Musings on Entrepreneurship and Innovation
Saturday, June 10, 2006Is the Invention Business for Fools?
The successful commercialization of an invention is a long shot, yet I'm in the invention commercialization business. Does that make me stupid, foolish, or both?
There is evidence that the market outcomes of even very similar products can be asymmetric. [1] In other words, within a given consumer product category, 2 to 5 products tend to account for a majority of category revenue. Furthermore, some well-constructed logic by people who think about such things as informational cascades suggests that there is a less than deterministic relationship between product quality and market success (that is, a "global cascade" of adoption). [2] In plain words, a great product may not win, and winning products may not always be that great. [3] Taken together, growing an individual invention into an innovation is something of a crap shoot.
Let's say that 99 of 100 inventions will fail. Does that make it stupid or foolish to be in the invention business? Well, that depends on the likely cost of failure and the likely benefit from winning. Let's say the cost of failure is $1 and the benefit from winning is $100. If you take a run at 100 inventions, you would expect to earn $.01 (.01 x $100 - .99 x $1 = $.01). Not much of a profit margin, perhaps, but Wal-Mart and Goldman Sachs, two pick two, have figured out how to generate a lot of wealth over time on modest margins.
Being in the invention business can make sense if:
- You have the staying power to take a lot of shots on goal, and
- You can keep the cost of failure really, really low relatively to the likely benefits from winning, and
- It certainly helps if you can learn how to improve your aim over time
That is not, however, how many inventors behave, in my growing experience. Risky (sometimes foolish) behavior includes:
- Assuming that your product is the best without subjecting that assumption to disconfirmation
- Assuming that having a truly great product will unerringly cause market success
- Ignoring disconfirming evidence when it presents itself
- Falling into the escalation bias trap, and
- Investing way too much time and money in a single invention
The last may be the critical misstep. One can make all the other mistakes and still have an entertaining and emotionally rewarding invention hobby. But, if one wants to be in the invention business, buying too aggressively into one's own bullshit is dangerous. However, the persistence of fraudulent invention promotion companies is a testament of the strength of confirmation bias.
It's possible, but not very likely, that my colleagues and I will make money in the invention business through sheer luck. If we are successful over the long-run, the source of the success is more likely to come from our ability to
- Undertake disciplined, fast, and cheap experiments to generate valid evidence regarding the hypotheses represented by the inventions in our investment portfolio
- Hedge our bets
- Keep our options open
- Be very skeptical of statements that include words such as "certain" and "know"
- Stop investing in projects whose likelihood of success isn't supported by evidence
- Appreciate, and guard against, our own propensity to be fooled (and to be fooled by ourselves)
Whether an individual inventor, a firm pursuing a Product Capitalist® model, or a corporation, it pays to know when you are pursuing an invention business or an invention hobby. Confusing the two is foolish.
[1] For instance, see "Market Shares: Some Power Law Results and Observations," a working paper by Rajeev Kohli at Columbia University and Raaj Sah at the University of Chicago.
[2] See Chapter 8 in Duncan Watts's book, Six Degrees: The Science of a Connected Age.
[3] That's not to say that product quality doesn't matter. Having a pretty good (often a very good) product is necessary to win in the marketplace. I'm just saying that having a great product is not sufficient; there is also a significant element of unavoidable chance.
