I’ve been thinking about this concept for several years. It’s certainly not new, but I haven’t come across any good posts on this topic. I don’t know how I feel about the title either. Maybe this post should be called “Why You Need VCs”, “The Risk of First Time Entrepreneurs”, or “Emotional Variance”.
I think that many people, companies, etc, are successful by accident. I’m not sure that accident is the right word. You achieve the intended result, but you get from point A to point B by doing something you don’t understand.
I can’t tell you how many times I have heard the phrase “nice miss” on a golf course. I could go to the driving range and hit golf balls all day reiterating my bad habits. When I go to put that practice to the test on the course, I hit the tree that is 10 yards to the left of the green. When my ball finally lands I end up 6 inches from the hole. Every time I wanted to land close to the hole I could hit the tree on the left. Pretty soon I would begin to think that I was pretty good. [edit: it’s like finding the glitch in the video game. you might suck, but if you can exploit the glitch you can still appear to be good.]
Typically when you are evaluating a strategic situation you map out all of your options. Based upon the available information you try and determine payoffs and possible opponent reactions. All things considered, you act in what you think is your best interest. Too many times I think people choose the correct decision for the wrong underlying reason. Your logic might be as follows: If I choose Path 1, Event A occurs which leads to my desired outcome. In reality, choosing Path 1 causes Event B which leads to your desired outcome.
The problem is that events are invisible. Consider the following event: I watch a quarterback throw a touchdown pass. How can that be invisible? I saw it, but that’s just an account of what happened. Because you have perfect information you are able to understand and analyze why this play worked.
There are many situations in which you don’t have “perfect information” (I don’t know how else to describe it so I am using quotations. It’s not perfect information in the game type of sense). Consider this hypothetical situation: Company A releases a new product or feature because they think potential customers will like the offering. They end up comitting a lot of resources to the project. One year later, they determine they were successful because they have 2x as many customers. They chose Path 1 (product release) because Event A occurs (potential customers like the product) thus they end up with more customers. Even if you survey every customer, you can’t be sure. You still don’t an accurate account of the event that occured. That product release turned out to be right move but for the wrong reason. They released because they thought potential customers would like the product, but in reality it might have put pressure on a less capitalized competitor, Company B, and forced them in a different direction (Event B) because they can’t bear the risk. Basically, you saw the quarterback do a 3 step drop, the lights go off, and when they turn back on the team has 6 points on the board. You know how it started. You know the result. However, you aren’t sure what really happened or why it worked. This accident simply met the perfect situation.
I think this concept applies mostly to young companies— especially those with first time entrepreneurs. I think it’s very difficult to learn as you go. I don’t want to repeat what everyone else says, but there are a lot of ups and downs when you start a company. You might be excuting perfectly but still feel “down” so to speak, or you can have a successful accident and feel “up”. So, how do you really know when you are doing things correctly— especially if over the course of a lifetime, an entrepreneur only gets 3-5 swings of the bat? How do you know if you’ve learned a bad habit from a previous successful accident? I think the emotional variance is just too big. This is why you need VCs, strong angels, and a great board. You need these investors/partners/advisors to help guide you because they encounter this over an entire portfolio (and probably 70-100 companies over a lifetime).
I don’t really know how to end this post because I have a lot to say on this topic. I’ll probably pick up where I left off in a different post some other time.
[note: serial entrepreneurs seem to be the exception. are they lucky enough to learn as they go?… of course, not all of these accidents are really accidents. big money is involved with startups which tend to attract the brightest minds. maybe they are able to recognize and exploit the mistakes of others. maybe this is completely irrelevant. it also might be a very small piece of the puzzle. maybe management skills are more important. i just dont know]
