Saturday, September 12, 2009
When at First You Don't Succeed...
It takes an average of 58 new product ideas to deliver a single successful new product. That is the core message of Getting to Plan B, a new book by John Mullins and Randy Komisar.
Since Plan A almost never works, it is critical to quickly learn from failure and move on to a successful Plan B (or C or D or E…). This book provides an exceptionally helpful framework for how to do this. Its power lies in its analytical framework combined with vivid examples from companies - including both for-profit and non-profit.
The first order of business for the authors is to dethrone the business plan. Many entrepreneurs and inexperienced investors obsess over the initial business plan. But the quality of the initial business plan is far less important than the ability of the entrepreneurs to form and test hypotheses rapidly - discarding the leaps of faith that don't pan out and doubling down on those that do.
Contrary to popular perception, most successful businesses did not strike it rich from the beginning. A company like eBay, profitable from day one, is the exception that proves the rule (and Pierre Omidyar has said that he realizes how lucky he was). Even eBay has struggled to figure out how to make money from new business lines such as Skype. Google would not be the behemoth it is today - and might even be out of business -- if it had not discovered its own Plan B, paid Adwords. Amazon burned through hundreds of millions of dollars before it hit upon the right business model that made it profitable. Today, the jury is out on whether Twitter and even Facebook will find profitable Plan Bs that sustain their early growth.
What matters most is not the quality of the initial business plan, but instead the ability of the team to iterate successive business plans as a means to finding what works. Merely flailing about from Plan A to B to C increases the chance you will run out of cash before finding the right Plan. So the trick is to experiment quickly but intelligently, and with discipline.
The authors urge entrepreneurs to assemble several analogs (features of other companies they want to emulate) and antilogs (features they want to avoid). Based on these, entrepreneurs then form a hypothesis about a product or service - essentially a leap of faith that customers will buy it at a price and quantity that generate revenues in excess of cost.
The next step is to develop a dashboard to monitor whether the hypothesis is correct. Can you get the product to market with the amount of investment you have been able to attract? Are enough customers buying? Are they willing to pay the price needed? Is the cost of production such that the company can become profitable at the appropriate scale?
The answer to one or more of the above questions is likely to be "no" for Plan A. So the next step is to repeat the process - develop new analogs and antilogs and another hypothesis or leap of faith based on those. Try it, and monitor with a dashboard. Repeat again.
The key is to pick the simplest possible dashboard that includes only the key drivers to your success. To help the reader determine these, the book provides helpful examples using real companies relating to several dimensions - the revenue, gross margin, operating cost, working capital, and investment models.
Anyone who is thinking about starting a new business should read this book. Given the pace of change in the world, even established business leaders should read it, since the constant threat of new competition often requires even existing companies to develop new Plan Bs.
More provocatively, this book helps explain why some economies grow faster than others. An economy whose institutions and other structures facilitate rapid-cycle experimentation is going to produce more successful companies and products. By contrast, economies that discourage experimentation and punish failure are going to find fewer of those one in 56 new ideas that work.
One implication of this is the need for a fundamental change in the DNA of development aid agencies. The existing aid agencies are based primarily on the idea that if a problem is studied in enough depth, then a select group of experts will be able to design a solution. As a result, a huge amount of resources go into Plan A, which results in projects with a typical life span of three to five years. And to make it worse, agencies such as the World Bank aim for a project success rate of 85% - far above the 1:56 chance of the first idea being a successful project.
For official aid projects, thorough reviews are done after several years have passed. In theory, the lessons learned are incorporated into the next project, which launches a couple of years down the road Though small course corrections are possible, it is difficult to significantly modify a project once it is underway. As part of this mentality, failure is seen as very bad - as evidence that not enough analysis and planning were done or (worse) that the experts involved were incompetent. Agencies go to great lengths to sweep failures under the rug instead of quickly embracing the lessons of failure and acting on them.
Aid agencies instead must mirror the way that successful economies operate- they must encourage rapid-cycle experimentation. They must acknowledge that even the best experts rarely get it right the first time - or even the second or third time. As counter-intuitive as it sounds, the key is to fail quickly and then move on to test new hypotheses until they find one that works, just like leaders of the most successful private companies.
I do have one major complaint with this book. As a leader of one of the organizations featured in the book, I was fortunate enough to have the counsel of Randy Komisar along the way. But it would have saved me a lot of headaches if Komisar and Mullins had written this entire book some nine years ago. When I co-founded GlobalGiving, I spent a lot of time on our initial business plan, and I was highly confident our Plan A was going to work. When Plan A failed, I spent a lot of time licking my wounds and wondering what went wrong. This book would have helped me understand that early failure is par for the course, and it would have given me a framework for getting to Plan B much earlier.
Update: Here is another review from the Financial Times.
Posted by Dennis Whittle at 10:34 AM