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Black Swans and Web Start-ups January 28, 2009

Posted by psychobserver in Social Networking, Start-ups, User Experience.
1 comment so far
The Black Swan

The Black Swan

I have just finished reading The Black Swan – The Impact of the Highly Improbable, by Nassim Nicholas Taleb. The book is a great read. I already found Fooled by Randomness by the same author very interesting and this one goes further by applying similar ideas to fields outside of finance. Black Swans are basically very improbable events that are impossible to predict and that have major consequences on their environment. There is no need to look very far to find a Black Swan, as we are in the middle of one with this financial crisis (although some could argue it is a “Gray” Swan as it might have been predictable).

For me, the main lesson I get from the book is that we need to face uncertainty as it is (unpredictable) and should not let unsound theories or stories (especially success stories) fool ourselves in making wrong or too risky decisions. Most articles out there try to rationalize things with checklists, qualities of the successful entrepreneurs… stories that transform successful entrepreneurs into semi-gods who somehow possess a magical potion to make any idea successful. One of the last such article I read had: “The product does not matter” in its checklist for a successful social network. After a short state of intense anger reading this few words, I came to wonder. Is that true? Does the product really matter? Or maybe not…

As a guy focusing on user experience and being a product manager right now, I am in a totally biased position. But I will anyway try to give my personal vision of the start-up world, focusing on the people in this world. There are two main types of actors for web start-ups. The investors (Venture Capital, Angels,…) and the actual entrepreneurs (I am lucky enough to be an employee in the start-up where I work, so I may have a clear vision on entrepreneurs). Both of these parties are aware of the role of Black Swans in their business. They somehow know that only a very small portion of companies make it big.

But which one of the two has the better position? Which one is the fool in the relationship? (after reading Mr. Taleb’s book I feel that there must be fools everywhere…)

When I look at all these articles and all the press only talking about the winners in the start-up world, I definitely see a massive survivor bias (the fact that you never hear about failures) phenomenon. Talking to entrepreneurs it also appears to me that only a few are aware of the real probability (or more accurately the total uncertainty) of their business being successful. While this is good to ensure entrepreneurs have the drive and put as much energy as possible in their business, it makes them the fools in this relationship. Investors know of failures. Most of their investment are failures and that knowledge makes them better equipped to not be fools.

So, what do investors do?! Well. They are looking for Black Swans. They invest in many companies and push these companies to put themselves in a position where they have a chance of being hit by a Black Swan. Usually, this results in a total reluctance to look at cash flow and profits and only focus on expanding the community and promoting the site (the product does not matter).

What is the result of that?! Well, many companies die as a result of this, but the investors still do okay as in the lot of companies they invest in, they only need one successful one to reap a lot of return and erase all their losses. They increase their chance of facing a Black Swan by having many companies under their umbrella and pushing them into the right direction.

But, what about entrepreneurs?! For that entrepreneur who hit it big, that’s great. But for all the ones facing failure (the immense majority), not good. Their companies could have done great by taking a more product centric approach with slower development but producing returns. Their growth would have been slower, their return (in case of success) would have been smaller, but they could have built a lasting business.

So the conclusion is: As an entrepreneur, it is important to know which group you want to belong to. Being a fool can be good, but only if you knowingly put yourself in this situation. For all the entrepreneurs who prefer not to be fools… the road is longer and tougher, but it may provide more chances of success in the end. And on that road, the product does matter.

Alrite. That was my 2 cents on the issue. I am sure that all over the web it is possible to find much better articles about this (I am just an employee after all). I just felt like putting some thoughts down as I was reading “The Black Swan”.