Sidestepping reason

Sidestepping reason

Our inherent creativity and hopefulness – the urge and passion to try new things – are often deemed unreasonable. That is, it is impossible for others to see any point to them or they simply seem too far fetched. This reflects a pervasive genius-vs.-lunatic tension between the retrospective clarity of breakthroughs once they happen and the paralyzing uncertainty of those yet to happen.

In the documentary Banking on Bitcoin, Erik Voorhees reflects on the questions of the early days of BitInstant: “Is this going to change the world in a good way? Are we just a bunch of crazy people who don’t know what the hell we are talking about? Or are we actually starting to initiate an industry which in hindsight would look obvious to everyone but right now not?”.

Similarly, in his book Against Method, Paul Feyerabend argues that (scientific) ideas are often made clear by actions, that today’s rationality exists because at various points in the past reason – as it operated then – had been overruled. On this basis, the only principle that can be defended in all circumstances is “anything goes”.  “If scientific achievements can be judged only after the event and if there is no abstract way of ensuring success beforehand, then there exists  no special way of weighing scientific promises”.

Or consider the closing scene of the movie Ratatouille, when the food critic – overwhelmed by the taste of the dish prepared by Remy the rat – writes in his review: “But there are times when the critic truly risks something and that is in the discovery and defense of the new… Not everyone can become a great artist, but a great artist can come from anywhere.”

In a new paper with Daniel Lerner and Richard Hunt – Action! Moving beyond the intendedly-rational logics of entrepreneurship – we explore the implications for entrepreneurship theory of action without reason. We propose that:

(1) entrepreneurial processes can be initiated by non-deliberate actions whose consequences give rise to the very purpose that ultimately defines those processes;

(2) such actions generate consequences that cannot be anticipated or evaluated by a priori judgment; the relationship between the two is diachronic.

Deviation – sidestepping reason – seems to be a vital condition for progress. The problem is it is neither necessary nor sufficient: and yet we can’t reap the benefits of entrepreneurship without it.

Holding the bag … of uncertainty

Holding the bag … of uncertainty

Every entrepreneurial project has a large degree of uncertainty that cannot be eliminated. The inability to foresee not only the outcomes of our actions, but also the consequences of those outcomes, and the meaning of those consequences represents an irreducible tension. The more we commit to one particular unfolding of the events ahead – with all the elation this brings – the heavier the counterweight bag containing doubt and the possibility of being wrong. Commitment comes with baggage. When the two move together, the baggage is a constant reminder of the need to focus on learning and to maintain flexibility to change direction.

Something interesting happens in organizations: commitment and baggage get separated. Unhitched, the commitment slowly rises upwards, ultimately bringing certainty to the top management. In the meantime, the bag is left behind and sinks, leaving the uncertainty with middle managers or front liners. No matter how hard they try, they are left holding the bag…

[Left holding the bag: being in a situation where you are responsible for something, because others fail to take responsibility for it (Collins English Dictionary)]

As uncertainty travels downwards, accountability travels upwards, defined by the expectations from the top. These arise from the certainty of received commitments about the impact of entrepreneurial initiatives. At that point, the bag of uncertainty has already vanished – the multitude of possibilities have collapsed onto the single path of history. This, in turn, cements the original commitment as a viable reference point and triggers a search for points of blame.

If only uncertainty and accountability could travel in the same direction. When the bag of uncertainty is held at the top, those who work on entrepreneurial initiatives no longer feel the pressure of being left with it. It also changes the focal point of accountability from what we did not achieve to what we did learn. When commitment and bag are held together, there is recognition at the top that the commitment is necessary to structure our action, but also that this structure is always tentative.

To avoid the anarchy of complete lack of accountability, there needs to be a clear labeling for the bags to indicate which go upwards (accountability) and which stay down (incompetence).

Killing innovation softly: grades

Killing innovation softly: grades

As universities offer more and more entrepreneurship courses in their curricula, their ambition to promote innovative thinking runs against one of the pillars of academic provision, namely the measurement of academic achievement. When its power as a signal of quality is too significant to ignore, it becomes an end in its own right. In the UK in particular, achieving less than an upper second class degree (2:1) can disqualify one from graduate jobs or further study. Students become invested in achieving a first class degree.

Measures of academic achievement are meant to signal relative standing based on the premise of their normal distribution. Their rigour is underpinned by quality-assurance processes that triple-certify the assessment and enforce its (normal) distribution through moderation, exam boards, and external examiners. In between the student fixation on grades and the imposition of the processes that produce them, innovation loses its punch.

For all the exciting activities that can be done in an entrepreneurship course to develop skills in creativity, experimentation, and design, if they are not graded students lose genuine interest to engage in them. If they are to be graded, two forces quickly deflate them. First, they have to be subject to certification, which makes the use of written or standardized assignments expedient for the transparency of their assessment. Second, these activities have uncertain outcomes and unscripted processes, which necessarily enshrines them in ambiguity and the risk of coming out empty handed. But such ambiguity is intolerable when students need a certain grade: they want to know what is to be done to achieve it. Model answers serve as anchors and effectively box in the outputs. 

Norms and normal distribution around them work for basic knowledge and skills, where achievements have clear boundaries. But the power of innovative ideas and entrepreneurial initiatives lies in their unbounded nature, in the long tail of outliers that arise naturally from unrestrained social processes of interaction and experimentation, fueled by innate purpose and curiosity. When these processes are defined by external purpose and restrained from the start through the instruments that measure their outputs, that power is lost.

 

The shackles of human “capital”

The concept of human capital has a stronghold in entrepreneurship research, as a reflection of the experience and skills entrepreneurs bring to their journey. It originates from economics where it was introduced as a means to measure the returns to years of education and experience. The main assumption behind it is that all years of accumulation are the same.

In a new paper, I demonstrate the need for a qualitative understanding of experience.  The knowledge and skills subsumed under human capital are not only derived in different contexts but also form qualitatively different combinations. Therefore, the term “capital” is misleading as it forces them into homogeneous units to be quantified. This works for financial capital because, regardless of its sources, it is ultimately assembled in the same bank account and put to the same uses. In contrast, the sources of human capital each feed into different pockets: 10 years of total experience
can amount to qualitatively different capacities depending on whether they are composed of education, industry, managerial or entrepreneurial experience.

The shades of human capital matter. In earlier work, I show that they can drive the entrepreneurial process to different realizations. They even point to different sets of skills in venture capital investing: those that minimize failure are different from those that maximize success. My favorite is that they can also explain investment decisions: finance expertise and early-stage investments do not go well together. It seems the focus on numbers and financial modeling can stifle even the greatest idea early on.

 

The void that cannot be filled with reason

In a dynamic world, companies recognize the imperative of being entrepreneurial, of exploring opportunities outside their comfort zones. But it is not long before this new energy runs against the core organizational forces of reliability and accountability. Entrepreneurial activity needs to deliver foreseeable results, for how else could it be justified?

As I explored in an earlier post, the messy, chaotic nature of entrepreneurial efforts sit uncomfortably within corporate structure: mistakes are a normal part of the process, it is impossible to know whether efforts are effective or efficient; it all looks like a huge expense rather than an investment. Mysteriously, the closer one looks and oversees, the more problematic entrepreneurship seems. To link to another previous idea, control is not the answer.

But stepping off and letting go is counter-intuitive and not conducive to a good-night’s sleep.  The challenge is front and central at the Strategy & Innovation Forum I am currently attending. Three ideas resonated with me from the shared stories of how people deal with this challenge within organizations. The first is that when we let go and keep our distance, we have to replace the void in between with trust. Trust can mean many things, but in this setting I see it as being about giving credence to the knowledge we cannot verbalize (our intuition) and not dwelling on the unknown (for the more we dwell, the more we fear it).

Lest the above induces a sense of being stuck in quicksand, the second idea is one of scaffolding, of basic discipline that we can hold on to. It is about setting boundaries, within which we can trust people to deliver: creating a sandpit in which there is play is free and unscripted, but a sense of purpose is clear. The boundaries evolve to facilitate productive behaviors and prevent destructive ones.

The third one is about not taking purpose for granted. It needs to arise from an exploration of how the original problem that sets the process off is embedded in a broader, holistic system. Rather than loose sight of what we are trying to do in the first place – a natural consequences of embarking on a linear, sequential, one-way process – we need to continuously revisit this question in the light of our broader understanding of the context. This is process of active perception – zooming and re-framing – through which we peel off layer after layer … under we get to a core that frees and inspires people to unleash their creativity and, at the same time, keeps them anchored.

 

From explaining the past to looking into the future

Great piece in the FT (below) on the mis-use of mathematics in finance. The target of criticism are those who over-fit past data to profess a successful trading strategy for the future.

It is not a long shot to extend this to explanations of entrepreneurial performance. To a large degree, we tend to look for patterns in past performance data, but are these really useful as guides for the future?

Because we know what actually happened, we can always find an explanation for it. But since what happened cannot be assessed probabilistically among its many alternative paths (which did not happen and which cannot be really enumerated) there is no weight to our explanation in guiding us towards an open ended future.

Financial Times, When use of pseudo-maths adds up to fraud

Opportunity as friendship

Entrepreneurship is typically defined as the pursuit of opportunities. But what is an opportunity?

Let’s answer this question by trying to construct one. As a basic minimum we need three things: (1) a product or service, (2) one or more agents who consume it, and (3) one or more agents who produce it. But just the simple collection of such agents and artifacts is not enough; the essence of the opportunity lies in the relationships among them. Behind each relationship lies a distinct pattern of interaction, for example exchanging money for the product or exchanging labor for money. In other words, an opportunity is a set of interactions, a social structure.

Friendship is also a social structure. It requires at least two people. But the simple collection of them does not produce friendship; it is their distinct pattern of interaction that does so.

As social structures, opportunities and friendship are emergent phenomena, i.e. they amount to more than the sum of their parts. It is the interaction of these parts that give rise to the structure in question.

Given this, what does it mean to identify, recognize, discover, research, or even create an opportunity? Well, these terms make no sense when applied to friendship, so why should they make sense for opportunities? In a forward looking sense, the relationships that constitute an opportunity or a friendship do not exist; they can be imagined and aspired to. An opportunity or a friendship arises – if at all, that is – only when those relationships are fired up and sustained.

We do not plan our friendships. We take small steps to interact and, if there is a mutual spark, keep the interactions going. Over time, these sustained interactions become friendship.

Let’s revisit the opening definition of entrepreneurship. Entrepreneurship is the taking of many first steps, some of which may give rise to opportunities.

The illusion of understanding entrepreneurial success

Whenever successful entrepreneurs are asked for the secrets of their success, it strikes me that their answers inevitably involve one or all of the following: (1) persist, i.e. do not give up; (2) learn from your mistakes; and (3) give the customers what they want.

I have always found it troublesome that such advice sounds too simple, that there must be someting else, the secret that makes such entrepreneurs special. But perhaps there isn’t. Perhaps entrepreneurial success is indeed built from the iteration of these simple rules.

Why – I hear you ask – isn’t everyone successful then? I see the answer in the fact that entrepreneurial outcomes – huge success, failure and everything in between – are chaotic. The key to understanding the term chaotic is not to confuse it with random. Both chaos and randomness imply unpredictability but in different ways.

Randomness is what creates lottery winners and it is clear to us that there is no secret to becoming a lottery winner. Hence we never invite lottery winners to speak about their success. This is because random outcomes are non-deterministic, i.e. there is no particular reason why they happen; they just do.

Chaotic outcomes, on the other hand, are deterministic but unpredictable. In other words, the rules that generate the outcomes are clear. They can be very simple but iterative, that is applying the rule over and over. Just like persisting, learning and responding to customers. In entrepreneurial settings, such iteration traces non-linear paths, which means that there is no telling where you might end up. Miniscule differences at the outset can end up widely apart. I love the analogy of kneading dough. If you put two chocolate chips next to one another and continue by pressing, stretching and folding – simple, iterative rules – there is no telling where the two chips will end up in the final form.

Many successful entrepreneurs say that entrepreneurship is simple. It indeed is – the action rules are simple. There is just no telling where you will end up.

The Anna Karenina principle in entrepreneurship

The opening sentence of Tolstoy’s Anna Karenina

“Happy families are all alike; every unhappy family is unhappy in its own way”

– has inspired the term “The Anna Karenina” principle. It readily applies to entrepreneurship:

Successful entrepreneurs are all alike; every non-successful entrepreneur fails in his or her own way. Success, then, is not about ensuring positive factors, but avoiding all the negative ones.

Succeeding by avoiding failure may sound like an oxymoron, but if you replace “avoid” with “learning from and adapting to”, then success is all about finding and ironing out the kinks.