Feb 13, 2015

The Chaos Theory Of Startups

"Since we don't know where we're going, we have to stick together in case someone gets there" - Ken Kesey

I was flying from NY to SF the other day and at one point the gentleman I was sitting next to asked me if I was flying towards or away from home. I told him NYC was my home and I was on a business trip. He then said, "let me guess, Internet business." I was momentarily self conscious (was it my shoes? laptop stickers?) but then figured it was a nice bit of self-reflective cultural commentary: everyone flying to SF is going there for the Internet.

We chatted about it and he asked me something I've been asked many times over the years - "how do these Internet companies make money." Which was nice because we discussed all the "Internet companies" that actually do make money because they are, in fact, good businesses. Points scored.

But then we got talking about what startups are, or aren't, and what that word actually means, or doesn’t mean. At that point I got more tongue-tied then earlier in the conversation. I couldn't totally describe the meaning of the word.

I still can't. But I thought more about it overnight and then had a notion this morning that maybe startups are actually about chaos. Not necessarily chaos meaning "a state of confusion," but instead chaos meaning systems that are explicitly designed to be dynamical and highly sensitive to initial conditions. Indeed, chaos theory provides an almost-perfect description here of the outcomes of startups:

"Small differences in initial conditions yield widely diverging outcomes for such dynamical systems, rendering long-term prediction impossible in general."
The process of starting something up, then, doesn't view that chaos as a bug, but as a reality. Even as a competitive advantage, if you will, because if the conditions are actually right, the outcome and its impact will be oversized (indeed, massively oversized). 

In chaos systems, one of the challenges then is to determine what is random, or chaotic, and what is meaningful. One of the hard things about being in a startup in this state of chaos is to actually figure out what course of action leads to randomness or instead leads to signal to build upon and grow into and out from. In short, the difficulty is how to decide what to do.

If one believes this, it probably follows then that the decision making process itself that goes into startups is primary: it's less about the actual decisions themselves then it is about the process used to make those decisions. In any given scenario there are three potential outcomes. The best outcome is that you make the correct decision. The second best is that you make the wrong decision. The worst outcome is when you can't make a decision.

So then, “process” becomes a defining characteristic. Your framework for making decisions matters as much or more than the decisions themselves, because the "chaos" of the system makes most outcomes indeterminate (again, chaos theory: “long-term prediction [is] impossible in general”).

So you need a framework, a set of first principles. That then guide your decision making and problem solving.

Taken a step further, I've always thought the most useful thing a venture investor can then do for a company is simply help them come up with that framework, that scaffolding, to throw all those choices into. And not specifically to help make the choices themselves. After all, one of the primary ways venture investors can add value is through having seen dozens and dozens of these chaoses. Presumably, we are well-suited to help determine frameworks for decision making in future, similar chaotic scenarios.

I think there are lots of different frameworks or first principles for decision making; it’s not a limited set. This may mean that figuring out the framework may be the hardest question of all. Determining what successful startups are outliers or are patterns may be less relevant, as we only need to look for the frameworks they use and then copy or fork them for our situation.

Phil Jackson believed this too. He wrote "the road to freedom is a beautiful system." The winningest coach in NBA history believed that his success was developing a framework for his players to guide the dozens and dozens of decisions that they have to make each game, each play. He actually believed then, that his job as a coach during games was just to watch. If he had helped the team develop the right framework, then his role would at its optimum - at decision-making time – simply to sit back and let them process. 

This doesn't always lead to the right decisions, but has reminded me that maybe our role as venture investors is precisely the same.

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