Innovation is Dangerous

Sometimes, when entrepreneurs come to me with a pitch, it goes something like this:

1. Everyone is doing this wrong.
2. What they’re doing doesn’t make sense. It’s crazy; we have no idea why they are still doing it like that.
3. We have a much better way of doing it!

Often, their idea is brilliant. And sometimes, the team is incredibly talented.

But I know that they are going to fail. And the more brilliant the idea, the more certain they will fail.

How do I know this?

If you will indulge me, I will start with a story.

“A little girl was watching her mother prepare a fish for dinner. Her mother cut the head and tail off the fish and then placed it into a baking pan. The little girl asked her mother why she cut the head and tail off the fish. Her mother thought for a while and then said, ‘I’ve always done it that way — that’s how babička (Czech for grandma) did it’.

“Not satisfied with the answer, the little girl went to visit her grandma to find out why she cut the head and tail off the fish before baking it. Grandma replied, ‘I don’t know. My mother always did it that way’.

“So the little girl and the grandma went to visit great grandma to find out if she knew the answer. Great grandma laughed and said, ‘Because my baking pan was too small to fit in the whole fish.’”

— Ack M Hamanova

Many entrepreneurs love this story, and I love it too. But there are two different possible lessons from this tale. Some people draw the lesson that the world is full of silly things that people are doing that are unnecessary and illogical. And that if something doesn’t make sense or you don’t understand the logic, it’s an opportunity to break the conventions and make it better.

That’s not quite the correct lesson.

What if the grandmother had said, “those are the poisonous part of the fish.” or if she said, “Luca, we turn in to sea monster if we eat a fish tail.” (If you have kids, you will get this reference to Luca.)

Some people think that if no one knows why something is being done a certain way, especially in an inefficient, slow way, it’s silly to continue to do it that way — especially if you’re an entrepreneur.

The real takeaway of the story is that you should first find out why.

Let me illustrate with another story.

Years ago, an anthropologist went to study an a village in Southeast Asia. While there, he noticed that the rice paddies on the hills were terraced illogically. They were irregular, randomly spaced and shaped, and it made it difficult for the farmers to tend to them efficiently.

He asked the farmers, “Look, there is a much better way to lay out the terraces. Why are you doing it this way?”

No one had an answer. So together, they relaid the terraces, at great effort, and made them efficient and regularly shaped. And they looked beautiful.

And at the next annuals monsoons, the terraces all washed away.

The irregularly spaced terraces slowed down the water but the regularly spaced ones did not.

Just because no one knows why something is done a certain way doesn’t mean there isn’t a good reason. There are many things we do that someone knew at one point but was forgotten.

We also do many things that evolved over time for reasons no one ever knew but are still important. For example, Peruvians mix clay with potatoes before eating them — this removes the high levels of toxins found in their potatoes.

Similarly, Native Americans would wash corn with lime water (the mineral, not the fruit), which reduces mycotoxins and improves the absorption of vitamin B precursors. When Europeans first started eating corn, pellagra became rampant because they didn’t understand the benefits of washing the corn in lime water — it seemed like a silly thing to do. (For an insightful discussion of how our tendency to follow traditions we don’t understand might have led to civilization, I recommend Henrich’s Secret of Our Success.)

One of JFK’s favorite quotes was from the polymath Chesterson, who said,

“There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”

Chesterton’s Fence is particularly important in entrepreneurship. Remember, if there is a blindingly obvious, genius way to improve the way something is done, and it’s not being done, then first, you need to understand why.

This is especially the case if you are entering an industry you are unfamiliar with. For example, if you’re a programmer and going into health care, or if you are an MBA, you’re going into rocketry.

There is often inertia against change because people generally don’t like change (and because change is often dangerous). It can be reasonable to say “this is such a radically new way of doing things that people are afraid to try it.”(1) But without understanding the industry, it’s hard distinguish between that reason and “because if did it the new way we would lose all our money because it would make our customers angry” or “if we did it that way we would violate government regulations.”

For example, I often hear digital health startup founders talk about how they’re going to reduce the cost of health care or the cost of drug development. These founders skipped the why.

They fail to understand that, unfortunately, much of the healthcare and pharma space is cost-plus or commission-based. Many players, like PBMs and physicians (in some cases), make money as a percentage of drug prices. Others, like pharma companies, justify their prices on the basis of the high cost of drug development. Many or most customers these startups target are not interested in lowering costs; they are more interested in raising them. (I will do a separate in-depth post about this.)

Doing a startup is like remodeling a house. Very rarely, you may be in a space that is so greenfield that you’re building a new house from scratch, but that’s rarely the case. Facebook competes against in-person meetings, emails, letters, listservers, etc. Netflix is competing against movie theaters, television, and DVDs.

In a house, there are load-bearing walls, non-load-bearing walls, and, most importantly, walls that used to be load-bearing but are no longer. When you’re doing a startup, you want to find that third category of walls. Walls that everyone thinks are load-bearing but aren’t.

Here is one example, and it illustrates why literally talking to your grandma in addition to figuratively may pay off. When Brian Chesky was starting Airbnb, everyone he talked to thought he was crazy. That no one in their right mind would stay at a stranger’s house. “People would never do that.”

Except his grandfather. Who said, “hey, that’s what everyone used to do when I was a kid, before there were hotels everywhere.”

Hotels became the standard over staying with strangers because you knew what to expect froma hotel and it was convenient. That was a load-bearing wall for many decades. But with rating system and the internet, it became as convenient and predictable to stay ina stranger’s home and the load-bearing wall became non loading-bearing. (2)

So, when a startup comes to me, I want Founders who know which walls are load-bearing. What I want to hear is,

1. Everyone is doing this wrong.
2. We know exactly why they are still doing it like that.
3. Things have changed, and it no longer makes sense/they are disincentivized to change because of counter-positioning/they don’t know how to change, but we do.
4. We have a much better way of doing it!

Number 3 can be “the regulations have changed” (Schwab), or “there is a new technology” (Uber), or “There is an oil shock and interest rates are at 20%” (Fidelity). But understanding why incumbents don’t/won’t/can’t do what you’re proposing is often the most important part of your business plan. Innovation is risky. It can be particularly risky if your competitors are doing things that make no sense to you but make sense to them.

See more at: richardychin.medium.com

Footnotes:

(1) Change can be dangerous, especially when we don’t understand what we are changing or when we don’t understand what we’re changing to. And especially if you are the first to try a new thing. There are many examples of changes and innovations leading to disaster, such as the Xhosa prophetess Nongqawuse and the cattle-killing famine. And the Donner party met a grisly end trying an innovative new shortcut called the Hastings Cutoff.

Innovators comprise only a small portion of the population because innovation is dangerous. And for millennia, human societies were static. It was extremely rare that anyone would come up with an idea that had not been tried before (and had already failed). The traditions had been built up to protect people and to preserve the status quo (including the power structure). There was no progress, so the likelihood you would find something no one had discovered was slim. The likelihood that you would come up with an idea that would wipe out the entire village was much higher. Or in the case of Thomas Midgley, a brilliant scientist who invented CFCs that destroyed the ozone layer and leaded gas that poisoned every child in the world, have an even greater impact. (Ironically, he was strangled to death by his own innovative device that he designed to help him after he contracted polio.) Innovation is not to be taken lightly.

Of course, refusal to change can also end in disaster, such as the Moriori people who refused to abandon their pacifist beliefs when confronted by invaders. (Don’t google it; it will ruin your entire week.)

There is a 2x2 matrix. One axis is how well you understand something. The other is whether it’s new or not. Unfortunately, most people neither know nor care to know. They just go with the crowd.

On the other hand, people are extremely good at following. The second person/society/company to change, and the third, etc., can come quickly. Once an innovation has been shown to work, the equation flips and then it becomes dangerous not to change. Fast follower is an extremely important and valuable strategy. (As my friend Ted likes to say, “early bird gets the worm, and the second mouse gets the cheese.”) Fast followers have a better success rate than first movers, as discussed here.

Certain societies are/were particularly good at this, such as Japan and UK, possibly because they were for most of history at the ends of civilization. My theory is that the Industrial Revolution started in the UK partly because they were used to adopting new technologies because they were the last to get new technologies for most of history. They knew the importance of adopting new technology, and by the time technologies reached them, they were usually mature — game changers. The same thing happened with Japan, which was the first Asian country to industrialize. It may not be a coincidence that the Industrial Revolution started on two islands, both on the ends of the Old World.

(2) This goes to my point in my other blogs that many innovations today are echoes of the past. We are going back to how things used to be: auctions instead of fixed pricing a la ebay; back to rumors over news a la X (Twitter); jitneys reborn a la Uber/Lyft. The product market fit was always there, and internet just allowed them to regain market share.