I get contacted regularly by startups looking to partner with large, global companies who can give them scale. My work over the years has shown me a number of these deals from both sides of the table. While almost all of these relationships make some logical sense on paper, in reality they are way more difficult to implement than founders initially think.
On the surface, the logic for these relationships is straightforward – one party has a unique technology or product that can improve things for end users while the other party has global distribution and scale. What’s not to love? But there are several other factors that go into the decision making process for large companies which founders often fail to consider.
Last week, I had the pleasure of attending and keynoting Carnegie Mellon University’s Corporate Startup Lab Demo Day. My friend and mentor Sean Ammirati first shared the Corporate Startup Lab model with me in 2017 and I’ve been a fan since Day One. The idea is to bring together Fortune 500 companies with interdisciplinary teams of students to build internal startups solving problems and developing new business models.
In today’s world, we’re constantly being inundated with “newness”. It seems like every day, there’s a new startup or company coming up with a technology to improve how we do things. Despite how much media hype there is around these new technologies, it’s hard to know which ones have lasting power and which will fall by the wayside.
When looking at something new, a mental heuristic I find really helpful is examining it through the lens of the Lindy Effect. Those who have read Nassim Taleb’s The Black Swan and Antifragile are already familiar with the Lindy Effect. If you haven’t, here’s a brief summary (though you should still go read the books):
The Lindy Effect refers to the life expectancy of non-perishable things, like ideas or technology. Basically, the rule states that the longer something has been around, the longer it will be around.
An easy way to grasp this concept is to compare two successful books, one old – say, The Bible and one new – like Fifty Shades of Grey. The Bible has been around for about two thousand years while Fifty Shades has only been around for a handful of years. Which book is more likely to still be around in a hundred or a thousand years? Obviously The Bible. This concept applies to more than just books though – it applies to anything. Technology, media, transportation – everything. Something which survives a long time has, by definition, gone through the crucible of time…and survived. That bodes very well for its future survivability.
While not true 100% of the time, the Lindy Effect can be a useful tool for predicting which new technologies or ideas will survive and which are just blips on the radar. A great example of this is the butter vs margarine debate. For literally thousands of years, humans have consumed butter. Then, for a brief stint during the twentieth century, humans were told butter was bad for them and many people switched to margarine. But as is becoming readily apparent, butter isn’t nearly as bad as once thought and margarine may literally kill you. And accordingly, butter has made a comeback. Which is more likely to be around in a hundred years?
Thanks to what I do for a living, I’ve been thinking about the current state of the beer industry and looking at it through the “Lindy Lens”. I’ve made a series of predictions with explanations below that arise from following the Lindy Effect to its logical conclusions in the beer realm:
There are two schools of thought about how information should flow within companies. By far the most common way is chain of command, which means that you always flow communication through your manager. The problem with this approach is that, while it serves to enhance the power of the manager, it fails to serve the company.
Instead of a problem getting solved quickly, where a person in one dept talks to a person in another dept and makes the right thing happen, people are forced to talk to their manager who talks to their manager who talks to the manager in the other dept who talks to someone on his team. Then the info has to flow back the other way again. This is incredibly dumb. Any manager who allows this to happen, let alone encourages it, will soon find themselves working at another company. No kidding.
Anyone at Tesla can and should email/talk to anyone else according to what they think is the fastest way to solve a problem for the benefit of the whole company. You can talk to your manager’s manager without his permission, you can talk directly to a VP in another dept, you can talk to me, you can talk to anyone without anyone else’s permission. Moreover, you should consider yourself obligated to do so until the right thing happens. The point here is not random chitchat, but rather ensuring that we execute ultra-fast and well. We obviously cannot compete with the big car companies in size, so we must do so with intelligence and agility.
One final point is that managers should work hard to ensure that they are not creating silos within the company that create an us vs. them mentality or impede communication in any way. This is unfortunately a natural tendency and needs to be actively fought. How can it possibly help Tesla for depts to erect barriers between themselves or see their success as relative within the company instead of collective? We are all in the same boat. Always view yourself as working for the good of the company and never your dept.
There are sooo many great points in this email. Let’s break them down:
500 Startups, one of the world’s leading startup accelerators, recently released a report on how large companies can best work with startups. Given their unique position in the market, 500 Startups surveyed executives at companies like General Motors, Simon Ventures, Embraer, and more to learn what they’re doing to drive collaboration with startups.
The 500 Startups Corporate report has tons of useful takeaways for both startups and corporate innovation teams. Here are their best practices for corporate innovation teams and my take below:
“Get good grades in school. You’ll have more options when choosing a college.” -Parents
“Pick a major that applies to many different industries. That way you’ll have more job options.” -College Counselor
“Consulting is a great field. From there, you can do whatever you want.” -Career Advisor
While this advice isn’t necessarily wrong, very rarely do we take a step back and examine what exactly we’re collecting all these options for. Perhaps at the beginning of our careers, we have some vague idea of a goal or accomplishment we want to reach but we’re not quite sure: a) how to reach the goal and b) if we even want to reach the goal in the first place. So naturally we choose the path that keeps the maximum number of future possibilities available to us. Unfortunately, this fuzzy goal mindset is often carried through to adulthood and leaves us grasping for optionality with all of our major life decisions. And over the course of a lifetime, this optionality maximization mentality turns us into habitual option collectors and prevents us from reaching our goals.
But I’m getting ahead of myself. Let’s start with the basics.
What is Optionality?
Optionality is a concept from the finance world. When someone holds an option, it means they have the right to do something but no obligation to do it. As Mihir A. Desai puts it in his Crimson article, “Optionality is the state of enjoying possibilities without being on the hook to do anything.”
When the universe conspires in your favor, you participate in the upside. And when it doesn’t, you aren’t on the hook for the negative consequences. It sounds pretty great, doesn’t it? In finance, this is referred to as a “non-linear payoff”, which literally means you stand more to gain than you do to lose.
Thanks to books like Antifragile, the idea of optionality has become popular in the mainstream. Predictably, people are very interested in the idea of having possibilities without any obligations. The optionality concept has been applied to things like careers (picking a job that opens up as many future opportunities as possible), relationships (dating around and not making commitments because you never know who else you’ll meet), and more.
Of course, in the financial world, every option has a cost associated with it. And so do real world options. But while financial options have an explicit price attached to them, real world options have more subtle costs.
What is The Optionality Trap?
When we first start making life decisions on the basis of the future options they create for us, we do so to reach some long-term goal. Perhaps we want to someday travel the world or start a company. Maybe we want to build enough skills and reputation so we can work on our own schedule. Or most common, we just don’t know what we want to do so picking an option that gives us more options seems to make the most sense.
However, when we do this for long enough, it becomes a habit and we start making all of our decisions through the lens of future optionality. After awhile, we aren’t even conscious of this rationale. We post-rationalize decisions and think we want to go to business school or consulting for their own sake but really, we’re optimizing for the opportunities we’ll have afterwards. Quoting Mihir Desai again:
The Yale undergraduate goes to work at McKinsey for two years, then comes to Harvard Business School, then graduates and goes to work Goldman Sachs and leaves after several years to work at Blackstone. Optionality abounds!
The optionality trap is something that ensnares us, not through outside forces, but through our own risk aversion and indecisiveness.
My opinion is that the optionality trap originates from an aversion to being hurt emotionally. A desire to avoid emotional pain is of course, completely natural. But in this avoidance lies an emotional stuntedness that prevents us from ever trying anything worthwhile and learning through the process.
Common Optionality Trap Examples
The optionality trap can affect more than just our career choices:
Let’s face it: coming up with startup ideas is not hard. The hard part is determining if your idea is viable and then of course, executing on it. And yet there are thousands and thousands of potential entrepreneurs sitting on the sidelines with a concept or an idea that “isn’t quite ready yet”.
Guess what? It’s never going to be ready. Instead of getting started with customer development to see if their idea has legs, these would-be entrepreneurs are keeping the option of being an entrepreneur alive, while not engaging in any of the emotional (ego) risk of being wrong.
If you have ideas, start testing them.
I also often see entrepreneurs who come up with tons of ideas but can’t pick one to go deep on. This is a close cousin of the “not ready yet” problem. These entrepreneurs are giving themselves optionality but never actually selecting one of their options.
As Chaz Giles frequently reminds me when I try to get “clever” with startup ideas, “Someone has built a profitable business selling bird diapers. Don’t overthink it.”
By focusing on optionality of ideas over execution, would-be entrepreneurs will never succeed. But perhaps more importantly, they will never make mistakes and in the process, completely stunt their own learning curve.
Individuals aren’t the only ones guilty of optimizing for optionality. Companies frequently do it too.
In companies, the optionality trap is often seen in the insidious form of endless meetings, which leads to decision-making procrastination. Quite simply, companies that don’t make decisions can’t be wrong. Actually, that’s not true at all – by not making decisions, companies are defaulting to making the wrong decision. But the individuals at the company (a key distinction) get to avoid making a decision which could potentially be wrong, which means they avoid any potential blame.
This is once again the optionality trap at work. By not making decisions, individuals within a company keep all their options open. But by not making a decision, their company (which ultimately includes them) fails at solving whatever problem they were trying to solve.
The optionality trap in dating is the ultimate modern day problem. When you can login to a dating app and get access to a huge number of single people, it becomes tough to commit to anyone. What if there’s someone better just on the other side of that app?
Plus, as you get to know someone, their flaws start coming out while the ephemeral “people” on the dating apps are still perfect. At least in theory.
When you live with the belief that there are people better than your current fling just a tap away, it becomes impossible to emotionally commit to someone. And without emotional commitment, no relationship can flourish.
For those lucky few who have the option to live wherever they want, the easiest thing to do is to live nowhere. I’m referring, of course, to the currently en vogue nomad lifestyle. Don’t get me wrong: the ability to live and work anywhere is generally awesome. Lord knows I’ve taken full advantage of it. But there are downsides that very few people talk about. For example:
When a person spends all his time in foreign travel, he ends by having many acquaintances, but no friends.
This quote about the nomad lifestyle was made by Seneca in Letter II of Letters From A Stoic, which is about 2000 years old but still holds true today. By not living anywhere, you experience a wide variety of locations but never develop deep relationships with people and place that someone who lives in the same area for years would enjoy.
How To Get Out of The Optionality Trap
You’re probably sitting there thinking to yourself, all this talk about optionality traps is fine but HOW do you actually make a decision? If you’re looking at two options with different risk profiles and appeal, how in the world do you decide which one to go for? Andy Dunn from Bonobos says it better than I can:
The risk is not in doing something that feels risky. The risk is in not doing something that feels risky.
Very little is obvious in the research on human decision-making and happiness. Very few things are proven. One thing that is proven is this: the only regrets octogenarians have are for the risks not taken.
If the risk taken does pan out, it is good. But if it doesn’t — and here’s the key thing — we find a way to justify the risk taken as learning.
That’s the secret.
If our goal is to live a good life without regrets, it’s so important to internalize Dunn’s quote. If we choose the path that doesn’t speak to our souls but feels safer, there’s a very strong likelihood that we’ll ask that dreaded question years later: What if? What if we took the plunge?
But if we choose the risky path and it doesn’t work out, we can (usually) call it a learning experience and move on. There’s very little thinking about what would have happened if we had taken the safe path.
By knowing this and then projecting to how you’ll feel in 10, 20, or even 40 years out as a result of this decision, you can take on the fear that quite naturally arises at a decision point. And by taking fear out of the equation, you can make a decision that’s based on what you actually want, rather than basing it on what’s safe or comfortable.
Is There a Time and Place For Optionality?
Despite what you may think from my railing against the optionality mindset for the past ~1800 words, there are plenty of times in my life where I’ve chosen optionality over the more direct path. While I do regret some of those decisions, there are a couple times that I’ve chosen optionality and it worked out.
Like most complex matters, there’s no “one size fits all” solution to decision-making. Big life decisions are deeply personal. Even something like deciding to go into consulting, which on the surface seems like it’s driven by optionality, can be a courageous decision depending on what the motivation is.
Ultimately though, if you know you want something, the fastest way to get there is to chase it directly. Optionality is a backup tactic, not something to pursue first.
The siren call of optionality is admittedly an alluring one. But it’s also dangerous. Unfortunately, when we don’t know what to do or the path to our goals is unclear, the easy default choice is to defer and pick something that gives us the most future choices. But the universe is strange. When we choose a path, things start to happen. Things we can’t necessarily predict in advance. Andy Dunn says it nicely:
If you can’t decide what to do, get on the road. You won’t find the answer. It will find you.
In other words, go punch the optionality trap in the nose and get after it.
I recently had the pleasure of joining Nat Eliason on his podcast ‘Nat Chat’ to discuss Antifragile by Nassim Taleb, which if you don’t know, is one of my all-time favorite books. During the podcast, Nat gave an example of a “naive intervention” that’s been percolating in my mind ever since: In response to children being distracted in class, doctors have, for years, been liberally prescribing Ritalin to “help” students focus. Instead of examining and redesigning the distractions and flawed class structure that leads to almost 20% of American boys being diagnosed with ADHD, the education and medical industries have decided to drug students into submission. And this naive intervention leads to long-term issues, as there seems to be a link between taking Ritalin and cocaine addiction later in life, due to the similarity between the two drugs. Nat referred to this overprescription trend as “trying to fix the terrain, instead of fixing your map”, the terrain in this case being children and their attention span while the map is the solution to capturing their attention.
To put it more broadly, your map is yourmodel of the world while the terrain is the actual world. Models are always, always, always (I can’t stress this enough) an approximation of reality. When models are effective, there is very little difference between the model and reality. When models fail, there’s a large difference. And because the world is constantly changing, models require continual feedback loops and updates to remain effective. Changing the model is much more in your control than changing reality, yet many notable screw-ups (like the ADHD example above) happen when humans try to re-shape reality instead of re-shape their model.
This terrain/map concept is so powerful and broadly applicable. Through the work I do, I see a ton of parallels with both corporate innovators and startups trying to force the landscape to adapt to their expectations instead of adjusting their solutions to the new reality.
Retail: Legacy Brands vs Adaptive Brands
In retail, the vast majority of legacy brands still base their strategy on a terrain that existed pre-Internet and pre-social media: namely, the supply-driven retail business model. Spotting these companies is fairly simple: they are the ones who are late to the game on almost every trend. Why? Because trends now emerge organically through “the public” (sometimes influencers but often just the dregs of the interwebz) instead of through corporate tastemakers.
The old model for retail was for a buyer or tastemaker to decide which products would be released in a given season. These buyers were/are extremely skilled at understanding consumer preferences and the model worked well for a long time. But now that we’re able to access products from around the world, taste has simply become too complex for any single human being (or in my opinion, an algorithm alone) to control or predict. Instead of a top down model of tastemaking, trends now generally emerge from the vast pool of humanity, without an easily determined reason – though people will try (and fail) to analyze trends in hindsight.
Brands that have embraced this new model (like Zara) are able to identify emerging trends through rapid piloting, kick the design and supply chain processes into action for successful experiments, and get products in-store before the trend has really taken off. Equally important, they can economically halt the process and respond to the next trend when the current one is over. Brands that have built processes like this to adapt to the new retail environment are exemplifying the idea of “fixing their map” to adapt to the new terrain.
Startup Sales Process
Likewise, over the years, I’ve seen plenty of startups miscalculate just how long and involved the enterprise sales process is, how many stakeholders there are, and the risks involved when a large company works with a small one. The startups who successfully navigate this process are the ones who, often through trial and error, develop an accurate model for the organization they’re selling to. This includes knowing who the key decision-makers are, what they are being judged on, what their top priorities are, and most importantly, how your startup fits into the picture.
The startups who get frustrated in this process are usually those who come into it with unrealistic expectations of how quickly a deal will get done, simply because of how much sense it makes…on paper. While mapping a deal on paper is important, it isn’t nearly enough to move things along.
To successfully close a deal with a large company, it takes an understanding of who in the company is actually buying your product, what that person or department is tasked with, what they’re succeeding and failing at, and so much more. All of this deep, detailed knowledge can only be gathered through research and many interactions with the target company. And this knowledge is then used to build and iterate on your map (i.e. model) for how to get the deal done.
But if a startup runs into a wall during the sales process and attempts to change the procurement process (i.e. change the terrain) – good luck. Those processes were likely created by a painstaking process involving dozens of people and months of debate. Most importantly, you – a little startup – don’t have the leverage to demand that the large company change their process. If the startup has a ton of leverage, it’s possible (though unlikely) that the large company may volunteer to fast-track the deal. But I have never seen a startup successfully demand that the large company change their process.
When things aren’t going right or are more difficult than expected, it’s easy to look externally and blame outside forces. But more often than not, it’s our model that’s flawed, driven by expectations which don’t match the reality of the terrain. Taking a step back and evaluating our map is often all we need to do to correct things. An even better tactic is to build in opportunities to check and adjust your map as you go along, for example interacting with customers often to continuously test your assumptions. These feedback loops are the only way to make sure the map you’re using is an accurate representation of the terrain and not a forced fit “solution” that has little connection to reality.
I’ve been going through the Jocko Podcast archives over the past few months. While listening to Episode 47, one of the listener questions really got my attention. The listener asked Jocko if he did anything ritualistic to get himself mentally prepared before his Navy Seal operations. Pretty innocent question and one that I’d imagine many listeners have thought about.
“I hate to spoil the romantic vision of the mindful warrior poet but that actually, that idea is just not what happens. Here’s the reality: first and foremost, when you’re in combat and preparing for an operation – you are freakin’ busy…there’s so much planning and preparation that needs to be done…you’re not just sitting around trying to figure out your mindset.
That being said, mindset IS a part of combat. So how did I get in the right mission mindset? Well the mindset is not achieved in the minutes or even hours before an operation, from chanting a mantra, or breathing, or meditation, or some song that will get you in touch with your warrior spirit. The mindset is achieved in the weeks, and the months, and the years BEFORE that specific operation commences.
We lived in the mindset and that mindset came from the training we went through, the repetition of the fundamental skill sets. The mindset comes from the discipline – waking up early, studying the tactics, understanding the enemy – from all those unmitigated daily disciplines”.
That is such a powerful answer, and one that any large company hoping to innovate should pay extra attention to. Before I dive into this further, a quick disclaimer: Yes, I fully understand that corporate innovation is orders of magnitude more trivial than war.
The Wrong Type of Innovation Culture
That being said (to borrow a classic Jocko phrase), there are SO many companies that think “innovation” can be learned in a single workshop or can be siloed into a department which will invigorate the rest of the company. You see this all over the place. Everyone seems to be looking for a shortcut and there’s no shortage of charlatans trying to sell it to them.
And when companies try to shortcut their way to innovation and fail, they wonder what went wrong. Let me say this unequivocally: things didn’t go wrong because you picked Outlook over Gmail, or because you chose to go to Tel Aviv for your innovation trip instead of San Francisco. It wasn’t because you picked the wrong innovation workshop vendor, or because you don’t have an open office plan.
This focus on appearances and shortcuts is just another symptom of the “innovation theater” mindset. Innovation theater refers to companies (and people) who optimize for the appearance of being innovative instead of actually being innovative.
Without a doubt, innovation in large companies fails because of company culture. So what can leaders do to make their culture more innovative?
Instead of trying to workshop innovation, companies need to build a questioning and experimentation mentality into their company culture. This starts with incentives – both positive and negative. Employees need to have some air cover from their superiors to question the status quo and try new things. In most organizations, a failed project can scar your career for life. This type of massive negative risk disincentive is a great way to ensure that employees never try new things. Getting rid of disincentives (or at least reducing the magnitude of the downside) is a good way for companies to get out of their own way.
But it can’t stop there. Employees also need some positive incentives for developing new businesses. Creating new things with proper incentives is hard enough – imagine having to do it in an environment where your best case scenario is earning a year-end plaque? Creating upside – both financial and prestige-based (early promotions, recognition, and more) – is crucial.
How Do You Spend Your Time?
Too often in large companies, employees spend the entire day running from meeting to meeting, with little time to breathe and collect their thoughts or do any “actual” work. This is no way to innovate. Creating new concepts, even non-disruptive ones, is grounded in thought and experimentation. Twenty person meetings typically have very little to do with it.
Google’s famous “20% Time” policy allows (or arguably, used to allow) employees to spend up to 20% of their time on side projects. This policy was responsible for the creation of Gmail, Adsense, and Google News, products which created or disrupted their categories. The biggest advantage to encouraging employees to start these side projects is that companies enjoy a risk-reward ratio that is massively in their favor. If a concept fails, barely any money or time was spent on it. If it succeeds, well, the results of Gmail speak for themselves. This is exactly that kind of low risk, high reward investment that professional investors hunt for all their lives.
While 20% time may or may not be directly applicable to your company’s situation, managers should be more comfortable giving employees leeway to experiment with new concepts. You never know what your company’s Gmail will be.
Added bonus: employees will feel more empowered and engaged, which usually leads to less turnover!
There’s no workshop, partnership, or class that will magically turn a stale company into an agile machine. Creating an effective innovation culture requires months and years of foresight, proper incentives, and vigilance against the innovation theater mindset. And to paraphrase Jocko, an innovation culture is built through unmitigated daily disciplines, not shortcuts.