The Star Business and The Black Swan

Sometime ago, I read two books - 'Fooled by Randomness' and 'The Black Swan' - by Nicholas N. Taleb. They are probably among the five best books I've ever read. Of course, there are plenty of extremely important ideas in both the books that are hard to describe in a short blog (such as underestimated impact of randomness, confirmation bias, survivor bias, the expert problem and more.) But one of the major ideas is the notion of the black swan. So I decided to make a blog entry about how the notions of a black swan intersects with the notions of a star business.

First a little background about the black swan ...
For thousands of years, people in England believed that all swans were white. Then, a few hundred years ago, Australian explorers discovered a swan species that was black in color. So centuries worth of 'confirming evidence' was overturned by the discovery of a single black swan.

So black swans are rare, unexpected events usually with a very large impact. It's important to note that black swans are completely unexpected. If you've expected a black swan to occur and it occurs, then it's a 'gray swan'. Black swans can be positive or negative. Examples of negative black swans include:
- September 11
- The Sub-Prime Mortgage Crisis
- A person discovering that he has cancer
- Death of a family member
- Emergence of a vastly superior substitute product (if you're running a business)

Examples of positive black swans include:
- A chance meeting with a hot shot film director who offers you a lead role
- You buying Google stock when it IPO'd.
- An unexpected, large contract
- Winning the lottery
- An unexpected discovery (like Viagra or Penicillin)

So how is this relevant for an entrepreneur or investor looking to create a star venture?

The one important idea is to avoid making predictions for the big things in life. While you can estimate the size of the impact of an event occurring (say, a tsunami hitting New York city), it is impossible and completely futile to predict the likelihood of the event occurring. So while it's important to protect the downside and know the likely consequence of failure, you should avoid relying on financial experts and economists while making making decisions.

The other idea is to increase the likelihood of a positive accident occurring. Some ideas for doing this are:

- Live in a big city with lots of opportunities to meet new people
- Go out and attend parties (you might meet somebody who can help you in your business.)
- Make lots of tries and try a lot of different things ("trial and error means lots of tries!")
- Indulge in endless tinkering sometimes without a logical reason to do so. But make sure that your tinkering is in a general direction and complies with a point of view or perspective.
- If you have a good thing going, ride it for all it's worth.
- Indulge in activities where the downside (the worst case scenario) is a known quantity while the upside (the best case scenario) is potentially very, very large. Such activities include feature improvements, new partnerships, new markets for your product or service, etc.

So let's say that you're an entrepreneur who has started a business and you discover that the business is taking off. Ideally, you will bet big on the business and give it your all. You will raise necessary financing and resources to ensure that the business has a good chance to succeed. You will also watch out for negative black swans and take immediate remedial action if a negative black swan appears.

Now comes the tricky part. 99% of the businesses land up in a different place from where they thought that they would be. For example, Twitter was started as a side project by the engineers working at Odeo which was doing podcasting software. Viagra was a happy accident that occurred when researchers were experimenting with blood pressure medicine. Google did not come up with the adwords revenue model for years after it's launch as search business. Flickr started out as an online video game company.

So the lesson here for entrepreneurs is this:
Step 1: Start out with a well-positioned, well-thought out star business and execute with razor sharp focus. Continue down this path until you come to an intersection on the road.

If your business turns out as you expected then that's great. You're one of those few people who did not need to manufacture luck on the way. If you're like the vast majority of entrepreneurs, you may run into a crisis or a potentially new opportunity. The crisis could be in the form of a cash flow problem (forcing you to cut out initiatives, features or services), a human resources problem (forcing you to manage without a key person) or a government problem (forcing you to re-evaluate your organizational ethics.) The new opportunity could be in the form of a new product feature, a new partnership or alliance, a new kind of customer or user, a new type of use for your product or service or a new investor.

Step 2: At this point, evaluate the opportunity or crisis very carefully. Usually a crisis is an opportunity in disguise. But sometimes it may be that the crisis is genuine and all-enveloping. If the crisis does not have a clean solution, it may be better to cut your losses, shut down operations and wait to relaunch a new business in the future. After all, you don't want to be like the housefly that, not knowing of a small hole nearby, relentlessly bangs into the glass pane until it falls dead from exhaustion.

If however, your crisis reveals a new opportunity or a new opportunity comes by, then it's time to re-position your business. It's almost like starting a new businesses. It may require you to kill all of your previous business or large parts of that business so that you can give the newly emerging star it's best shot at survival and success.