The entrepreneurial mind – upgrade

We live in a VUCA world: it’s volatile, uncertain, complex, and ambiguous. These global conditions are the same for everybody, for every organisation. But different types of organisations show different kinds of responses to these circumstances, in particular in the business world. While small entities like start-ups seek to draw their competitive advantage from agility and fast adaptation, big entities like large-scale corporations try to rise above the tempest, to ride out the storm, to resist change.

Obviously, there is a distinctive entrepreneurial leadership style prevalent in the start-up culture, but rarely found in big business. That’s what I want to address today, expanding on the previous post on the entrepreneurial mind and the discussion thread there (as always, I’m grateful for the inspiration).

It can be a challenge to realize just how far apart big business and start-up cultures are. If you are familiar with big corporations, with their internal administration, their standard operating procedures, their resident experts for any kind of topic, and their entangled, almost artful, decision-making hierarchies, then a start-up’s reality is a culture shock (here’s an insightful field report on hardcore strategy-making for start-ups). In the start-up world, resources are always tight, bankruptcy is always just a few weeks away, and every decision to make could end the start-up’s future before it really started: start-ups exist in a condition of permanent existential risk. And in such circumstances, it’s only natural to think about smart decision-making: not just about the best decision to take in a specific case, but in general terms about how to make decisions.

Smart decision-making

In his 2017 letter to shareowners, Amazon CEO and founder Jeff Bezos, who is arguably one of the most successful entrepreneurs on the planet, articulated his views about what he calls Type 1 and Type 2 decisions. The following quote is taken verbatim from Bezos’ letter (emphasis added):

Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions.

But most decisions aren’t like that – they are changeable, reversible – they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.

Obviously it’s essential for any start-up to identify which decision type applies to each of the challenges ahead. It will then focus its scarce resources on the potentially fatal Type 1 decisions, while affording a more experimental approach, and a higher risk of failure, for the less consequential, reversible Type 2 decisions. However, larger organisations do not seem to follow the same logic. In his letter, Bezos goes on to observe (again verbatim, emphasis added):

As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention. We’ll have to figure out how to fight that tendency.

Bezos’ diagnosis of the malady is brutally honest. Using the heavy Type 1 decision-machinery as a one-size-fits-all tool does not only waste precious resources. It makes big corporations tardy, promotes risk avoidance, curtails experimentation, and ultimately paralyses the generation of new ideas. And what is more, it seems that somewhere on their path to market domination, most of today’s big corporations have lost their start-up DNA. They seem to have forgotten how to differentiate between Type 1 and Type 2 decisions.

Failure and experimentation

But there’s still one more thing to consider, and that is an organisation’s attitude towards failure. Jeff Bezos wraps up his ideas in the following statement (one last time quoted verbatim, emphasis added):

One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there.

Viewed this way, failure loses its negative dimension: failure is not a sunk investment of resources, failure is not just a write-off. Instead, failure is a source of inspiration, failure helps generate new ideas, failure can create useful knowledge. Failure is not destructive, but creative. Failure is not a waste, but it can actually be beneficial.

With this positive connotation of failure comes a strong call for experimentation, and in particular for experimentation on Type 2 decisions. Given that these kinds of decisions are reversible, your experiment can only result in some benefit: either your experiment is successful, then you can move forward and take the next step; or your experiment fails, then you learn how you could do better next time. Frequent experimentation of this kind can even have a positive side-effect for related Type 1 decisions: you gather more insights faster, you can –at least partially– test the environment before you step through that one-way door.

Motivation

Stereotyping start-ups and big corporations for a moment, and thinking about a boxing match between them, we’d see two different types of fighters. In one corner, we find a start-up: low on capital (market share, power, resources, reputation), but high on ideas, and agile. In the opposite corner, we find a big corporation: high on capital, but low on ideas, and immovable. Under normal conditions, different weight classes would make sure that they never meet in a boxing ring. But even if you ignore such rules, you would usually would not expect that a flyweight start-up could have the punch to fell a heavyweight big corporation. Instead, you’d foresee the start-up knocked out halfway into round 1. And most often, that will happen. But what about the rare cases in which the start-up actually prevails? What is different about the successful start-up?

To my mind, it all boils down to a question of fundamental motivation: successful start-ups fight to win, whereas big corporations fight to not lose. And this seemingly subtle difference can be decisive:

• Successful start-ups want to win their lives; as they have nothing to lose, they have everything to gain. They must accept risk out of necessity, and they embrace experimentation and failure as a path to a knowledge advantage. As a consequence, they are fast learners, agile, adaptive – and most importantly, they are driven by a positive vision of shaping the world of the future.
• Big corporations fear losing their lives; as they have everything to lose and nothing to gain. They reject any risk, they loath failure and avoid experimentation. Hence they are unable to learn, remain static and reactive – motivated only by a preservationist perspective of maintaining the world of the past.

In this seemingly unfair fight, superior motivation combined with agility and inventiveness can develop the necessary punch to knock out even a heavyweight opponent.

Beyond Jean-Baptiste Say …

In the previous post, I had summarized the entrepreneurial spirit based on the observations of Jean-Baptiste Say, a French 19th century economist. In essence, this spirit is characterized by prioritising resource investments, expecting resistance to change, keeping a broad perspective of the required resources, exerting influence over resources beyond our immediate control, and staying focused in the final implementation.

Today’s discussion reflects on the lessons we can draw particularly from start-ups in the 21st century business environment. The result picks up many of Say’s observations, amending and recasting them in a different frame, shifting from an abstract description to more pragmatic advice. That way, we see the entrepreneurial mindset in a more modern light, with a strong emphasis on “keeping the momentum”: exercising smart decision-making (which is so much more than just making smart decisions), accepting risk, embracing failure as an opportunity to learn, and promoting experimentation. When taken together, these actions ensure the entrepreneur’s agility and fast learning; they are the foundation of entrepreneurial success in a VUCA world.