Conventional Wisdom Isn’t –Why Going Against The Grain Is Often To An Entrepreneur’s Advantage

conv.JPG"Contrariwise," continued Tweedledee, "If it was so, it might be; and if it were so, it would be; but as it isn't, it ain't. That's logic."

-Lewis Carroll

Entrepreneurs often must take counter-intuitive, contrarian positions in order to succeed. One of the first steps required to move out of The Herd is to see the world from a slightly different vantage point. This often requires rejecting what is conveniently termed: "Conventional Wisdom."

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Herd Inertia
conv2.JPGThe Herd, by its very nature, moves in the same direction long beyond the point when it makes sense to continue to do so. In the start-up world, the popular press encourages this Herd behavior by initially overselling new technologies and then prematurely trashing them when they fail to meet the overly optimistic, unrealistic expectations that are initially set. For expediency, journalists often characterize the world in black-and-white terms. As such, entrepreneurs on The Fringe cannot rely on the popular press to determine the merit of new opportunities.Business journalists are much like Hollywood gossip reporters who quickly build up a new celebrity and then immediately accentuate flaws in order to destroy the idol they helped to create. Controversy sells, so the angle of many business articles is: "Breakthrough Technology Will Change the World Tomorrow." Once the new technology does not meet the overly-hyped expectations, it is "shot, hung and tried" with articles entitled: "Breakthrough Technology a Bust."

There are numerous examples of the media's tendency to prematurely sensationalize and then subsequently crucify a new technology before it is ready for prime time. For instance, in the early days of the Internet, a major business magazine declared the "Coming Dawn of a New Age," which was followed by an article entitled, "Will Anyone Ever Make Money on the Internet?" Remember the slew of articles touting the "new economy" and the fact that "the rules have changed?" The same journalists later wrote articles proclaiming that the Internet was dead, in the wake of the dot-com bust.

In addition to the Internet, examples of "shot, hung and tried" technologies include Artificial Intelligence, Robotics, Application Service Providers ("ASPs"), Biotechnology, Solar Power, etc. In each case, popular press journalists over-estimated the customer adoption rate and under-estimated the technological challenges that remained unresolved. Thus, a good rule of thumb for assessing whether or not a particular technology is ready for prime time is if it has shown up on the cover of a major business magazine, heralded as the next big thing. If so, it may be too early. Conversely, if the popular press declares a new technology as dead, it may be the right time to enter the market and explore the opportunity.

The graph below depicts the usual manner in which high tech trends are treasured and then trashed by the media. Once the dust settles and a technology is evolves into a value-added solution, journalists often rediscover the technology (often under a new acronym or name) and again herald its benefits. However, the rediscovery is usually grounded in factual usage data and thus the journalists' expectations are more realistic.
convbig.JPG


In The Black Swan, Nassim Taleb does an excellent job of highlighting numerous real-world examples in which actual events run counter to what Conventional Wisdom predicted. His premise is that conventional wisdom does a poor job of anticipating exceedingly rare events.Let's take a quick look at several issues which run counter to Conventional Wisdom.

Radio and Baseball

The first radio broadcast of a professional baseball game was on August 15, 1921. However, it was not until 1935 that a major league owner agreed to allow his team's entire season to be broadcast on the radio. Why the 15-year delay? Conventional Wisdom. Most major league owners initially believed that radio broadcasts would negatively impact ballpark attendance. Why would someone pay to attend a game when they can sit in the comfort of their home and listen to it for free? As gate receipts represented the majority of the owners' revenue, their desire to protect this important cash stream is understandable.

Despite Conventional Wisdom's notion that radio would destroy baseball, it actually drove attendance higher in every city that rolled out season-wide broadcasts. What these owners did not realize is that radio immersed fans in the games in ways that were previously not possible. Instead of simply reading after-the-fact static box scores and newspaper accounts, radio broadcasts allowed fans to experience their team's dramatic ups and downs in real time. It also allowed fans to establish personal rapports with players which was previously not possible by sporadically attending a few games each season.

Grateful Dead Bootlegs

Record executives were dumbfounded when the Grateful Dead's strategy of encouraging Deadheads to create and share bootlegs paid off. Conventional Wisdom dictated that the proliferation of bootlegs would supplant the market for concert tickets and commercial recordings. Even through the ganja haze, the Dead knew better.

By allowing fans to share concert recordings, the Dead's cult status was significantly enhanced. Some fans began to collect show recordings. Others began following the band on tour. It seems everyone knows someone who substantiates their Deadhead status by proclaiming the dozens of Dead shows they have attended. Even more out-of-line with Conventional Wisdom is that fact that these hardcore fans also devoutly purchase the Dead's commercial releases and other licensed products (T-shirts, bumper stickers to put on their Cadillacs, etc.).

Bigger Isn't Better

"More businesses die from indigestion than from starvation"

-David Packard in "The HP Way"

Visitors to my various startups often asked, "How many employees do you have?" My answer was always, "As few as possible." Another common question was, "How many square feet do you have leased?" Again, my response was usually, "As few as possible."

Members of The Herd prefer to use overt size metrics, such as headcount and square feet of office space, as measures of a venture's success. This lack of insight is one of the reasons they are still with The Herd. Conventional Wisdom dictates that more employees, more office space, and more locations are better. This could not be further from the truth.

In most Western Cultures, Conventional Wisdom dictates that bigger is better. In business, this truism is based on the belief that Big Dumb Companies (BDCs) are effective competitors because of their size and access to resources.

In nature, it is true that the big often eat the small. However, it is also true that in many instances, the fast eats the slow. Consider the Triggerfish. This nimble creature nips at a larger fish's rear fin until it is sufficiently frayed. A frayed tail generates less propulsion and thus significantly slows down the larger fish. Once the larger fish's ability to propel itself is compromised, the Triggerfish then blinds the larger fish. This effectively results in a living, breathing, future source of fresh food. In a contained environment, like an aquarium, the Triggerfish can then dine on the larger fish at its leisure.

Just as the quick eat the slow in nature, so is it true in business. Like a child determined to eat a pint of ice cream, some BDC's eyes are larger than its corporate stomach. As noted in countless business books (most notably The Innovator's Dilemma), large companies are eventually devoured by their smaller rivals if they do not make a concerted effort to remain agile and keep their fins intact.

Despite this reality, too many companies focus on getting big as fast as possible. In many cases, the wrong metrics are emphasized. Yes, getting bigger is an appropriate goal, as long as size is defined by the appropriate metrics.

As you lead your company, keep it nimble by growing the right metrics, such as profit per employee, profit per location, profit per square foot leased (do you sense a pattern here?).

Still think bigger is really better? Consider id Software. One of their first games, Wolfenstein 3-D, cost approximately $25,000 to create, if you include the apartment rent for a half-dozen developers as an office expense. The first month's royalties were $100,000 and the game ultimately generated over $24 million in total revenue. id's next game, Doom, was created by an expanded team of approximately a dozen engineers. The Doom brand (i.e., sequel games, merchandise, a major motion picture, etc.), generated hundreds of millions in total revenue.

Despite id's success as a small team, Co-Founder John Romero decided that his new startup, Ion Storm, needed to grow quickly and substantially in order to effectively compete with more established gaming companies. He raised $30 million, quickly hired over 100 people and rented the penthouse of the Texas Commerce Building.

Ion Storm's first game, Daikatana, was delivered over two years late and was met with a ho-hum reception. It sold less than 30,000 copies. The game was as bloated as the company - too many worlds, too many characters, too much of everything. Ion Storm lost $44.8 million and John Romero was eventually ousted. He went on to start a new company, Monkeystone Games. This time, he maintained a lean staff of a few talented engineers.

Get on The Fringe and question Conventional Wisdom. The Herd slowly recognizes and accepts the truth, while entrepreneurs with the proper frame of reference quickly understand and adapt to new frontiers as they evolve rather than once they are self-evident. As noted in Where Have All The Ideas Gone? there always have been and there always will be new business frontiers for entrepreneurs to conquer.

As Gandalf notes in Tolkien’s Lord of the Rings, “All we have to decide is what to do with the time that is given us.” As an entrepreneur on The Fringe, you must recognize and take advantage of the frontiers that arise during your lifetime. You cannot control the frontiers which avail themselves, but you can make the most of them by understanding that Conventional Wisdom is often not wise.

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Copyright © 2007-9 by J. Meredith Publishing. All rights reserved.

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.


Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.





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