail), that is when
things get really weird. Sure, there are
things you can do to increase the odds of success, work hard, find smart
people, and so on. BUT if I was going to pick one thing (based on the
evidence), I’d vote for irrational optimism, convincing yourself and everyone
else that success is certain.

Why?
There is a huge literature – more than 500 studies out there now – on the
self-fulfilling prophecy: If you believe that great things will happen, the
odds of success go up, if you believe that bad things will happen, the odds of
failure do to. Sociologist Robert Merton wrote
classic article on the subject in 1948, and of course, this notion goes back to
the story of Pygmalion. And much the
same story emerges from medical research on placebo effects, that sugar pills
often work just as well as “real medicine” because people have irrational faith.

So,
if you look at the innovation and entrepreneurship game from a portfolio
perspectives, this means that – although their failure rate will remain plenty
high – investors will do better over the long hail if they bet on persuasive
optimists. Thomas Edison fits this
description perfectly, so does Francis Ford Coppola, Steve Jobs (of the famous reality
distortion field), and Burt Rutan. Rutan is the designer of the Voyager, the first plane to fly non-stop
around the world, and more recently, won the 10 million dollar X-Prize with two
flights by his Spaceship One — to demonstrate the possible viability of “space
tourism.” When so called experts told him that Voyager would never make it, he
told his team that “Confidence in nonsense is required.”

The
problem with such success stories, however, is that we tell and remember them,
and we don’t tell and forget all the failures, all those optimists who go from
failed idea to failed new idea. And that is why, as March’s quote hints, there
is a true ethical dilemma in the world of innovation. If you are on top of portfolio, being
optimistic and funding optimists, increases your hit rate, but as March says,
for the typical person, project, or company in the portfolio, the effect is to
“entice the innocent into unwitting self-destruction (or if you prefer,
altruism).”

There
is also a further twist that I’ll talk about in a future post: The same
optimism that increases the odds of success also can lead to escalating
commitment to a failing course of action. That is why banks have one group to
hands-out loans and another to pull the plug.  And it is why the lead venture capitalist on a
deal often remains behind a company 100% until the moment that his or her
partners intervene and terminate the investment. The overly optimistic backers of the
adventure will often keep throwing good money after bad because they have too
much invested to quit, even though, as they say, sunk costs are sunk and shouldn’t
affect decisions. The result is thaqt cooler and more detached folks are
enlisted to kill investments that seem doomed.

In
short, if your goal is to have the highest internal rate of return for a
portfolio of companies or the highest success rate for set of development
projects, than a strong empirical case can be made for “Decide to Do Something the Will Probably Fail, Then Convince Yourself
and Everyone Else That Success is Certain.” Yet all those sticky and
difficult ethical problems remain, and I don’t quite know what to do about
them. Think about it, if most entrepreneurs came to grips with how bad the odds
against them are, they might be less likely to be “enticed” to start new
companies, and thus avoid the pain and expense of failure. But there would be negative effects as well,
fewer new ideas, less innovation, less cool new stuff. And if only rational, well-informed
pessimists that elected to innovate, to do something new stuff, their failure
rate would be even higher.

I
once teased a local venture capitalist that, if he gave the entrepreneurs his
firm invested in true informed consent, they would have them sign a
document that said something like “I understand that, even though I am
accepting this money, the odds are only 5% that my company will succeed, and
that even if it does succeed, the odds are over 50% that the investors will
remove me from the firm."  It doesn’t
sound like much fun, does it?