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Innovation: an entrepreneurs perspective

Vinod Khosla8/25/2011

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Introduction

ATweetIsawrecentlyshowcasesthemindsetoftheinnovatorsthatwillleadthischargeforchange:

"Cynicsneverdotheimpossible,achievetheimprobable,takeontheinadvisable.Hopeisonlypathto

extraordinarysuccess."Tweetingisaninnovationfewcouldhaveseenordefined:whowouldhave

thoughtafewyearsagothatmillionsofpeoplewouldfollowmessagesin140characters?Andwho

wouldhavethoughtthattheycouldtellthemoodofthenation?Orrevealthecultureofacity,avoid

traffic,sensethestirringsofarevolution,predictthefinancialmarkets,detectandmapnatural

disasters,predictthepopularityofpeople,technologiesandgoods.Icouldgoonforever!Forthe

longesttime,Ihavethoughtofinnovationanditspartner,entrepreneurship,asaboutthosewhodare

todreamthedreamsandarefoolishenoughtotryandmakethesedreamscometrue.Andfoolishness

isakeyingredientofbothinnovationandentrepreneurship.MartinLutherKingsaidhumansalvation

liesinthehandsofthecreativelymaladjustedandGeorgeBernardShawechoedallprogressdepends

upontheunreasonableman.Itisthiskindofcreativity,innovation,andrisk-takingthatrepresentsthe

fundamentaldriverbehindeconomic,cultural,andsocialprogress.Thereisabsolutelynomistakeasto

whytheUnitedStatesledtheworldforthesecondhalfofthe20thcentury,andwhyitisalsohometo

themostentrepreneurs,newbusiness,andrevolutionarytechnologiespercapita.

Whyweneedinnovation

Alloftheriskyattemptsthatcatalyzethisformofinnovationbypassafundamentalhumanbehavior:

humanbeingsfocusonwhattheyknowtheydontknow,andspendnotimesearchingforwhatthey

dontevenknowtheydontknow.Withoutthissearch,howdoweexpecttochangetheworld?By

dabblingonlyinwhatweasasocietyknowwedontknow,weareexpandingourknowledgelittleby

littleintothosefieldsweknowexistjustbeyondourpresentreach.Thisisequivalenttotakingbabysteps,butwearenotdealingwithbabyproblemsanymore.Theproblemswearefacingpromisea

disruptiontoourcurrentlifestyle,andsoweasasocietylogicallyrequireequivalentlydisruptive

solutions.Inotherwords,thedisruptionpotentialofthesolutionmustmatchthatoftheproblem.Now,

ifweimaginetechnologyinnovationasaprobabilitydistribution,wefindthatthebulkoftheinnovation

happensinthelow-disruptionregionandittapersoffintoasmalltailthatrepresentsinnovationinthe

high-disruptionregion.Whatweclearlyneedisthoseideaswiththelowestprobabilityofoccurrence

buthighestprobabilityofinnovation.Thetruthisthatwearentinapositiontosettleforanythingless.

SohowdoweatKhoslaVenturesfindtheseideaswithhighdisruptionpotential?Theonlyansweris

trial,errorandfailure.Ioftensaymywillingnesstofail,givesmetheabilitytosucceed.Addtothisdiversityofthoughtandtrial,imaginingthepossible(andmaybetheimpossible),andjustdoitas

criticalfactorsintherateofinnovationforallofourproblems,rangingfrombattlingpovertyand

resourceshortagestoenhancinginformationspreadandprocessing.Thissameapproachalsoappliesto

ourenergyproblems.Moretailriskwouldbeagoodthing.Giventheprobabilisticnatureof

innovation,wetryandtakemoreshotsongoal.AtKhoslaVentures,wetryandtakeshotswhere

failurewonthurtusbutifwesucceeditisworthsucceeding.Notjustshots,butintelligentshots:

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science(aswecurrentlyunderstandit,andmodulatedgenerallybyourcurrentbiases)takessome

thingsoffthetable(mostly),andthuswereduceourselvestointelligentshotsongoal,ratherthan

randomshots.Inthecleanenergydomain,weseemanyaproposalforperpetualmotionmachines,

whichignorethelawsofthermodynamics.Likewise,weseehorrendouslycomplexandcircuitouspaths

toreachamazingresults,whichweestimate(acknowledgingourfallibility)willneverseethelightof

day.Weunderstandclearlythatnoteveryshotisworthtaking,especiallyforusandgivenoursetof

experiences,capabilitiesandbiases.Accordingly,thistypeofinvestingisnotforthefaintofheart;it

requiresthevisiontoimaginethepossible,toembraceandnurturetheimprobable,butwiththe

discriminationtoeliminatetheimpossible,andtoprioritizetheimprobableswiththelargestupside.

ButinadditiontotheperpetualmotionmachineandengineefficiencieshigherthantheCarnotlimit

thatsciencedictates,andthehorrendouslycomplexblueskyideas,wealsoseemanyhighriskbut

perfectlyvalidideaswhichifwecoulddox,yorz,wewouldhaveabreakthroughtechnology.Though

differentiationisonerequirementofaninterestingstartup,risk-takingisalsousuallyarequired

ingredientintherecipe.Thislatteringredientisoftenmissingbecausepeopledontwanttofail;as

experts,theyoftenthinktheyknowwhatisnotpossible.

Itsoktofail,aslongasyoufailatsomethingworthsucceedinganditisoktorealizethatwewillmiss

manyshotsweshouldhavetakenandothersmaysucceedwherewefail.Manyofourdecisionswill

seemfoolishinretrospectandtheshotstakenbyotherswillbeobviousandduh,howcouldIhave

thoughtotherwise.Itisimpossibletoanswerapriorithequestion,ontheprobabilityoreconomic

viabilityscaleisit"intelligentshotsongoal"ormorelike"shootarocketintospaceinenoughdirections

tofindlife"?Beinginadealstreamorratheranideastreamwhereweconstantlyseeinnovative

ideastoconcludethatitistheformerandnotthelatter.Butmaybetouswithourhammerevery

problemappearstobeanail.

Isthissortofdisruptivechangewearesearchingforknowable?Isitpossibletodeliberatelytake

economicallyviableshotsattrulydisruptivechange?Idon'tbelieveitisknowable,butIdobelieveitis

possibletodramaticallychangetheprobabilitythatchangewillhappeninanygivenareathroughthe

encouragementofappropriateculture,policy,coststructures,etc.ThekeytomarginalizingMicrosoft

wasnottobuildbettersoftwarebuttobuildabettersearchforaconnectedworld.Thekeytobeat

Googlewasnottofocusonbuildingabettersolutiontosearchbuttocreateanewmarketforsocial

communicationsandsocialrecommendations.Shortofcontinuousexperimentation&learning,isit

possibletofindthekeytodisruption?Andisrapidevolutionarychange,asistypicalofSiliconValleyand

theInternetecosystem,thekeytolargestepsforward?Ifso,istheenergysystemamenabletothe

sametypeofinnovationorbyitsverynaturewillitdoomustoslowinnovationandslowprogress?The

lowcostofexperimentationandtheSiliconValleyculturehaveensuredamuchgreaterrateofchange

inthatbusiness.Personally,Ibelievethateventhoughthefundamentalcycletimeinenergyislonger

wewillseesimilarunexpectedevolutionbutwillsubstitutemonthswithquartersoryears

dependingupontheareaofinnovation.Itappearstomealmostcertaincontrarytoconventional

wisdomfromtheenergycompaniesthatmanyofourcurrentassumptionsaboutenergywillbe

wrongintenyearsandmostwillbewrongintwenty.Similarly,ifonedropsallassumptionsaroundfood

andeating;onecanseethatfoodisnotaneed,itisjustatool.Thetrueneedisnutritionandcalories,

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andtasteofauthenticfoodslikebeefisagate.Followingthatlogic,areweasaracedoomedtothe

negativeenvironmentalimpactofthedevelopingcountriesadoptingamoremeatorienteddietorwill

wegrowthesemeatsinthelaborisitmorelikelywewillreplicatethetasteofbeefwithplantproteins

andimproveefficiencyofmeatby5-10X,eliminatingmanyoftheconcernsandreducingtheneedfor

cornproductionevenbelowcurrentlevels?Evenseeminglyintractableareaslikepovertyand

agriculturearemorelikelytobeimpactedbyinnovationthanallthepoliciesandprogramsof

governmentandthevariousservice-basednon-profitorganizations.Mykeymessage:Innovationasa

problem-solvingtoolismorewidelyapplicablethanmostexpertsbelieve.

Backgroundoninnovation

Thefactisthatinnovationcreatesjobs.Manypeopleandpoliticiansliketosaythatitissmallbusinesses

thatcreatejobsinthiscountry;onthecontrary,itisntsmallbusinessesorlargebusinesses;themost

jobsarecreatedbynewbusinesseswhicharestillfreshlyinnovating.1Innovation,inmyview,isalsothe

keytocompetitiveness,beitforcompanies,statesorcountries.StevenJohnsonsbookWhereGood

IdeasComeFromandClayShirkysbookTheCognitiveSurplusprovideframeworksaroundpathways

toinnovation.Johnsonidentifies7pathstogoodideas,andShirkyoutlineshowtoharnesspeoples

cognitivesurplusandthefactthatthelargerthedisruption,theharderitistopredict;bothofwhichI

willexploreinmoredetaillateron.Inthatvein,"InnovationKillers:HowFinancialToolsDestroyYour

CapacitytoDoNewThings"(HarvardBusinessReviewClassics)byClaytonM.Christensenresonated

withme.Christensenpointsoutwhysomanyestablishedandotherwiseeffectivemanagersinwell-run

companiesfinditimpossibletoinnovatesuccessfully.Hisinvestigationsidentifyanumberofsources

whichincludepayingtoomuchattentiontothecompanysmostprofitablecustomers(therebyleaving

less-demandingornewcustomersatrisk).Itfurtheridentifiesthemisguidedapplicationofthree

financial-analysistools,discountedcashflow(DCF),netpresentvalue(NPV)andearningspershare

(EPS)asinnovationkillers.Hereasons,whilethesefinancialtoolsarenotinthemselvesbadconceptsortools,theycreateabiasagainstinnovationbydistortingthevalue,importance,andlikelihoodof

successofinvestmentsininnovation.Inthelastsixyearsofrunningourventurefund,KhoslaVentures,

Iamproudtosaythatinover75+investments,IhaveneverpaidattentiontoanIRRcalculationand

weareaninvestmentfirm!Itistooearlytosayifthisapproachwillbesuccessful,buttheearlysignsare

promisingcomparedtothevariousventurefundsIhaveknown.InthealmosttwentyyearsthatIhad

beenageneralpartneratKleinerPerkinsCaufield&Byers,IhadseenatleasttenoftheForbes500

companiesbeingcreatedbyadozenpartners.

DoClaytonChristensonsassertionsoffinancialanalysistoolsgotoofar,ornotfarenough?Whilefor

manysmallinnovations,typicalofmostlargecompanies,theymaygotoofar;personally,however,I

havefoundthattheymaynotgofarenoughforrealinnovations.Whendealingwithradicalinnovations,

notonlyshouldwethrowoutmostfinancialtools,butalsothetraditionalbusinessplan.Infact,

businessplansmayactuallygetinthewayofrealinnovationbecauseoftheblindersitputsonagroup

assoonasthetargetmarketrequirementsareclear.AsIwillexplainlater,managementofbig

innovationsrequiresshepherdingwithoutprecision,butratherwithroughanalysisandintelligent

1http://www.nber.org/papers/w16300

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guidancetomaximizetheoptionvalueofaninnovationinitsmultiplepossibleinstantiations,insteadof

afocusonIRR,NPVorDCF.AndyGrove,formerCEOofIntel,speakstowhenthePCwithitsfuzzy

screenopeneduppossibilitiesinhisbookOnlytheParanoidSurvive.Weneedtotolerate

extremelyfuzzyviewsofthefuture,visionsthatarenotsubjecttofinancialormarketanalysis.Andwe

needtoplanontheevolutionofcurrentlyunsuccessfulideasorbusinessplansthatcatchfireinthe

market.TheCEOofDEC,thenumbertwocomputercompanyintheworldin1982whenSunand

CompaqComputerwereborn,confidentlypredictedthatnoonereallyneededacomputerinevery

home.DECpracticallydisappearedwithinfiveyearsandhewasright:peoplemaynotneeda

computer,theywillneedtensofcomputersineveryhome.Yourrefrigeratorwillhaveoneandyour

phonewillhaveamulti-processor.Whowouldhaveimaginedacomputerineveryhomein1985?

Grandmaonemailin1990?TheInternetin1995?Thesmartphoneandamobileworldin2000?

Facebookin2005?

Frankly,Iquestionwhetherreallyinnovativeideasaresubjecttothekindofanalysisbusinessschools

teachasthetoolsofgoodmanagementpractice.Clearly,theycannotbepracticallyappliedto

innovationsinmarkets,butitispossibletheyareonlyrarelyapplicabletoinnovationsinscienceandtechnology.

Similarly,Icringewhengovernments,betheycountriesorstates,tryandfosterinnovation.Ihavenot

yetfoundarelevantprogramthatismateriallyeffective(atthescaleofglobalrelevance),thoughwith

enoughexperimentationoutthere,Iamsureonewillsucceed.TheARPA-Eprogram,runbytheUS

DepartmentofEnergy,maybeoneoffewapproachesthatworksbecauseitgetsatthefundamentalsof

innovation:increasingexperimentation.Butitisworthnotinginmyadmittedlybiasedviewthat(a)

innovatorsarekeytoinnovationandinnovatorsdon'tcreateprograms;theyjustdoit.(b)Thereisa

lotofpostinnovationanalysisouttherewithfamousarticlesandbookslikeCrossingtheChasm.

Thereare,inmyview,goodanalysesofpatternsofbehaviorthatleadtoinnovationandgoodcasestudies,butintheend,innovationhappensinmanydiversewaysandsettingsandonecanproveor

disprovealmostanyassertionoranalysis.Personally,IfindanalyseslikeCrossingtheChasm,Goodto

Greatandotheracademicstudieslargelyirrelevantandoftenwrong.(c)Myobservationsleadmeto

concludethatthemosteffectivestrategyistohavegreaterexperimentationormoreshotsongoal

strategy,astrategywediscusslaterand(d)Yes, policiesdomatterbecausetheycanencourageor

discourageexperimentation:taketheriskout(butnottoomuch,adelicaterecipe),orotherwise

reducethecostofexperimentationsothatmoreinnovatorscanaffordtotaketherisk.

Therearemanyformsofinnovation;thekeytoinnovationisnotjusttechnologyinnovation(qualifier:

thisarticleismostlyabouttechnologyinnovation),butalsomarketinnovation(technology-driven

marketinnovationbycreatingnewproductsandservicesorbusinessmodels).Forinstance,inmyview,

thebiggestinnovationatGooglewasmarketing.Theirmodelallowedsomeonewitha$2000marketing

budgettopullouttheircreditcardandstartexperimentingwithadvertisingbybiddingonGoogles

links.Noneedforanadvertisingagencyorabigbudgetorsomemeasureofhighrisk.Searchinnovators

likeExcitefailedtoseeorunderstandGooglesmarketinnovation.Exciteisanexampleofhowprocess

killsinnovationeveninyoungcompanies,aconceptIwillexplore.A25-year-oldproductmanagerdid

notseethevalueofGoogleanddroveprocessthatledtoadecisionbythemanagementteamtonot

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acquireGoogleforunderamilliondollars.Ofcourseiftheyhadacquiredit,theywouldhavemoldedit

intotheirvisionandkilledtheinnovation,ashappenswithsomanyacquisitions(asTimeWarnerdid

withAOL).Youdon'tknowwhichmarketinnovationwillhappenuntilyouknowwhattheproductis,and

youdon'tknowwhattheproductisuntilyouknowwhatthetechnologycando,andyoudon'tknow

whatthetechnologycando(ornotdo)untiltheinnovationhappens.Andcontrarytotraditional

businessschooleducation,technologylookingforamarketcanfailorleadtolargerealinnovations;and

no,wedonotneedtolistentoourcustomersunlessweonlywanttorestrictourselvestojustthose

customers.OneofmyfavoritestoriesinvolvesPicturetel,anearlyleaderinproprietaryhighcostand

highqualityvideoconferencing.Theysurveyedtheircustomers,mostlyITandTelecomdepartment

typesinbigcorporations,whotoldthemtheydidnotneedsmallpersonal,internetbased

videoconferencingsystems,andmostofPicturetellistenedexceptthefounderandafewothers.The

founderleftandstartedacompanycalledPolycom.Afewyearslater,whentheinternetbased

videoconferencingmarketoverwhelmedthetraditionalvideoconferencingmarkets,Polycomacquired

theremainsofPicturetel.Afterobservingthis,Istartedteachingthevirtuesofnotalwayslisteningto

onescustomers.Thereisabig,butseldomrecognized,differencebetweenacustomersperceived

wants(usuallyincremental)toacustomersrealproblems,leadingmetodistrustmanyfocusgroup

researchresults,whichoftenoverpowergoodeducatedguessesorsmartexperimentation.Thishas

beenrepeatedacrossseveralindustries;theexpectedusecasesoftendeviatefromthebreakaway

applications.ThishasbeentrueevenforjuggernautslikeFacebook,Sunmicrosystemswithserver

networks,andGooglewithtextadvertising.Onlywhenanenvironmentiscreatedwhereexploration

canoccurwithoutsevereconsequencesforfailureistherepossibilitytoobtaintheunknown.Itisfrom

thedepthsoftheunknownandtheunexpectedthatrevolutionaryinnovationemerges.

Itiseasytofindcasestudiesthatlampoontechnologylookingforamarket(oftentruebecauseofbad

judgmentappliedbythetechnologistratherthananythingtodowiththetechnologyitself)orfailureto

domarketresearch(suchasFordsfamousfailureofEdselinthelate1950s),butthereareasufficientnumberofcounter-examples(Viagra,microwaves,theinternet,lasers,plastics,touchscreens,tablets

computers,etc.)torendermanytraditionalconclusionsequallyirrelevant.Inotherwords,this

haphazarduseofanecdotalevidenceprovesmypointthatonecanproveanypoint.Thekeyistorealize

thatonefailuredoesnotbalanceonesuccess.Thinkaboutit;asinvestors,donethoughtfully,wecan

onlyloseonetimesourinvestmentonafailurebutcanmakeahundredtimesourinvestmentinabig

innovationsuccess!Weusethisastheprincipalinvestmentthesisatourventurecapitalfirm,soit

shouldbenosurprisewerewillingtodiscardIRRanalysisandfocusonthemoonshots.Iliketostaywe

don'tmindmakinginvestmentsthathavea90%probabilityoffailing,andwedon'tmindfailurebutit

betterbeworthsucceedingwhenwedosucceed.Itrulybelievethatourwillingnesstofailgivesus

theabilitytosucceed.Believeitornot,mostcompaniesuseanalmostoppositephilosophyof

investing.

KhoslaVenturesreadilyappliesthismoonshotinvestmentthesistofosterthemostinnovationwecan.

WecallitourBlackSwanthesisofinvesting,afterNassimTalebsmemorablebookthatfocuseson

highlyimprobableevents,theirunpredictablepatternofoccurrenceandtheoutsizedeffectstheyhave

ontheworld.Forourpart,westrivetoinvestinpotentialBlackSwantechnologies.WedefineBlack

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Swansastechnologiesthatarefundamentallydisruptivetotheirmarket;theymayhaveuptoa90%

chanceoffailure,butiftheysucceed,theyupendconventionalwisdom.Interestingly,manyonlyappear

tohaveahighprobabilityoffailure,mostlybecausetheyhavenotbeenworkedon,andoneoftengets

theskepticalquestionwasntthistriedbefore?orwhynow?BlackSwansengendershocksthat

haveretrospectivebutnotprospectivepredictability.Afterall,so-calledonceinahundredyearevents

actuallyhappenallthetime!WithonlyasuccessfulfewBlackSwaninnovations,everythingchanges.

AnEcosystemforInnovation

Sowhatdoweneedtoencourageinnovation?IcallittheYodastrategyempowerthepeoplewho

feeltheforce!Anddontworryabouttheoneswhofailbecausethoughmanyinvestmentswillfail,

morewealthwillbecreatedthanlostbecauseoftheoccasionalBlackSwan.Iamastrongbelieverinthe

disruptiveideapathtoinnovationbycultivatingpotentialBlackSwans:ideasthat,iftheywork,will

disrupttheorderofthings.ThereareseveralviewsandpathwaystotheseBlackSwaninnovations,

whichareworthdescribing.

Purposefulcomplexityanddepth

StevenJohnson,inhisbookWheregoodideascomefrom,identifiessevenpathwaystoinnovation.

TheEconomistsumsupJohnsonspathwaysasfollows:2

Thefirstofthepatternsistheadjacentpossible:theinnovationsthatbuildlogicallyon

previousbreakthroughs.Intechnology,thisresultsinthecommonphenomenonofseveral

peopleinventingthesamethingatthesametime,becauseitseemedtheobviousnextstep.

Similarly,lifeitselfemergedasacascadeofincreasingcomplexity,andtheforkingpathsof

evolutionallowoneinnovationtoleadtoanother,suchasthesemi-lunatecarpalbonethat

madevelociraptorsmoredexterouspredators,butsubsequentlyledtotheevolutionofwinged,

flyingbirds.Culturalandsociallifeisalsoanexplorationoftheadjacentpossible,asone

unexpecteddooropensandthenleadstoothers.

InasimilarveinMrJohnsonexplorestheliquidnetworksthatfosterinnovation,whether

online,incoffeehousesorinecosystems,andtheslowhunchwherebyanideadevelopsslowly

andoftenwrongly,beforesuddenlybecomingtherightanswertosomething.Healsoexamines

thebenefitsofserendipityanderror,whichcaneachleadtobeneficialinsights;thenotionof

exaptation,inwhichaninnovationinonefieldunexpectedlyupendsanother(Gutenbergs

presscombinedink,paper,movabletypeand,crucially,themachineryofthewine-press);and

platforms,fromoperatingsystemstocoralreefs,whichprovidefertileenvironmentsfornew

developments.

TheotherpathwaysthatJohnsondescribesincludeliquidnetworks,theslowhunch,serendipity,error,

exaption,andplatforms.Alloftheserequireafertileecosystem,wherethereisalowcostof

2http://www.economist.com/node/17145208

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experimentationthatallowsforacriticalmassofpeoplewithdiversebackgroundsandconstantly

connectingideasandlittleimprovementsacrossmanydifferentfields.Butitiskeytorememberthat

smallinnovationssuchasthesemi-lunatecarpalbonethatmadevelociraptorsmoredexterous

predators,butsubsequentlyledtotheevolutionofwinged,flyingbirds couldnothavebeenanticipated

toleadtoflyingbirds.Iamabigbelieverinecosystemsthatencourageinnovation,despitethemyth

oftheloneinventor.Ideascombinedintherightecosystem,createendlessadjacentpossiblesthatare

criticaltoinnovationinbusinessandsociety.

Onceanecosystemiscomplexanddeepenough,thecreationofexcitingideasaccelerates.Whenan

ideaissuccessful(evenifincremental),itcombineswithothersuccessfulideas,creatingnewideasatan

everfasterpace,throughwhatIcallauto-catalysis.Thisconceptoriginatesfrommydaysofstudying

complexitytheoryattheSantaFeInstituteandstudyinguponStuartKauffmansassertionthatany

sufficientlycomplexmixtureofelementswillmakemanyifnoteverypossiblereactionauto-catalyzed

bysomeotherelementinthemixture.ItisclearthatwhatStuartKauffmandescribesasathesisforhow

lifemayhaveoriginatedonplanetEarthisalsotrueofSiliconValley.Themoreideascreatedand

explored,thegreaterthelikelihoodforaFacebook,Google,orlightbulbthatcompletelychangesassumptions.Foreverytechnologylookingforasolution,someoneintheecosystemfiguresouta

differentexperiment,oftenwithatechnologyormarkettwist,thatisworthattemptingandmaygoon

tobethenextFacebookorGroupon.Theinterestingaspecttothisprocessisthatitisnon-linearand

withunexpectedtrajectories.Thisisoneofthebigreasonswhyitissohard(butnotimpossible)to

replicateSiliconValleyinotherplaces.Thisisstraightforwardwhenconsideredinthecontextofthe

JohnsonsadjacentpossibleconceptorcomplexitythatKauffmancreatedtoaddresstheoriginsof

life.Withonlyafewmolecules(orentrepreneurs/ideas),theadjacentpossibleisasmallset,andlikely

uninteresting.Withhundredsoreventhousandsofentrepreneursandtheirideas,theadjacentpossible

explodesgeometrically,andgetsquiteinteresting.Ironically,therichnessoftheecosystemiswhythere

aresomanymoreseeminglyloneentrepreneursinSiliconValleywhoaresuccessfulversuselsewhere.Whenexaminedmoreclosely,mostoftheselonersarenotaloneatall;thereareplentyinSiliconValley

thatarefailingbypursuingotheradjacentpossibilities,buttheydontmakethehistorybook.Suchan

ecosystemreliesondiversity,autocatalysiswhereanadjacentpossibleexperimentbecomesmuch

cheaperbecauseoftheavailabilityofdiverseservicesandconnectednessbetweentheentities

(entrepreneurs,molecules,businesses)thatinstigateideas,createexperimentalmodelstoreplicate,

oreasilyandcheaplytrytoimproveupon,thusallowingeasycreationofastartup.

Still,onesometimesseesstep-changeinnovation.Thoughlesscommonthanevolutionaryinnovations,

therearebigboldideas,especiallyintechnology,whereevenlargebreakthroughsandinnovationscan

happeninisolation.Often,alargetechnicalleapcanmakeanewscenariopossible.EvenseeminglylargeinnovationsliketheInternetareoftensmall,incrementalimprovementsfromhumblebeginnings

inthe1970suntiltheyreachedacriticalmassofusageorfunctionality,atwhichpointgrowth

accelerateddramatically.InthecaseoftheInternet,thebrowser(1995)reallyacceleratedgrowth

thoughthebrowseritselfwasnotahugelydifficulttechnologicalstep.Butthebrowserdidexpandthe

numberofadjacentpossibleexperimentsthatcouldbetriedatlowcost.Itispossiblethathadthe

browserbeenlaunchedinamajorwayfromalocationoutsideofSiliconValley,theexplosionof

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experimentationarounditmaynothavehappened.Goodrecentexamplesoflargetechnologyjumps

aretheinventionofthecellphone,CMOStransistors,flashmemory,hydro-fracking,digitalcameras,

LEDs,thoughitwouldbefairtosaythateachoftheseitselfwentthroughaseriesofevolutionarysteps

togettotheircurrentformandtothecriticalmassstage,fromwhichtake-offcouldhappen.JamesM.

UtterbackillustratesthisideaofbuildingonandimprovingotherideasinhisMasteringtheDynamics

ofInnovation,butitisimportanttodistinguishbetweencaseswhentheinnovatorsimplygetsitright

andwhentheinnovationistheresultofaniterativeprocess.Yetboth,thisevolutionphaseandthe

take-offpost-criticalmassstage,aregreatlyfacilitatedbyanencouragingecosystem.Thequestion

arises:whenissomethingaquantumjump?Inmyview,moreimportantthanthetechnologystep

itselfisthetrajectoryoftheinnovationandtheadjacentpossibleitenablesateachevolution.Each

stepthenbecomesacreatorofadditionalpossibilitieswhichdrivetheultimateoutcomes.Inmany

casestheexplosionsinthesepossibilitiesandthecriticalitystageofatechnologymaynothappen

untilmanyevolutionslater.

Groupingandsharingtoreducecost

ClayShirky,inhisbook,CognitiveSurplusandinseveralrecenttalks,inasmalltwist,concludesthat

radicalinnovationsactuallycomefromsmallgroups(~12-20)ofintelligentpeoplesharingideasinloose

association.Onepersoncanoftengetanidea70-75%there,butitistheinsightsandponderingsofthe

restofthegroupthatoftengetsthemorsomeoneelseallthewaytothebiginsight.Interestingly,he

claimsthatlargegroupscanstifleinnovationbyleadingtogroupthinkandlimitedindividual

contributions,whilealonertendstonotaccomplishmucheither.Hecitesmanyhistoricalexamples,

suchastheso-calledInvisibleCollegeinEnglandinthe17thcentury(precursortotheRoyalSociety),a

smallgroupofacademicswhodefinedthemodernscientificmethodofreportingresults,aswellasthe

FrenchImpressionistpainterswhoonlyreallystartedtoexcelonceMonet,Renoirandtheir

contemporariesstartedtocompete.Hefurtherassertsthatthereisnowausefulcognitivesurplus,theabilityoftheworldspopulationtovolunteer,contributeandcollaborateonlarge,andsometimes

global,projects.Thissurplusistheresultofalotoffreetimeandtheconnectivityofthemodernworld.

CognitiveSurplushasgivenuseverythingfromUshahidi(crowdsourcedcrisisinformation)toLOLcats,

andheassertsthereisnowaytodirectthiscreativity.Therewillalwaysbeaspectrumbetween

mediocreandgood,whichisfine;itisbridgingthegapbetweendoingsomethinganddoingnothingthat

isbyfarmoreimportant.SiliconValley,withitsjustdoitandrisk-takingculturebridgesthatgapquite

effectively.Andastheexamplesshow,stimulationoftheseideashappensasmuchincollaborationasin

competitionbecausebothresultinthesameexpansionoftherateofexperimentation.Interestingly,he

alsoidentifiesaparadoxofrevolution;thebiggertheopportunity,thelessanyonecanextrapolatethe

futurefromthepresent,whichmeanswereinforawildrideasthenumberofinnovatorsandthemagnitudeofchangegrows!

IagreewithpartsofShirkysconclusions,butIbelievethattherearelayerstothelooseinteractionsand

thebenefitdoesnttopoutat12-20peopleforinnovations.Itmaybethateachunitis12-20for

intellectualinteraction,buteachofthosegroupsislooselylinkedtoothersmallgroups,andthe

membershipofthosegroupschangesconstantly.ThecomplexecosystemofSiliconValleyismadeupof

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anever-shiftingsetoflooseinteractions,makingitfarmorepowerful(andunpredictable!)thansimple

groupsof12-20.

TheeconomistBrianArthurdescribesasimilarthesisonhoweconomieswithsufficientdiversityand

serendipity(connectivity)canincreasecomplexityandgrowthrates,inhisbook,TheNatureof

Technology.Justthinkofthedensityinherenttocitiesnowonderruraleconomiesfailtoachievetheeconomicgrowthratesofurbanones!Alongtheselines,Iproposedasystemtoincreasegrowthrates

inruralareasbyinstallinginternetandconnectivityinfrastructurenearruralcommunities;notin

individualvillages,butstrategicallyplacedtodrawalargeenoughruralpopulation(onbicyclesIcalled

thisthebicyclecommuteeconomy)thataggregatesenoughvillageswithin40kilometers(I

hypothesizedabouta100villagesora100,000people)toreachcriticalmassforacceleratinggrowth.3I

postulatedthat,withthiscriticalmassofpeople,therewasaserviceavailablefromsomebodywhich

wouldreducethecostofnewabusinessexperimentbyanotherperson,encouragingnewbusinessor

servicestartups.Thebenefitsgobeyondthebenefitsofalargermarketthatsuchcongregationsof

customerscreate.Reducingthecostofabusinessexperimentwillincreasethenumberofexperiments

andthenumberofsuccessfulnewbusinesses.ThisprocessisnotthatdifferentthanwhathappensinSiliconValley.Whatiscriticalmass?Itisreachedwhenyouvegatheredenoughpeople,ideasand

interactiontocreateaself-feedingauto-catalyticcyclewhichstartschurningoutexcitingideasand

acceleratinginnovationandgrowth.Thedefinitionofcriticalmasswillvarywiththecostof

experimentation;thesamewaydifferentradioactiveelementshavedifferentcriticalmassestoachieve

sustainednuclearreactions.Inmyview,thisisthesciencebehindinnovation-basedeconomicgrowth

andinnovationecosystems.

Afterall,ratesofinnovationarehighlydependentonthecostofexperimentation.Inerasorcultures

whereanyexperimentscostisveryhigh(eitherindollars,reputation,orother),youseeverylittle

innovation.Forexample,thereisanextremelyhighreputationcostassociatedwiththeshameoffailureincertaineconomies.IrecentlymetwithagroupofGermanMBAstudents;overhalfofthemwantedto

beentrepreneurs,butwereplanningtojoinlargecompaniesanywayjusttoavoidtheriskoffailureand

thesocialconsequencesthatgoalongwithit.Incontrast,inSiliconvalley,intheageofAmazoncloud

services,opensourcetoolkits,ahugeecosystemofsuccessfulbusinessmodels,andaculturethat

celebratesrisktakingandevenfailure,itsunsurprisingthatsomanystudentswith2-3buddiesare

startingcompaniesthatbecomeFacebook,Groupon,Twitterandgoontobeworthmillionsorbillions.

Exciting!Takethepassionforimpact,thepossibilityofglory,adashofgreed,andgoodoldhardwork,

withlimiteddownsiderisk,andyouvegotapowerfulsoup.Ialwaystellentrepreneurstoknowtheir

goals;isitfortune?Fame?Familybusiness(beingtheirownboss)?Fervor?Friends?Takeawaythe

stigmaoffailure,addanyofthegoalsaboveandyouhavearecipeforrisktakingandshootingforthemoonandaninnovativeecosystem.

Theimportanceofcostofexperimentationrevealsthatsomeareasareriperforinnovationthanothers.

Ibelievethatinnovationcansucceedeverywhere,butadmittedlythebarriersarehigherinsome

regimesthanothers.Italldependsuponcycletime,technicalchange,rateofmarketchange,rateof

3http://www.khoslaventures.com/presentations/RISCNov.2003.doc

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experimentationandbarrierstoexperimentation.Thisvarieswidelyacrosstelecom,computers,media,

pharma,energy,materials,agriculture,automotive,andaeronauticalsectors(onecouldeveninclude

culture,politicsandreligioninthis),butinnovationcananddoeshappeninalloftheseareas.Consider

Telecomintheearly1990sforaminute:trillionsofdollarsofinfrastructure,anarchitecturethathad

notchangedinfiftyyears,unions,needforcompatibilitywithfifty-year-oldtelephoneexchangesforcall

transmission,andmanyotherconstraints.Itcertainlydidnotfeellikeanareaforinnovation,andyetit

changedrapidlyinthefaceoftheinternet.In1996,whilewewerestartingJuniperasaninternet

routingcompany,everymajortelecomcarriertoldmetheywouldneverchangethecoreoftheir

networktotheinternettechnologies.By2000,theyarealladoptingthesesametechnologiesandmy

oldfirm,KleinerPerkinshadmadea$7billionprofitonalessthana$10millioninvestment!Energy

doesnotseemasmalleableandopentoinnovationastheInternetworld,butIsuspectwewillsee

substantiallymorechangethanwemightimaginetoday.Caseinpoint,shalegasbasedonhorizontal

drillingtechnologiesandhydro-frackinghasalreadychangedassumptionsandforecaststhatareonlya

fewyearsold,andwilllikelychangeyetagain.

ACultureforInnovation

Whetheranorganizationoranecosystem,therightcultureisvitaltoinnovation.Communitiesand

companiesshouldberewardingfailurelikeTatainIndia.Theyhaveanannualcompetitiontoreward

thebestfailedideaoftheyearthemottoofthecontestistryfrugallyandfailfastindividualsare

muchmorelikelytospeakupiftheyknowitsoktofail!4Wecanalsocelebrateandlearnfromfailures;

offbeatconferenceslikeFAILCONcanhelpaswell.Ultimately,developinginnovationecosystem

conditionsthatencourageexperimentation,iterationandeventuallyrapid,repeatedandintelligent

failureisessentialtofosterinnovation.Itisequallyimportanttonotmakeyourengineerstoalways

(sometimesisok)listentoyourbestcustomers,buttoallowthemtoignorethemwhentheinnovator

thinkstheymayknowbetter.Whenitcomestolong-termplanninginacompany,itiscriticaltonotrely

oncommandandcontrol,buttoinsteadallowundeterminedplanningwhereplanningisaniterative

processthatisopenandwelcomingtodisruptionandachangeindirection.ScottCook,thefounderof

Intuit,talksaboutreplacingtraditionalengineeringmanagement,atleastinpart,bycreatingaculture

ofexperimentationtodriveinnovationandde-emphasizingtraditionalcommandandcontrol

management.Theroleofthemanagerthenbecomestocoachthisexperimentationprocess.

Innovationblackholeinbigcompanies

Whentheexpertslookforinnovation,theyexpectitfromtheGoliathcompanieslikeGeneralElectric,Exxonandthelike.Canbigcompaniesinnovate?Iarguetheydoalotlessofitthanmostpeoplethink.I

citearough80/20rule,statingthat80%ofinnovationscomefromwhereyouleastexpectit,butIthink

thenumberisactuallyevenhigher.Iamhard-pressedtodiscoverrealinnovationfromanyestablished

entity,withafewyoungornon-traditionalexceptions(e.g.,Apple,Google)thatIcoverbelow.In

4http://www.economist.com/node/18285497

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contrast,topinnovationsasdiverseasYouTube,Facebook,laptops,LASIK,disposablecontactlenses,

DVRs,SpaceShipOne,andsomanyothersallhavecomefromstartups.

Oneotherinterestingphenomenonisevenwhentheinnovationoriginatesinabigcompany,thefirst

successfulcommercializationisdonebyastartup.Forinstance,whileitcouldbearguedthatIBM

inventedvirtualizationoncommodityhardware,butitwasVMWarethatmadeitmatter.SolarcellswerentinventedbyFirstSolarorSunpower,buttheymadethemmainstreamdespitethelargerand

moreexpensiveeffortsofoilcompanieslikeBPandShellLEDswerentinventedbyCree,butCree

madethemrelevantdespitealltheclaimsoflightinginnovationbyGEandPhilips.ThefirstEVonthe

marketwasmadebyGM,butthefirstreasonablesuccesswastheTeslaRoadster,notaGMorToyota

product.CraigVenterdidntcomeupwithDNAsequencing,buthislittlestartupprojectcompletedthe

humangenomefirst.JeffBezosatAmazondidntinventonlinesales,butmadethemrelevant(and

inventedtheone-clickpurchase)withWalmartasafollower.Meanwhile,Google,Facebook,Twitterand

Yahoobeforethemhaveredefinedhoweveryoneconsumesmedia,nottheNBC,ABC,CBS,NewYork

TimesorTimeWarnerssoftheworld.Similarly,biotechnologywascommercializedbyalittlestartup

calledGenentechratherthanthelargepharmaceuticalcompanieswiththeirmassiveR&Dbudgets.Acommonstatementisthatnotallareasaresubjecttoinnovation.Idothinktheyare,thoughthe

difficultyofinnovationdependsupontime,technicalchange,rateofmarketchange,rateof

experimentationandeaseof(barriersto)experimentation.AtKhoslaVenturesweareexperimentingin

newunlikelyareassuchasagriculture.Tounderstandtheexistingbarrierstoexperimentation,itsworth

aquicklookatwhatinnovation(orlackofit)lookslikeinbigcompanies.

Whybigcompaniesdontinnovate

Theaspirations,budgetsandfinancialpracticesofstartupsdifferfromthoseofalargecompany,yet

innovationpromisesthesamevaluetoboth.ClaytonChristensonfocusesonwhymostlargecompanies

innovatesolittle,inhispaperinHarvardBusinessReview,InnovationKillers:HowFinancialTools

DestroyYourCapacitytoDoNewThings.Christensensarticle,liststhreeinnovationkillers:misuseof

discountedcashflowsandnetpresentvalue(DCF/NPV),treatmentofsunkcostsandfocusonearnings

pershare(EPS).

TheuseofDCFandNPVtoevaluateinvestmentsfundamentallyunderestimatestherealreturnsof

innovation.TheDCFTrapbeginswiththemethodofdiscountingcashflowtocalculatethenet

presentvalueofaninitiative.Thecustomaryoperationalprincipalofdiscountingafuturestreamofcash

flowsintoapresentvaluerequiresassumingcashflowsintheoutyears.Inthebusinessasusualcase,

cashflowsintheoutyearsareusuallyassumedtobeflatorgrowingatamarketgrowthrateasifthe

marketisunchangingandcompetitorsstandstill.Thisisfundamentallyflawed,sincethemarketfor

everybusinesschangesovertime,andwithoutanyinnovation,cashflowswilltrenddownwardsasyou

fallfurtherbehindyourcompetitors.Thiscomparisonofaninitiativetoafalselyrosybusinessplan

undervaluesinvestinginnewinnovationandraisesthehurdleratefordoinganewproject.Frommy

perspective,thereisanevenlargertraphere:inordertocalculateaDCForNPV,youhavetocomeup

withadetailedbusinessplanforyourinnovation.Ifyouwantittogetselectedinyourcompanys

pipeline,itneedstobebelievableandlarge,whichoftenendsupmeaningitiscloselyrelatedtoyour

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currentproducts(sothemanagersbelievetheprojections)anditsinyourbiggestmarkets.Thisis

exactlytheoppositeofhowtoinnovate;youoftenwanttotargetmarketsthatarehardtosizeand

predict.Justthinkofthesearchmarketin1998,whenGooglestartedandmostsearchcompanieshad

givenuponsearchasamarket,andconsidereditavaluabletoolinstead.Thebulkoftheteamstime

shouldbespentoncreatingadisruptiveinnovationandnotmassagingbusinessplansbeforea

technologyhasprovenwhatitiscapableof.

Thesecondmisappliedtoolishowcompaniesassessfixedandsunkcostswhenevaluatinganew

technology.Whenevaluatingnetcashflow,managersconsiderthefutureormarginalcashoutlaysthat

arerequiredforaninnovationinvestmentandsubtractthoseoutlaysfromthemarginalcashthatis

likelytoflowin.Thisassumesstatusquoandignoresthefactthatinnovationisgoingtocontinueto

occurwhetherornotthecompanydecidedtoinvestinit.Bynotrecognizingthatnewcapabilitiesare

requiredforfuturesuccessandmarginingonfixedandsunkcostsbiases,managersareleveraging

assetsandcapabilitiesthatarelikelytobecomeobsolete.Itdisadvantageseverycapitalintensive

platforminvestmentandsupportsanythingthatprolongsthelifeofagingassets.

Thethirdinnovationkilleristheintensefocusonearningspershare(EPS).Sinceinvestorsandthe

marketputsomuchemphasisonEPS,theCEOisdriventofocusonthenear-termEPSgrowthandtode-

emphasizelong-termgrowthofthecompany;inessence,aCEOispunishedforspendinganythingon

realinnovation,sinceitwilltakeawayfromthebottomlinethatyear.EPShasbecomethemetricfor

corporateperformanceandCEOsknowthat,thesedays,theirlegacydependsontheircompanysstock

price.Notonlyisthestockpricehighlyvisible,itisalsotheeasilyquantitativemeasureoftheirsuccess

andthebasisoftheircompensation.Withtheevaluationofperformancefocusedsolelyontheshort-

term,CEOsarenotonlydeterredfrominvestingininnovation,theyarepenalized.

WhatsaCFOtodo?Abetterwaytofinanciallylookatinnovationattemptsisfortheiroptionvalue.

What-ifscenarioplanningyieldsmanyscenarios,anditisdifficulttopredictthefuture.Ifyouchoose

onepathearlyoninsteadofexploringtherangeofpossibilities,youresuretomisssomething.For

example,nolessthanMcKinsey&Companypredictedina1986studythatbytheyear2000there

wouldbeslightlylessthan1millionphonesintheUS.Theactualnumberwasinfact109million,but

AT&Thadalreadydivesteditsmobilephonebusinessbasedonthestudy.ShouldntAT&Thave

consideredarangeoftechnologyscenarios(likefast,lowpowerprocessorsandbetterbatteries)and

developedalowcostexperimentthatpreservedoptionvalue?Theydidntbother,becausethereturn

fromthesupposedlysmallmobilephonemarketdidnotmeetmaterialitythresholdsforAT&T;this

missedthecentralfactthattheoptionvaluecreatedbythathypotheticalexperimentandbycontinuing

toexplorewirelesstechnologywasthebiggerreturn.Infact,AT&Talsoshunnedinternettechnologies

in1996andendedupsoldtoCingularWireless,amobilephoneoperator.Atthispoint,theAT&Tbrand

nameremainsonlyduetorecognitionvalue.OfcourseAT&TandMcKinseyarenotaloneinforecasting

errors.ProfessorTetlockatBerkeley,inhisbookExpertPoliticalJudgment,concludesafterrigorous

statisticalanalysisthatexpertsandforecastshaveroughlytheaccuracyofdartthrowingmonkeys.

ThisisallthemorereasonwhyoptionvalueisfarmoreimportantthananyIRR,NPVandDCFanalysis.It

alsoillustratesthevalueofdoingscenarioanalysisasaprecursortooptionvaluejudgments(thereis

neverenoughprecisioninthebigideastodoactualanalysis!).Judgmentsbecomekeybecauseusual

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entrepreneurialpossibilitieslikere-inventingtheadvertisingmarketwithGoogle,creatinganew

$100billionsocialmarketbyFacebookinsixyears,withintenyearsgivingtwiceasmanypeoplein

Indiacellphoneaccessashaveaccesstotoilets,replacingallthefossiloilintheUSarejustnotgiven

enoughcredibilitytobefairlyassessedinspreadsheets.AlanKay,aSiliconValleyveteran,famouslysaid:

thebestwaytopredictthefutureistoinventit.Iadd:themoreentrepreneurialwayisnottoforecast

thefuturebyextrapolatingfromthepastbutrathertoinventthefutureonewants.

Canbigcompaniesinnovate?

Everybigcompanywasastart-uponce.Abrilliantfounderhatchedanidea(orderiveditfromsomeone

else),disruptedamarket(orcreatedone),andbuilttheirlegacyandtheircorebusiness.Butoncebig

andestablished,dotheycontinuetoinnovate?Itssafetosaythatthemomentacompanystartstotalk

aboutinnovationinastructuredway(innovationconferences,innovatorsforums,etc.),ithasstopped

innovating.InhisTheInnovatorsDilemma,Christensendescribesthemodesinwhichentrantfirms

havebeenabletotoppleestablishedfirms,usingthediskdriveindustryashisstartingpoint.His

researchshowsseveralpatternsofcompanybehaviorwhenfacedwithsustainingtechnologies

(improvingexistingachievements)anddisruptivetechnologies(applyingexistingtechnologies

differently).Christensenfoundthatdisruptiveinnovationdidnotdirectlycompetewiththeincumbents

inthemarket.Infact,myriaddisruptivetechnologiessoughtoutanemergingornichemarketoutsideof

themainstream.Here,theentrants/entrepreneursperfectedthetechnologyandexpanded.Meanwhile,

establishedcompaniesfocusedonsustainingtechnologiesbecausetheyofferedhighermargins.These

largecompaniescouldnotentertheemergingornichemarketsbecausethatwouldhavemeant

reducingthepricesoftheirproducts,therebycannibalizingthebulkoftheirbusiness.Fromthe

viewpointofthelargecompany,focusingonsuchsmallmarketssimplydidnotmakesenseinrelationto

thelargeronetheywerealreadyaddressing.Inthisway,innovationoccurredattheedgesofthe

mainstreamandattackedtheincumbentsmarketsfrombelow.

Fromhisresearch,Christensenprovidescertainlessonsforbigcompanies.Ononehand,heemphasizes

thenecessityforacultureinwhichfailureisacceptableandevensupported.Ontheotherhand,he

urgesestablishedcompaniestoseekoutnewandemergingmarketsratherthanpushinginnovationto

existingcustomers.ThesearethewaysthatChristensenaddressestheinnovatorsdilemma.Even

thoughitmightnotbealongthesespecificlines,P&Ghastriedaninterestingexperimenttotryand

overcometheirbigcompanylimitationandIameagerlywaitingtoseewhatitwillleadto.TheCEO

issuedacorporatemandatetoget50%ofnewproductideasfromoutsideP&G.Simplymeasuringthis

metric(evenifforced),maybethemostusefultoolinmakingtheprogramasuccess.Itsevenbetterif

thismetricispartofexecutivesreviewsandnotmeetingitisevaluatedasafailure;thismayforce

executivestokeeptrying.Toencourageinnovation,failuremustbetolerated,evenrewarded.

Innovationresultsinfrequentfailureandreiterationbehaviorsbigcompaniestendtodiscourage

especiallywhentheinitialattemptfails.Thetruthisthatlargecompaniesgrowfarmoreeffectively

outsidetheircorebusinessbyacquiringsmallinnovativecompanies.Thefolksinsidehavesomehow

losttheabilitytoinnovate.Despitemuchgoodadvicefrommanysourcesforbigcompaniesonhowto

innovate,Idoubtifthemajoritywillbesuccessfulatitgiventhefactors,behaviorsandconstraintsI

havedefinedelsewhere.

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Processkillsvision

Whydontbigcompaniesinnovate?Aretheirengineersstupid?Dotheylackimagination?Vision?No

theysimplyhavenoincentive.First,theyareincentivizedtolimitriskduetothecompanysfocuson

EPSandcorebusinessprofits.Second,intheunlikelyeventthatthecompanychoosestoinvestin

innovationandtheengineersdosucceed,theirparentcompanymakeslotsofmoney,andtheengineer

mightgetasmallmonetarybonusandapatonthebackfortheirhardwork.Forinstance,whenShuji

NakamurainventedtheblueLEDatNichia,whichisrevolutionizinglightinganddisplaysasIwritethis,

hewasinitiallyawardedatoken$180bonusforhistriumph.Nakamura,however,learnedfromthis

experience:heistodayintheUS,doinganewstartupwithKhoslaVentures,wherehopestoget

rewardedwithmillionsofdollarsifsuccessfuland,equallyimportantly,changetheworldwithabolder

visionofthefuture.Still,inadequateincentivesarenotenoughtokeepinnovatorsfromdreamingnew

ideas(therearemanytypesofincentives,mostarenotmonetary).Therealimpedimentiswhat

happenswhentheyfail(which,giventhatmostideasdontpanout,isverylikely).Thisfailurecan

happeninamultitudeofways,allofwhichhurttheaspiringinnovatoroutofproportiontothebenefits

theyachievewithsuccess.Demotion,culturalostracism,failuretoadvance,inabilitytopursuetheir

nextvision,andothersignificantnegativeoutcomesinbigcompaniesdiscourageattemptsat

innovation.

Letssaythatanengineerhasdecidedtotaketheriskanyway,andtrytopushtheirideathroughthe

largecompanytocommercialization.Theideamustfirstgetthroughthedevelopmentfunnel,which

differsbycorporationbuttendstofocusfarmoreonhypotheticalmarketreturnsthanonthetechnical

risksandmerits.Iftheyfailduringthatfunnel,thentheyresimplylabeledasanengineer/scientistwith

unmarketableideasonewhocoworkersandmanagersaremuchlesslikelytolistentothenexttime

around.Perhapstheyarelesslikelytobepromotedaswell.Bearinmindthatthiswillhavelittletodo

withthevalueoftheidea;ithasfarmoretodowiththevagariesofthedevelopmentfunnelandthe

committeeswhodecidewhetheranideatheymaynotyetunderstand(andmayhaveulteriormotives

tonotsupport)hasmerit.Thetakeawayisthattheprocessthatmostlargecompaniesputinplaceto

stage-gateeverythingstiflesinnovation.Innovationoftenreliesoninstinct,hunchesandevennaive

optimismaboutwhatispossible.Naivetyaboutwhatexpertsbelieveispossible(ornot)mayinfactbe

keytoinnovation.Inalargecompany,thekeythenistoallowlotsofsmallexperimentsratherthana

fewlargeones,creatinganenvironmentwherenofailureisbigenoughtomatter,andcareersdon'tget

hurtbecauseoffailure.Thekeyisnottoavoidfailurebutrathertomakefailurelessconsequentialtoa

corporationsshorttermgoalsandplans,andyetpreservetheideasoptionvalue.Somecompanies

recognizethisandworktoactivelypushthefailfrugallyandfailoftenmodel,suchasTatainIndia.As

mentionedearlier,thechairmanhasinstitutedaprizeforthebestfailedideaeveryyeartoencourage

engineerstotakechances.Withoutknowinghoweffectivethisis,Iwouldstillhighlyrecommendthisto

anycompanywantingtoencourageinnovation.FransNautaextendsthisidea,arguingthatevery

organizationshouldhavetwowalls:oneforfame,oneforfail,andtheyshouldbothbevenerated.

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Forthesakeofargument,letssaytheideahasmadeitpastthedraconiandevelopmentfunnelandpast

themarketingandsalesfolks,andthecompanybringstheinnovationtomarket.Mostbignewproduct

introductions(notincludingincrementalchangestoexistingproducts)bybigcompaniesfail.Why?Of

course,itcouldvejustbeenabadproductoridea.Farmorelikely,however,somepartofthelarge

companysengineering,manufacturing,marketingorsalesapparatusfailedtoiterateenoughtimes.It

wentthroughnumerousiterationsinthehandsofpeoplewhodontshareorevenunderstandthe

inventorsvision(longbeforetestinginthemarketplace)orbeforeitgotrealfeedbackfromthemarket,

anditisoftenmorphedintoanunrecognizableform.Regardlessofthecause,ifitfailsinthe

marketplace,nowourinventorisinrealtrouble:theyhaveshamedthecompanybycreatingthenext

MicrosoftBoborFordEdsel.Everybodywillknowtheyhatchedtheidea,andtheirformerlyupwardly

mobilecareermaycometoahalt.Theinnovationencouragingpathistointroducetheideatothe

marketinlessvisiblewayswithsmallerinvestmentssothatonecaniterateovermultiplemarket

feedbackcyclestofixissuesastheycropup.Weneedsmallerbitesizestoencourageinnovation,nota

massive,visibleinvestmentinsinglelargeinnovationefforts(ofcoursetherearesomeexceptionstothis

andeveryotherrulewhenitcomestoinnovation).

Inmostbigcompanieswhentheideafails,whichisquitelikelyjustfromastatisticalperspective,the

engineerismarkedasacreatorofideasthat didntcreateafinancialreturn,orfarworse,thatmadethe

companylookbad.Incontrast,inventurecapital,afailedinnovatorislikelytogetfundedforhissecond

venture.Whenyoustepback,youseetheobviousnessofthetruth.Mostrationalengineersinalarge

companywithabigideawilldooneoftwothings:suppresstheideaandmoveonwiththeboringtasks

athandorleavetheircompanytostrikeoutontheirownintheworldofentrepreneurswhereitis

possibletoiteratequickly,failoften,andachievehugesuccess.Insomecases,theentrepreneursmight

havetoleavethecompanytoavoidaconflictofinterestsbecausetheirproducttargetstheinformation

andpracticesofthatverycompany.Thus,itisnosurprisethatmorethanmosttrueinnovationscome

fromlittlescrappycompanies(orbigcompaniesthatwerelittleandscrappywhentheyhatchedtheinnovation).

Thereareacoupleofnotableexceptions:ApplewiththeiPod,iPhoneandtheniPad,andGoogle,which

hasbuiltitsculturearoundinnovation.Processoftenkillsvision.ApplelookedtothevisionofSteve

JobsversustheprocessthatNokia/Motorolafollowed.Itishardtorememberin2010thatonJanuary

1,2007theiPhonedidnotexist(andAndroidwasnotrelevantinearly2009)anditwouldhavebeen

hardforanypundittosaythenthatMotorolaandNokiawouldnolongerberelevantinthemainstream

mobilephonemarketwithin3-4years.Apple(andprobablyGoogle)violatedmostrecommendationsof

soundbusinessbooksonhowtorunabusinesslikeGoodtoGreat(orpickyourfavoriteexampleand

mostwillapplyevendartthrowingmonkeyswilloccasionallyhitthetargetandgettheirassertionsright).Googlenotonlyencouragesinnovation,butallowstheiremployeestoutilize20%oftheirwork

timedevelopingtheirown,outsideprojects.Still,youllseethebiggestandmostsuccessfulinnovators

atGoogleandAppleleavingforsmallercompaniesovertime,andgraduallyinnovationwillslowtoa

crawlasGoogleandApplegetcomfortableandcomplacentwiththeirrevenuesandprofits.Indeed,

GoogleandevenFacebookarestartingtobeseenasthenextMicrosoft.

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Sowhat?Encouraginginnovation

So,innovationdoesntreallyworkinbigcompanies,butwhocares?Ioftensaythatbusinessplansare

overrated.Afterall,realreturnscanappeartobenon-monetaryandunpredictable;thesemi-lunate

carpalbonethatmadevelociraptorsmoredexterouspredators,butsubsequentlyledtotheevolutionof

winged,flyingbirdscouldnothavebeenanticipatedtoleadtoflyingbirds.Thisisevidentintheearlyhunches(oftenwanderings)andsuccessiveiterationsofGoogle,Facebook,Twitterandmany

others.Irememberwhenmanyofthemwerecriticized(andoftenstillarewithinsub-sectionsoftheir

business)fornothavingabusinessmodel.Tobefair,manyventureswhichdidnothaveabusiness

modelultimatelyfailed,butonaveragemuchmoremoneywasmadefromsuchanti-modelsthanwas

lostinmyview.Itcallsfortheneedforintelligentshotsongoal.

Theseshotsongoalhavetobeunderstoodinthecontextofpathdependence.Anincidentlikethe

JapanesetsunamiortherevolutioninEgypt,bothinthefirstquarterof2011,cancompletelychange

ourpriorities,ourfocusandthedirectionofourexperimentation.Andcertainpathsbecomeaself-

fulfillingprophecyoratleastastrongbiasonfutureoutcomes.TheArabspringmayfocususon

energysecurityandreplacingoilbutwillitbefromrenewablesourcesorfromoilshaleandtarsands?

Orwillitleadtoincreasedfocusonelectriccarsfortransportation?Thesuitabilityofonepathover

anotherfromascientificandeconomicperspectiveisonlyoneofmanydrivers,andoftennotthe

dominantone.Theanswerisdependentonunpredictabledynamicsbasedonpolitics,interestgroups,

andmanyotherperturbationsinanalmostunknowableway.WilltherecentJapanesetsunamikill

nuclearenergy,asitseemstobedoinginGermany,Japanandmuchofthewesternworld?Willitalso

killnuclearpowerinIndiaandChinaorwillitdotheoppositeandenablethesecountriestodominate

themoreopenfield?Itishardtopredictwhatbringstheattentionofentrepreneurs,scientistsand

technologiststoaparticulartask.Adegreeofrandomnessinthisfocusisunavoidable.Yet,itis

randomnessintheformofsmallperturbationsthatcanaccumulatetochallengethepathdependenceandchangeoutcomesaltogether.

AMindsetforInnovation

Inmyview,analysisshouldlookatinnovationasinsuranceoropportunityoroptionvalue,and

givelessweighttoearningspershare,DCF,orIRR.Moretechnically,therisksandassumptionsinthese

analysesareoftenmischaracterizedorplainwrong.Itisn'thardtoseewhyabureaucracy,entrusted

withspendingbillionsofdollars(corporate,taxpayerorfromothersourceslikenon-profits),ismore

concernedwithminimizinglossesandlookinggoodthanmaximizinggains.Forinstance,theNationalInstituteofHealth(NIH),theUSgovernmentsmedicalresearchagency,fundsonlyrelativelysureto

succeedprojectswithlimitedrisk.AmongthemostexcitingfindingsfromanyNIHworkwasthatof

MarioCapecchibutonlybecausehecompletelyfloutedtherulesoftheNIHbytakingfundsfrom2

relativelyboringprojects,andpouredthemintoa3rdhighlyriskyproject(tomakespecifictargeted

changestomouseDNA,backinthe80s)thatNIHhadflatlyrejected.5Threeeconomists,PierreAzoulay,

5http://www.slate.com/id/2293699

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GustavoManso,andJoshuaGraffZivin,actuallyanalyzedtheoutputoftherisk-averseNIHmodelvs.the

highlyriskyHowardHughesMedicalInstitute(HHMI),andfoundthatthoughmoreHHMIprojectsfailed,

theonesthatdidntwerefarmoreinfluentialthantheNIHprojects(HHMIissoriskythattheyare

knownforrejectingmanyexcitingprojectsonthebasisthattheyaretoocertainofsuccess,whichis

prettysimilartotheKhoslaVenturesmodel).Thoughonecanlevelcriticismforthisanalysis,Ibelieve

theresearchersaremorerightthanwrong.ToquotetheSlatearticle,

TheNIHapproachdoeshaveitsplace.TheSantaFecomplexitytheoristsStuartKaufman

andJohnHollandhaveshownthattheidealwaytodiscoverpathsthroughashifting

landscapeofpossibilitiesistocombinebabystepsandspeculativeleaps.TheNIHis

fundingthebabysteps.Whoisfundingthespeculativeleaps?TheHowardHughes

MedicalInstituteinvestshugesumseachyear,butonlyaboutone-twentiethof1percent

oftheworld'sglobalR&Dbudget.ThereareafeworganizationsliketheHHMI,butmost

R&Diseitherhighlycommerciallyfocusedresearchtheoppositeofblue-skythinking

ortarget-drivengrantstypifiedbytheNIH.Thebabystepsarethere;theexperimental

leapsaremissing.

Icompletelyagree.InlinewithmyBlackSwanthesis,theworldshouldbefundingatleast10,000high-

riskshotsongoalinenergyalone;even10successeswillcompletelychangethefuture.

Toarriveatthese10successesoncewehavetheecosystemandthecultureinplace,weneedthe

individualbehindtobringtheideasintoreality.Butwedontneedanyaverageinnovatorand

entrepreneur!Weneedinnovatorsandentrepreneurswithaspecificmindset,peoplewhoare

hardwiredinsomesensetoleveragetheinventivenessinandaroundthem.Andthoughsometimesa

singlepersoncanplaybothrolesofinnovatorandentrepreneur,oneshouldrememberthatsometimes

theseareseparate.Therefore,whatismostimportantisunderstandingthemindsetofeachroleand

howthetwointeracttogether.

Innovators:Necessity(notsafety!)isthemotherofinvention

Myexperienceisthatinnovatorswiththeirbacksagainstthewallthinkbolder,solvethetoughest

problemsandsearchmuchmorebroadlyforsolutions.Ifyouretoocomfortableorcomplacent,you

lackthedrive,passionandobsessionofneedingtogetthroughthenextmilestone!Teamswithasafety

netdontpushashard,ortheygiveupandtaketheeasyroadwhenthingsgettough.Entrepreneurs/

innovatorsfocusonexperimentationanditerationdrivenbytheirnaivety/religion/passion;beliefin

intuitionmaybemoreimportantthanintuitionitself.Thisisbecauseintuitioncanserveavaluable

purposeofgettingyouintoalotoftrouble(youroverconfidenceandnaivetyleadsonetoignoreallthe

problemstheexpertscouldhavetoldyouabout),creatingamomentwhereyoupanic(ohshit!)and

theninnovateyourwayout,becausenecessityisthemotherofinvention.

Thismechanismofgettingpeopleintroublewhentheyhavenoeasywayoutbuttobangtheirhead

againstthewallorbecreativeaboutsolutionsisapowerfultechniqueinfosteringinnovation.In

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situationswhenmostpeoplewouldthrowinthetowelgiventheenormityoftheissues,entrepreneurs,

drivenbytheneedforfundingandalmostreligiousbeliefsintheirpassionsandmission,keepgoingand

becomeevenmorecreativeproblemsolvers.Inthisworld,whereonlytheparanoidsurvivebutthe

overconfidentinnovatethereisavaluetowhatIcallignorantbliss.Itisnotunlikejumpingoutofa

planewithoutaparachuteandhavingtofindawaytolandsoftlywhileinfreefall.Whetheronedoesor

doesnotknowthataparachuteisnecessary,onceinthesituation,theinnovatormustcreatesomething

(maybeaparachuteandmaybesomenewcontraptionaltogether)tosurvive!

Humanbeingsoftenusehistorytojustifywhythingswillorwillnotwork;thiscreatesanartificialdone

thatbeforeconstraintwherepeopleoftenfailtoanalyzewhyitfailed.Whendiditfail?Areanyof

thesefactorsstillrelevant?Thereisabigbutoftenignoreddifferencebetweenafailedstrategyand

afailedtactic.ThereweremanyFacebook-likestrategiesthatpredatedFacebook,includingOrkut,

MyspaceandFriendster(whicharegoodexamplesofwhythethinkingthatitsbeentriedbeforeandit

wontworkisonlytrueuntilitssuddenlynot).Similarly,accumulatedexperienceisimportantand

valuablesometimes(atleasttohavearoundthetable)butitcanconstrainthinking.Thetrulyinnovative

mindsetisnotaboutlookingatwhatmarkettoenter,itslookingatwhatmarkettocreate.AperfectexampleistheAppleiPod/iTunesvs.theMP3player.MP3playershadbeenaroundforover4years

whentheiPod/iTunescombocameout,andcompletelyredefinedwhatmarkettheywereeven

competingfor.AppletookwhatwasmarketforMP3playersthatmanybig(andsmall)companiessold

andcreatedanewmarketthatIcallthemusicexperience!MP3playershadbeendone/triedby

manyotherlargecompaniesuntilAppleappliedthevisionofSteveJobstotherealproblemofthemusic

experiencebeingfragmentedandclumsy.Thekeymessagehereisthatthecompanycannotsimply

evolveitsproductinrelationtoitsbusinessplan;thebusinessplanitselfmustevolveaswell.

Entrepreneurs:Shepherdinginnovation

Aswecansee(tonosurprise!),theinnovationpathwayisfullofhardandunexpectedproblems.Even

moresurprisingly,itrequiresabandoningmanyso-calledgoodmanagementpractices.Ifanideawere

easyorobvioustoconceiveofandimplement,itwouldhavebeendone;innovationbydefinitionishard

andhasunexpected,convoluted,andevolvingpathways.Thismakesithardtomanageintraditional

wayswithinabusiness,especiallylargerones.Evenentrepreneursstruggletoovercometheirinternal

biases,andtheveryunexpectednessoftheinnovationsthatwillmatter(andhowtheywillmatter)

makesitdifficulttodevelopbusinessplans.Whenplansgetstaticduetocorporateapprovalcycles,high

visibilitywithinacorporatehierarchy,orthroughannualplanswithannualbudgets,thetaskbecomes

almostimpossible.Weneedahealthytoleranceforslips,misses,missteps,dead-endsandloops.

Personally,Ifindtoleranceforthesekindsofmisstepsormisestimatesakeytoallowingthelargerand

betterbusinessopportunitiestoevolve.Itendtoignoremanyofthegoodoperatingmanagement

practicesuntilmuchlaterinaventure(yes,thereisanappropriatetimeforthat,butnowinebeforeits

timeapplieshere).Thebestinnovatorshave(andneed)theflexibilitytochangeproductsandplans,

andtheirteamandinvestorsneedtosharethatopen-mindedness.Goodmanagementinvolves

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delicatelybalancingthistolerancewithestimatesofwhatisawasteoftimeorsimplypoorperformance

ortherightamountoffocus/defocusforaventureandatwhatstage.

Moreoftenthannot,therecomesatimeduringtheinnovationcyclewhenyouhavetocutoffalineof

thinking;infact,youmayhavetodoithundredsoftimesbeforefindingtherightformula.Ioften

encouragepeopletoacceleratecyclesofexperimentation.Howdoesonemakethatcall,whenisenough,enough?Thisinstinctisoneofthekeythingsthatseparatethebestentrepreneurs(and

advisors/investors)fromtherest.Inrevolutionaryareas,onesabilitytoknowwhentostopandwhen

toplowforwardisonlyprovenoutifsomeformofsuccessisachievedbutuntiltheneach

entrepreneurandmanagerhastofollowtheirintuition,listentotheiradvisors,butdontnecessarily

followtheiradvice.Theteammakeupisalsoakeyfactorinwhetheracompanywilliteratewell,fail

quicklyandoftenandfindpathstosuccess.Andtheteamsbackgrounddiversityoftenbecomesakeyto

ingredienttorapidandmorefruitfulexperimentationorwhatIcalltheideassoup.

So,whendoyouaddtherightpeopleandwhoaretherightpeopletoadd?Theanswerstothese

questionsrepresenttheessenceofwhatIcallgenepoolengineering.6Ratherthanfillingoutan

organizationchart,itiscriticaltoidentifyasmanyasthekeyriskstotechnologyandbusiness

development,andfindthebestpeoplewhocanaddressthoserisksthroughanalogousexperienceand

skills.Asnewrisksareidentified,additionalrolesarecreated.Riskmanagementisevenmoreimportant

thanprojectmanagement.Butthefarmorecriticaltaskmaybetodrawpeopleofdifferent

backgroundsandphilosophiestoensurediversityofthinkingandcreateanenvironmentofcreative

disagreementanddiscussion.Beforesocialnetworksandsitessuchaselance,bigcompaniesheldthe

advantageofbeingabletoamasstheresourcesinengineeringanddevelopmenttoactuallyprototype

andevolvetheproduct.Withtheincreasedconnectivityandofferingofconsultingservicesthough,a

companyoffivepeoplehasaccesstothesameresourcesatamuchlowercost!byhiringengineers

inRussiaandIndia.

Thereisalsoabigdifferencebetweenatypicallargecompanyplan-to-executeversusaplantolearn,

iterate,aswellasaplantodevelopaplan(exploratoryphaseofinnovativeventures).Theresanartto

knowingwhentoletyourmindandtheteamrunfreeandexploreeverypossibility,andatimeto

introducerestrictions.Thegradualunfoldingofconstraints/planningrequirementsisakeytoinnovation

managementinmyview.Ioftendescribeinnovationmanagementastheshepherdmodelratherthan

thesergeantmodelofmanagement.Asergeantpointstroopsinaspecificdirectionandeverybody

marchesinsynctothegoal.Butininnovation,goalsarehardtodefineand,moreimportantly,thereisa

needtobeflexible.Thatiswhereaherdofsheepwilldobetter.Eachsheepmaygoinahaphazard

direction,withsomegoingsidewaysoreventhewrongway.Buttheherdfindsgreenerpasturesasthey

meander.Anditisoftenthecasethatthebestandgreenestpasturesareoffthestraightpath.Thegoal

ofthemanager,theshepherd,istokeeptheherdgenerallytravellingintherightand,more

importantly,samegeneral(butvariable)direction.Ihavesuggestedtheshepherdingmodeltomanya

founderduringtheirearlystagesbecausethesergeantmodelworksforinstanceswheneverythingis

defined,fromtheproducttothemarket,allthewaydowntospecificcustomerneeds.Inthatcase,

6http://khoslaventures.com/khosla/entrepreneurial.html

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thereisatargetandexecutionmattersmost;thecompanycanmarchinanorderlyfashiontomeetthat

target.Whenmuchisstillunknown,thismodeldoesnotmakesense,especiallybecauseitdoesnot

allowtheentrepreneurstodreambeyondthepossibleandintotheseeminglyimpossibleor

unreasonable.Inthisway,Iliketokeepentrepreneursbouncingbetweenthewallsofdreamingand

practicality.Innovatorsoftenhavetoleranceforthisambiguitybutmanagersdont.Butcomplete

freedomtoexplorewithoutguidanceordirectiontowardsavisionisalsounlikelytoyieldresults.

AnotherwaytoapproachthisdilemmaisthroughwhatIsuggest,whenpossible,asatwo-tierpath:get

tothefirsttierthatensuresthesustainabilityofabusinessandgivesonetimetoinnovateandthen

embarkonthesecondtierandstartplayingforthebiggerandmoredisruptiveinnovations.Afterall,

mostinnovationsarenotsuccessfulINITIALLYeveniftheyarepracticalandrealandSHOULDsucceed;

innovationisoneofmanyfactorsthatmakesomethingsuccessfulandotherfactorscanjustaseasilykill

aninnovation.Sometimesweneedlotsofiterationsandanoriginalinnovatordoesnotgofarenoughor

doesnotiterateenough;someoneelsepicksupanditeratestonewproductornewmarketorspecific

customerpainpoint.Soevenafailedinnovationmaydriveanattitudelikeitdoesnotworkforone

person(alreadytriedthat)orhowtodoitbetterforanotherpersonandtryagainforathird.Themoralistotryandtryagainuntilyousucceed.AgoodexampleofthisisAirBnB,whichoffersusersthe

optiontorenttheirhomes/apartmentsforshortperiodsoftimetootherusers.Therewereother

startupsatthetimethatwereperformingasimilarfunctioninthisspace,butitwasAirBnBssimpleand

effectiveuserexperiencethathasdrivenittohavemoreroomsinNewYorkCitythanthelargesthotel,

andisgrowingfast.

Risk-takingandcertainty

WheredidAirBnB,Apple,Googleandmanyothersfindthepersistencetokeeptryingandthecouragetokeepinnovating?Theinnovativeecosystemsthatallowfordisruptiveideastoariseactuallyleverage

thefundamentalbehaviorsbehindsomeofthemostsuccessfulinnovatorsasoutlinedinThe

InnovatorsDNAbyDryer,HalGregersen,andClaytonChristensen.Theauthorsisolatedthefive

discoveryskillsthatseparateordinarymanagersfromexceptionalinnovativeleaders.Theseskillsare:

associating(drawingconnections),questioning(challengingcommonwisdom),observing(scrutinizing

markets,customers,andcompetitors),networking(meetingdiversepeople),andexperimenting

(garneringinsightsfrominteractiveexperiences).ThisisagoodwaystartatbreakingdownthetrueDNA

ofaninnovator,butincomplete.Twokeyadditionalcharacteristicsinmyviewareoptimismand

persistence.Entrepreneursneedtofundamentallybeoptimistictobelievetheycandothingsothers

havenotdonebefore,toassumeawayproblemsandtopotentiallyoverestimatetheircapabilitiesand

underestimatetheobstacles.Butwhentheyrunintoproblems,theycontinuetopersistbecauseoftheir

religiousbeliefsaboutwhattheyaretryingtodo.

RobertBurtontooklooksatpreciselythesebeliefsandthesciencebehindtheminhisOnBeing

Certain.Hebeginsbyinvestigatingtheneurosciencebehindcertainty,andfindsthatcertaintyisa

feelinglikeanyother,butcomesfromalocalizedandprimitiveregioninthebrain.Thismeansthatthe

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feelingofknowingsomethingtobetrueisactuallyincrediblystrongandunrelatedtotheexistenceof

contradictoryevidence.Notonlythat,itsgenetic!Somepeoplenaturallygetthefeelingofknowing

mucheasierthanothers.

Sowhat?Fortheentrepreneurinastartup:regardlessoftherisksandlowprobabilities,the

entrepreneurwillnotgiveupbecauseofthecertaintytheentrepreneurfeelsinhisventure.Certaintyactuallyfeelsgood,rewarding,even.Andsincewevalidateourconclusionsinternallythroughfeelings

ratherthanreason,certaintycandrivetheentrepreneur.Itslikejumpingoutofaplanewithouta

parachuteinastateofseeminglyignorantbliss.

Ofcourse,jumpingoutofanairplanewithoutaparachuteisnotforeveryone.Infact,therearethose

whoarguethatsomepeoplearehardwiredforit!SarasSarasvathyputitwellinapapertitledWhat

makesEntrepreneursEntrepreneurialpublishedinHarvardBusinessReview(HBR)backin2001.

Sarasvathyseparatedcausalandexperientialreasoningandexploredhowentrepreneursthink

comparedtotherestofus.Mostmanagers(andallbigcompanies)tendtothinkcausally;theytryto

comeupwiththebestwaytoreachapredeterminedoutcome.Thisworksfineifyouhavean

establishedmarketandacorebusiness.Forthosejuststartingout,effectualreasoningisafarmore

usefultool.Manyanentrepreneuruseseffectualreasoningandstartswithonlywhattheyare,what

theyhave,andwhotheyknow.Theymakenoassumptionaboutwhattheoutcomeshouldbe;no

predeterminedthoughtsontheendmarket(noneedforabusinessplan).Theycaniterateandtesta

hugenumberofanglesandpotentialoutcomes,lookingforthemagicformulathattakesoffas

assumptionsandenvironmentschange.Effectualreasoningismuchmorerobustinuncertainand

unpredictableenvironments,anditisnosurprisethatsuccessfulearly-stageentrepreneursthinkthis

way.Thisiswhydetailedandthought-outbusinessplansaresuchawasteoftimeforanearly-stage

startup,andanindicatorofanentrepreneurwhoisnotthinkingaboutinnovationandtheartofthe

possibleflexiblyenough.

7

Inmyview,trueinnovatorsfigureoutaparadoxicalapproachtoinnovation:thinkbig,actsmall.They

behaveasiftheyaretryingtogettheirnextmillionortwoinrevenueorfundingbutkeepmuchlarger

visionsofthefuturedisruptionorreligiousmission/visioninmind.Unlikethefinanciallymotivated

executives,theywillsometimesbeimpracticalandrefusetogiveuptheirlargervisionfornearterm

convenience(evenneartermnecessity).Iencouragethattothemaximumextentpossible.Butthereis

alotofdiversitytooinhowthishappensandsomeinnovatorsformtheirvisionalongthewaygetting

smarterandthinkingbiggerastheyencountermoresuccessandlearning.Stillothersinmyvieware

accidentalvisionariesandinnovationhappenstothem.Thelatterislesscommonthantheformerand

thislattergroupcanrarelyrepeattheirfirstsuccessatinnovation.

7http://www.khoslaventures.com/presentations/What_makes_entrepreneurs_entrepreneurial.pdf

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Conclusions:

Innovationisnotjustabouttheentrepreneurthereisanentireecosystemtoconsider!Indeed,

innovationhappensonthreelevels:ecosystem,culture,andindividual.Innovationisexploringtheartof

thepossible.Yetthepossiblebecomesmorediversifiedandmorereachablethedeeperanecosystem

becomeswithacriticalmassofpeoplewithvariousbackgroundswhoarewillingtoshareideasandwhoareofferedlowcostsofexperimentationsothattheycantakerisksonthem.Oncesuchanecosystemis

establishedandbarrierstorisk-takingareminimized,itisessentialtoactuallyfosteraculturewhere

failingintelligentlyisavirtue.Encouraginginnovationmeanscreatingenvironmentssuchthatpeople

arefreetofailoften.Thesmartwaytodothisistohelpthemfailsmallandfailearlyandencourage

themtotryagain.Inourportfolio,wedmuchrathertakefifty$20Mbetsthanone$1Bbet.Large

companiestendtodothelatterbecausetheywanttogobiginmarketstheyknowarebig.Thisinmy

viewisamistake!Asabigcompany,ifonemadesmallbetsontheirengineersinareaswithnomarkets

atall,thoseengineersmayverywellcreatemarketsthatenduplargerandmoreimportantthanthe

corebusiness!Seemsunlikely?JustaskMicrosoftaboutGoogle,GoogleaboutFacebook,IBMabout

Sun,PicturetelaboutPolycom,orAT&TaboutCingular.Ofcourse,innovationcannothappenwithouttheleaderontheground,drivingtheeffort.Drivingtheeffortrequiresashepherdingmodelatfirstto

allowcreativefreedomwhilefollowingtherightgeneraldirectionandasergeantmodellatertoreach

theidentifiedtargets.Atthesametime,shepherdinginnovationisnotforeveryone.Itrequiresaperson

whosportsanuncannyintuition,revelsinuncertainty,andsettlesfornothinglessthansuccess.

Whetheryouareinabigcompanyorthinkingofstartingyourown,findingyourroleandthencreating

andsustaininganecosystemandculturewillyieldunpredictableresultsthatnoonehasimagined.

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NOTES

Afewexamplesofinnovationlists:

USATodayTop25sincethe70s:http://www.usatoday.com/news/top25-inventions.htm

1. CellPhonesMotorola1983(handheld)2. LaptopsCompaq19833. BlackBerryRIM19994. DebitCardsVISA1995(notthefirstone,justthefirstpopularone)5. CallerIDBellSouth19846. DVD(Industrystandard)19957. Li-ionbatteriesSony1991(firstcommercialproduct)(1 stproposedatExxon,then

developedbyBellLabs)

8. iPodApple20019. PayatthePump(SmallgasstationChaininTexas)10.LettuceinaBagFreshExpressinventedthespecializedplasticbag198911.DigitalCamerasKodak1986firstcommercial,Applehadfirstconsumercamerain199412.DopplerRadar199013.FlatPanelTVsRCApioneeredin1960s14.ElectronicTollsTollTag1989(TexasTollwaywasthefirstuser)15.PowerpointMSFTthroughthepurchaseofForepoint-198716.MicrowavePopcornGeneralMills198417.HightechsneakersNike198518.OnlineStockTradingAmeritrade199419.BigBerthaGolfClubsCallawayGolf199120.DisposableContacts(inventedbyRonHamiltonafterheleftCoopervisionin1993)introto

USin1995(BoughtbyBauschandLomb(JohnsonandJohnsonindependentlydevelopedthe

techbypurchasingasmallFloridastartuplenscompanyintheearly80s)

21.StairmasterStartupinTulsa-198622.TiVoStartup199923.PurellGojo(startup)mid90s24.HomeSatelliteTVDirecTV-199425.Karaoke1970spurportedlyinventedbyaJapaneseSinger(disputed)

26KeyInnovationsoftheLast20Years: http://howtosplitanatom.com/news/26-key-innovations-of-

the-last-20-years/

1. WWW2. Windows33. GeneTherapy4. Hubbletelescope5. LASIK

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6. Linux7. Pentium8. GPS9. Yahoo10.DVD11.Java12.Flash13.VOIP14.MammalCloning15.MP3player16.FuelCells17.Google18.StemCellresearch19.DVR20.Napster21.Genomeproject22.iPod23.Abiocorartificialheart24.Wikipedia25.MarsRover26.YouTube

Top50in50:http://www.popularmechanics.com/technology/gadgets/news/2078467

ModernInventions: http://inventors.about.com/od/timelines/a/ModernInvention.htm

Tenthingswedidn'thaveuntilthepastdecade:

http://media.www.alestlelive.com/media/storage/paper351/news/2010/01/14/Ae/Top-

Ten.20002009.Invention.Events-3853384.shtml

TIMEMagazine'sBestInventionsoftheDecade:

http://www.inventhelp.com/Newsletter/2009_12/time-magazine-best-inventions.asp