Don't Bet Big. Little Bets Are The Ones That Turn Into Billion-Dollar Ideas

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Editor’s note: The following guest post is by bestselling author and former venture capitalist Peter Sims.  His next book, from which some of this article is exclusively drawn, is Little Bets: How Breakthrough Ideas Emerge from Small Discoveries.  His last guest post for us was on how Google is becoming more like Microsoft.  

He can be found on Twitter @petersims.

When I was in business school, one of the most common things I would hear people say was that they wanted to do something new—like start a company or take an unconventional career path—but that they needed “a great idea” first.  That always surprised me a bit, especially at an entrepreneurial hub like Stanford, since most successful entrepreneurs don’t begin with brilliant ideas—they discover them.

Ironically, this would include the biggest business idea to come out of Stanford in decades.  Google didn’t begin as a brilliant vision, but as a project to improve library searches, followed by a series of small discoveries that unlocked a revolutionary business model.

Larry Page and Sergey Brin didn’t begin with an ingenious idea.  But they certainly discovered one.

Meanwhile, Pixar started as a hardware company that never found a market, and got into digitally animated movies by making a number of small bets on short films.  Twitter began as a side project within Odeo, a podcasting company that was going nowhere.  After asking employees for suggestions about what the company should do, Odeo founder Evan Williams gave Jack Dorsey, then an engineer, two weeks to develop a prototype for his short messaging idea.  People inside Odeo loved using it and Twitter was soon born.

The truth is, most entrepreneurs launch their companies without an brilliant idea and proceed to discover one, or if they do start with what they think is a superb idea, they quickly discover that it’s flawed and then rapidly adapt.

Of course, everyone wants to make big bets.  That’s a Silicon Valley maxim.  Go big.  Be bold.  But brilliant ideas are over-rated and people routinely bet big on ideas that aren’t solving the right problems, including Google Wave and WebVan.  Pixar storytellers must make thousands of little bets to develop a movie script, Hewlett Packard cofounder Bill Hewlett found that HP needed to make 100 small bets on products to identify six that could be breakthroughs.

Just as Twitter went from a small bet to a big one, small bets are affordable and achievable ways to learn about problems and opportunities, while big bets are for capitalizing upon them.

Saras Sarasvathy, a professor at the Darden Graduate School of Business at the University of Virginia, is one of the leading researchers to study how entrepreneurs tend to make decisions.  (One of her studies, titled, “What Makes Entrepreneurs Entrepreneurial,” started to ripple through Silicon Valley after Vinod Khosla posted a copy of the article on the Khosla Ventures website along with the note, “First good paper I’ve seen.”)

Sarasvathy points to the value of what she calls “affordable losses.”  Seasoned entrepreneurs, she emphasizes, will tend to determine in advance what they are willing to lose, rather than calculating expected gains.  They don’t teach this in business school; just the opposite, in fact.  But the next new billion-dollar idea is virtually impossible to predict, even for a visionary like Mark Zuckerberg for much of Facebook’s early history.

The rapidly shifting Silicon Valley landscape for entrepreneurs and venture capital reflects these realities.  Unlike some of the old guard venture firms who still seek to bet big on ideas before the entrepreneurs have proven they are actually solving user problems, Y Combinator, Lean Startups and the Customer Development model, as well as the way some ‘Super Angels’ invest, are predicated on small bet philosophies and affordable losses, while seeking to help entrepreneurs iterate as cheaply and quickly as possible to find valuable problems.

Expect great debates to come between these two camps on things like expected exit values: big bets versus little bets.  After all, the old VC mantra was to find the next billion-dollar idea.  “We’re out to hit singles and doubles,” angel investor Dave McClure has stated reflecting a shifting tide, “We’re not trying to hit a home run every time and strike [sic] out a lot.”  Traditional VCs privately chafe at this kind of talk.  But with the rise of Y Combinator, and DST’s recent announcement to invest $150,000 in every seed-stage Y Combinator company, everyone understands the game is changing.

Photo credit: flickr/Jo Christian Oterhasl