The Art Of The Little Bet
Peter Sims is the coauthor with Bill George of the bestselling book True North. His writing has appeared in the Harvard Business Review, Fortune, and TechCrunch, and he is a contributor to the Reuters and Harvard Business Review blogs. His latest book is Little Bets: How Breakthrough Ideas Emerge from Small Discoveries.
Q: For a Fortune-500 type of company, what’s the littlest big bet that’s feasible?
A: I define a little bet that’s affordable and achievable, so a big bet requires a leap of faith. If people inside a Fortune 500 truly understand the problem or need they are solving with an idea, they should bet big. Unfortunately, people too often bet big on ideas that aren’t solving the right problems, such as Google Wave or mergers and acquisitions that the research shows don’t create value 70 percent of the time.
Q: What’s worse: too much or too little R&D funding?
A: I don’t think there’s an answer to that question. Microsoft has traditionally outspent Apple roughly 4 to 1 in R&D as a percentage of sales. What’s much more interesting is how to build and maintain cultures that thrive on experimentation and constant learning, like Apple, Amazon, Pixar, Toyota, or 3M. That’s what Little Bets is about.
Q: When all the dust settles, what percentage of little bets should you expect to pay off?
A: Hewlett Packard cofounder Bill Hewlett, an ardent proponent of small bets, estimated that HP would have to make about 100 small bets to get to six breakthrough ideas. Writers for the humor publication the Onion, meanwhile, estimate that to discover eighteen headlines each week requires trying about 600 possibilities, a 3 percent success rate. You learn from each little bet, so it’s hard to quantify success or failure in black and white percentage terms, but the point is, if you want to do something new, you can’t expect your first little bet to become a breakthrough. It’s a volume and iteration game. The best entrepreneurs I’ve known think of learning the way most people think of failure.
Q: What is the role, if any, for “strategic planning” for a company that buys into your concept of little bets?
A: Traditional strategic planning relies on data from the past to predict the future. That works fine if you’re trying to make future plans for businesses that are mature and predictable and don’t change too much from year to year. But that linear analytical approach becomes a big problem when the conditions are highly uncertain or unpredictable, such as the U.S. Army’s experience in the Middle East, where they don’t even know what problems they’re going to confront when they go to a new city or town. The colonels on the ground can’t plan farther out than they can see. In situations like these, the best strategy is to understand the needs of the civilian population, and to orient the activities around that goal, much the way Jeff Bezos orients strategic discussions at Amazon around asking how any ideas or actions will improve the customer experience.
Q: How does an established company make the transition from betting big to betting small?
A: Procter & Gamble has traditionally had a very risk averse culture, but has been working to incorporate a little bet mentality over the past several years. One way they’ve done this is: instead of expecting perfection for new ideas before showing them to potential users, to encourage P&Gers to use rough and dirty prototypes, made from cardboard or duct tape, to share with users early in the process.
P&G execs have found this both reduces the barriers to feedback coming from users, since they can see that the idea sucks and that their input will be valued, while at the same time, people at P&G are not overly emotionally invested in their ideas, so the ideas can evolve to solve the right problems. By all accounts, the shift to more little bets has turned the needle at P&G. Interestingly, when we interviewed execs at big bet organizations like GM, the State Department, or P&G, they all said independently that little bets were an antidote to risk aversion.
Q: How, assuming it’s the right thing to do, does management prevent totally anarchy while making little bets?
A: There’s a chapter about why “creativity loves constraints.” Management teams might use little bets for 15 percent of their future initiatives, while other constraints on projects might include time, budget, or staff involved. Architect Frank Gehry calls constraints like these “guardrails,” and you have to define them in advance, as well as what you are willing to lose, so that you can measure your progress over time. These disciplines are critical.
Q: How does a startup explain thrashing around with little bets to its investors?
A: In my experience as a former venture capitalis, there are two types of investors. The ones who understand the creative, iterative process required in order to discover big problems and scale up, and another group who have never been entrepreneurs and don’t understand how creative processes work. I’ve never met an investor who understands entrepreneurship who doesn’t advocate using little bets to identify and develop opportunities. As Jeff Bezos says, “You can’t put into a spreadsheet how people are going to respond to a new product.” The way you figure it out is by thrashing around with little bets.
Q: What’s the difference between your advocated “failing quickly” and giving up too fast—other than hindsight?
A: Failing quickly to learn fast is a method that anyone can use to develop creative ideas, such as by using rapid prototyping. That’s how comedians like Chris Rock or Jerry Seinfeld develop and test new joke ideas in small clubs. Most of their ideas bomb, and they build on what works. But at a certain point, everyone including Rock or Seinfeld must decide how far and hard they are going to push their ideas, even despite the feedback they are getting. It’s a very individual choice, and depends on many factors, including how much you are willing to lose, and how passionately you believe in your idea, so it’s impossible to provide a universal answer.
But I will say this, the best ideas are solving interesting problems and needs for other people, whether it’s a Chris Rock joke or Amazon product, so you need to be able to figure out those needs and problems as quickly and strategically as possible, and there are methods for accomplishing this—whether it’s being able to identify needs as an anthropologist might, smallify big problems, or utilize constraints.
Q: Can one make the case that capitalism is a lot of little bets and communism is a few big bets?
A: Absolutely. Capitalism is built upon bottom up innovation through little bets, while Soviet communism featured top-down planning and big bets.
Q: Based on your concept of making many little bets, how should an about-to-graduate college student make career choices?
A: As author and investor Randy Komisar wisely says, you have to “rub up against the world” when you’re young to figure yourself out. Making little bets on internships, jobs, classes, or networks is the best way I know to get to know your interests, abilities, and set of career options. The better you know yourself and the opportunity sets, the more likely you will land in the right career path and thrive.
If you’d like to learn how to make little bets work for you, be sure to check out Little Bets: How Breakthrough Ideas Emerge from Small Discoveries. You can also follow Peter on Twitter at @petersims or read his blog.