Luck and the entrepreneur

Marc Andreesen has an awesome post about luck and the entrepreneur here. In it, he talks about the 4 types of luck, and how entrepreneurs can best exploit luck.

Chance 1: Blind luck

The good luck that occurs is completely accidental. It is pure blind luck that comes with no effort on our part.

Chance 2: Motion

In Chance II, something else has been added -- motion. A certain [basic] level of action "stirs up the pot", brings in random ideas that will collide and stick together in fresh combinations, lets chance operate. Motion yields a network of new experiences which, like a sieve, filter best when in constant up-and-down, side-to-side movement... Chance II springs from your energetic, generalized motor activities... the freer they are, the better. [Chance II] involves the kind of luck [Charles] Kettering... had in mind when he said, "Keep on going and chances are you will stumble on something, perhaps when you are least expecting it. I have never heard of someone stumbling on something sitting down."

Chance 3: Recognizing good fortune

We see blind luck, but it tiptoes in softly, dressed in camouflage. Chance presents only a faint clue, the potential opportunity exists, but it will be overlooked except by that one person uniquely equipped to observe it, visualize it conceptually, and fully grasp its significance. Chance III involves involves a special receptivity, discernment, and intuitive grasp of significance unique to one particular recipient. Louis Pasteur characterized it for all time when he said, "Chance favors the prepared mind."

Chance 4: Personal approach to the opportunity

[Chance IV] favors the individualized action. This is the fourth element in good luck -- an active, but unintentional, subtle individualized prompting of it.

Chance IV is the kind of luck that develops during a probing action which has a distinctive personal flavor. The English Prime Minister, Benjamin Disraeli, summed up the principle underlying Chance IV when he noted: "We make our fortunes and we call them fate." Chance IV comes to you, unsought, because of who you are and how you behave...Chance IV is so personal, it is not easily understood by someone else the first time around... here we probe into the subterranean recesses of personal hobbies and behavioral quirks that autobiographers know about, biographers rarely. [In neurological terms], Chance III [is] concerned with personal sensory receptivity; its counterpart, Chance IV, [is] involved with personal motor behavior.

To recap:

• Chance I is completely impersonal; you can't influence it.
• Chance II favors those who have a persistent curiosity about many things coupled with an energetic willingness to experiment and explore.
• Chance III favors those who have a sufficient background of sound knowledge plus special abilities in observing, remembering, recalling, and quickly forming significant new associations.
• Chance IV favors those with distinctive, if not eccentric hobbies, personal lifestyles, and motor behaviors.
  

For entrepreneurs, this means:

• How energetic are we? How inclined towards motion are we? A variation on the "optimize for the maximum number of swings of the bat" principle. (Same thing that Reid Hoffman mentioned in his talk) In a highly uncertain world, a bias to action is key to catalyzing success, and luck, and is often to be preferred to thinking things through more throughly.
• How curious are we? How determined are we to learn about our chosen field, other fields, and the world around us? Curiosity is more important than intelligence. Curious people are more likely to already have in their heads the building blocks for crafting a solution for any particular problem they come across, versus the more quote-unquote intelligent, but less curious, person who is trying to get by on logic and pure intellectual effort.
• How flexible and aggressive are we at synthesizing -- at linking together multiple, disparate, apparently unrelated experiences on the fly? I think this is a hard skill to consciously improve, but I think it is good to start most creative exercises with the idea that the solution may come from any of our past experiences or knowledge, as opposed to out of a textbook or the mouth of an expert. (And, if you are a manager and you have someone who is particularly good at synthesis, promote her as fast as you possibly can.)
• How uniquely are we developing a personal point of view -- a personal approach -- a personal set of "eccentric hobbies, personal lifestyles, and motor behaviors" that will uniquely prepare us to create? This, in a nutshell, is why I believe that most creative people are better off with more life experience and journeys afield into seemingly unrelated areas, as opposed to more formal domain-specific education -- at least if they want to create."

Rising tide lifts all ships

Great post by VC Jeremy Liew here. He quotes a McKinsey study that shows the following:

"Within industries, there was very high variability in the growth rates of competitors. For example, ten European telcos saw compound annual growth rates of between 1 and 25% between 1999 and 2005 - a very wide range.

McKinsey found that there were three key drivers of the variance in growth:

1. Portfolio momentum: organic revenue growth from the market growth of segments where they compete
2. M&A: inorganic growth from acquisition or divestiture
3. Market share performance: organic growth from gaining share in a market

Interestingly, market share performance was found to explain just 22% of the variability in growth rates. Portfolio momentum explained 43% of the differences in growth rates, and M&A explained 35%. McKinsey concludes:

Simply put, a company’s choice of markets and M&A is four times more important than outperforming in its markets. This finding comes as something of a surprise, since many management teams focus on gaining share organically through superior execution and often factor that goal into their business plans."

"Plan B"

We met with Randy Komissar again from Kleiner Perkins. He talked to us about a framework that startups should use to make a lot of progress quickly. His working title for the framework (and book that he is writing) is called "Plan B."

The process works like this: the founding team should identify all relevant analogs and "anti-logs" for the new opportunity that is being explored. Analogs are examples of successful companies--not necessarily from the exact same space, but relevant enough that we can glean lessons applicable to our opportunity. The "anti-logs" are companies that were not successful. We want to draw upon the experience of others before us to identify the "knowns" regarding the given opportunity.

Then we identify the unknowns, upon which we wish to take a "leap of faith." These leaps of faith are pivotal for the start-up, and they are where the company should be focusing all of their efforts.

To address the leaps of faith, the startup should follow a 5-step iterative process.
1. Identify what the key questions are that need to be answered regarding the leap of faith.
2. Develop hypotheses regarding each of the key questions.
3. The company should go out and do testing to validate or invalidate the hypotheses.
4. Interpret the data from the testing to generate insights.
5. Refine the original hypotheses based on the insights from the testing.

Iterate steps 1-5 until you have resolved most of the key questions/leaps of faith. Once you have done that, you will have backed into a business plan which you can then execute.

Seems like a pretty simple, straightforward process? The challenge in executing this process well lies in the judgment that needs to be applied at each step.

• What analogs/anti-logs do you select for comparison?
• What are the most important leaps of faith? What are the key questions that need to be answered?
• What are the hypotheses for each key question?
• How do you create and execute the tests to validate the hypotheses? How do you run the tests as quickly and inexpensively as possible?
• How do you interpret the results, and what insights do you draw?
• When do you refine your hypotheses, vs. when do you throw out your test results and try again?

The most successful companies, according to Randy, can get through the process quickly because (1) their hypotheses are usually correct, so they don't have to spend a lot of time and energy iterating their hypotheses; (2) the hypotheses that are wrong fail early, fail often, and fail quickly. So you have to have the experience and judgment to develop hypotheses that are mostly right, and/or you have to be lightning fast with your iterative testing and have your hypotheses fail quickly up front.

Randy then took us through the example of Steve Jobs and the iPod. Jobs had a few different analogs: (1) the Walkman (people were willing to listen to music on headphones in public places), (2) Napster (people were willing to download and share digital music), (3) VCRs (media industry had to settle for "fair use"). He also had a couple of anti-logs: (1) The Rio (a poorly designed MP3 player), (2) Napster (got sued by RIAA because the record labels felt they encouraged pirating). He knew that people would listen to music on-the-go, and that they craved digital music. He also knew that he could design a much better user experience than the Rio, and he could create an ecosystem that would be friendly to the record labels. His biggest leap of faith--would people be willing to pay for digital music? Jobs didn't believe that they would. So what did he do? He hedged his bet. He decided that he wouldn't make money off of music, but off of the hardware. He created a "fair use" case by charging money for the legitimate music, but he also enabled users to download pirated music onto the device as well. The result? Only 3% of music on iPods was actually purchased from iTunes. But the record companies weren't able to sue Apple, and in fact, they cooperated with them.

Made to Stick

We've already talked about Simple and Unexpected as 2 key principles for why ideas stick. Now we cover 2 more:

1. Concrete - use of simple, vivid language. The opposite of abstraction.
2. Credible - use of internal or external authority to make your message more believable.

Concrete

Easy visualized nouns ("bicycle" or "avocado") are easier to remember than abstract ones ("justice" or "personality").
Use personas to make your customer more concrete.

Credible

Have someone that knows the intended recipient spread your message for you. We believe our family and friends.
Use authorities--experts, aspirational figures, or "anti-authorities" (people who truly embody the essence of the message)
Internal credibility comes from relevant details, statistics (using the human-scale principle: "in other words, you would have to drink 200 glasses of OJ to get the same Vitamin C"), the Sinatra test (if you can make it here, you can make it anywhere).

The last point re: internal credibility--I've seen this at work in a few different situations. At McKinsey, I noticed that the most effective folks were the ones who had a phenomenal memory for details. They could surface extremely specific, relevant details at the right moment. Lars, one of my EMs, also told me that you should have the numbers in your model at the tip of your fingertips. This also goes to the point of statistics. People--especially analytical people in business--tend to be persuaded by numbers and quantification. Finally, regarding the Sinatra effect--we used this at Yodlee. We would say, "Our security has been audited by the top 10 banks, companies like Merrill Lynch, American Express, and Bank of America. Don't you think we could pass your security audit process?"