This session is called The Tournament Approach. These ideas come from my book, Innovation Tournaments, which I wrote with Christian Terwiesch. So if you really want more details about some of these ideas, you can check them out in the book. The ugly truth of entrepreneurship is that any single opportunity is plagued by uncertainty. Is the need real? Will my solution work? What will my competitors do? What’s going to happen in the macro economy? Will our team be able to execute? Will our partners deliver? What happens to the regulatory environment? There’s really nothing you can do to eliminate all uncertainty. Many of the things we’ll do in this course are designed to minimize uncertainty but at the end of the day, you’re still stuck with uncertainty, intrinsic uncertainty that you can’t analyze away.
There’s only one known strategy to mitigate uncertainty and that is to diversify across several opportunities, and to delay commitment until additional information is revealed. Venture capitalists know this, and so that’s why they take the strategy they do to investing. So for a typical venture capitalist, they will do,for a given fund, that if for a given pool of money that they invest. The venture capitalists partners will hold about 1,000 meetings, maybe closer to 2,000 meetings with entrepreneurs. And so, I’ve represented that here on this slide on the left side and I’ve shown a little yellow circle there in the middle, that’s you. That’s you and your opportunity. That’s where you fit in the sea of opportunities that a venture capitalist might look at. That venture capitalist will then, from those thousands of meetings, make about 40 initial investments. And then based on the success of those initial investments, will typically invest in about half of those ventures with some follow on capital.
And then by the time the fund has run it’s course, usually seven to 10 years later, one to two of those investments will be big wins, plus several smaller base hits. Now if there weren’t uncertainty the venture capitalist would only invest in the companies that were going to win. The problem is, of course, that it’s unknowable which of those companies will prove to be the winner. And as a result, the venture capitalist adopts the strategy of diversifying across a lot of opportunities, making some investments and then waiting till uncertainty is revealed. This basic structure is what we call an innovation tournament. In any innovation tournament, you see this general structure. A large number of raw opportunities are generated or identified and then a series of development steps and filters are applied until only the exceptional opportunities are revealed.
Now most of you will recognize this structure from lots of areas of daily life. In fact we see this structure in the popular casting show, American Idol. This is Kelly Clarkson, who won the first season of American Idol. But regardless of what country you’re from, you probably have a version of Idol in your country and so you recognize this basic pattern. If you look at American Idol, over 200,000 initial contestants vie to be the eventual winner. Here their shown auditioning in a baseball stadium, a venue that’s large enough to accommodate all those that want to compete in the Idol competition. Now there’s two implications for entrepreneurs. The first is, that while you can’t possibly get diversified, across hundreds of ventures, you can probably only pursue a few in your lifetime. You could consider several different alternatives. Alternative opportunities before you commit to the one that you’re going to devote the next few months or years to. And so, the first insight you should take away as an entrepreneur is that you should run your own tournament. Before you commit hours, months, or years to a new venture, you really ought to consider five to 10 distinct opportunities. You ought to make small investments in exploration and in nurturing the opportunity and then select one for further investment and development. So while this tournament is much smaller in scope than the kinds of tournaments that a venture capitalist can run that are diversified across dozens or hundreds of companies. It still gives you some measure of diversification and allows you to make small investments until additional information is revealed about the true promise of the opportunity.
The second insight for entrepreneurs, is that you make dozens or even hundreds, of small innovation decisions within the context of your new venture. Anyone of those problems can itself be viewed as a small tournament, let me give you a few examples. This is the Oral-B cross action toothbrush, the handle designed for the cross action was developed by the design firm Lunar Design. And you might look at this toothbrush and say, wow, they had a brilliant designer who came up with that idea of a soft and hard material molded together, in that ergonomic form. But the reality is, that Lunar Design considered hundreds of different handle designs. And they then developed several dozen of those handle designs into foam models that could be tested and held in the hand. And then they took the best five of those and they made models with the production-intent plastics and then gave them to consumers. And then they picked the best of those five to eventually become the Oral-B Cross Action product. And so, even in a small decision like, what should the shape of this toothbrush handle be, you can use a tournament logic in order to explore many different alternatives and select only the one that offers the most promise. In another example from a company that I co-founded, we applied the tournament logic to the development even of a simple question like what should the graphic identity be. Here shown are several dozen of the original graphic concepts that we considered. The best seven that we thought offered the most promise, and then the final one that was developed from those seven to be the final graphic identity, which is in fact the graphic identity of what is a successful company today. And the third example shown here, is the development of a name for a small company I co-founded called Xpult. The Xpult is a kit that’s sold to school teachers to teach design of experiments, a form of statistical analysis. When we were trying to consider what to name the company and what to name the product, we developed a couple of dozen initial concepts, from that selected the best 10, then tested those 10 to identify the best three, and then finally selected the final name based on testing with consumers. So even in a decision as small what should we call the product, you can apply this tournament logic in order to identify the best opportunity, the exceptional opportunity, the one that’s going to best serve you.
Uncertainty is an intrinsic property of entrepreneurship. There’s no way you can analyze away all uncertainty.
And yet, the best strategy for dealing with uncertainty is to consider a large number of alternatives, make a small investment, reveal additional information before you have to place your bet on the one opportunity you’ll pursue further.