Book Extract: Setting a failure ratio

Creators don't fear failure. Instead, they find ways to soften its impact, says a new book

THE CREATOR'S CODE: THE SIX ESSENTIAL SKILLS OF EXTRAORDINARY ENTREPRENEURS
Author: Amy Wilkinson
Publisher: Simon& Schuster
Price: Rs 599
ISBN: 9781471142536

How much failure is acceptable? Ten percent? Twenty percent? More? In my research, I found that a surprising number of creators decide that ratio ahead of time. They aim not for perfection but to ensure that they take enough risk. Being prepared for a certain number of failures allows them to experiment to find the way forward. They take a holistic view of failure, recognizing that even blunders often have value.

Creators are thoughtful about failure in ways most of us are not. In a session with CIA analysts, In-Q-Tel founder Oilman Louie offered a pointed lesson about counterproductive attitudes toward fail­ure. In-Q-Tel is a strategic venture fund created to foster technology companies whose products can help the U.S. intelligence community. Louie pointed out to the analysts that many of them weren't thinking clearly about the risks they were willing to take in their work. He was surprised at how courageous they could be in one kind of situation and risk averse in another.

"If terrorists rolled a hand grenade down the middle of a room," Louie said, "all of you would jump out of your seats and throw your body on it to protect everyone else. You would all give up your lives for one another and your country. However, if someone ran into the room and said, 'I need someone to make a decision, but if it's the wrong one it will be the end of your career,' all of you would run toward the door. It strikes me as odd that people at this agency will risk their lives for God and country, but not their careers."

A case officer raised her hand and offered a wry explanation. "If I jump on the hand grenade and die," she said, "I don't have to live with it afterward."

Yes, failure can be frightening. Its real cost, however, is not as great as we think.

"You have to change the way you think to say that it's okay to fail, just not catastrophically," Louie said, examining the dilemma. "To do that, don't look at the probability or success of any one item; instead, evaluate your performance in the context of a portfolio. It's a nuance, but an important distinction."

Creators don't fear failure. Instead, they find ways to soften its impact. One way is to take the focus off individual failures and evaluate results in a larger context. In the investing world, for example, even Warren Buffett can't consistently pick a bundle of stocks that are all winners. The most successful investors get ahead by choosing more winners than losers.Most often, they worry if they experience too few failures. "An important metric we've talked about is making sure that we have a sufficient number of failures," eBay founder Pierre Omidyar said. "Continuing to do what you did to get where you are is a recipe for the end."

The optimal failure ratio is specific to the creator and may be higher or lower depending on the organization, industry, and cul­ture. As a rule of thumb, the lower the cost of failure, the higher the failure ratio can potentially be. "I have it roughly in my mind, sort of one out of three times I want to fail at something," Stella & Dot founder Jessica Herrin said. "It's a sustainable balance of success." If you're not failing, Herrin believes, you're probably not being aggressive enough.

"Frankly, if you tune it so that you have zero chance of failure, you usually also have zero chance of success," Linkedln cofounder Reid Hoffman said. "The key is to look at ways for when you get to your failure checkpoint, you know to stop." Creators set time and financial limits to know when to shift.

As companies grow successful, risk tolerance shrinks. At large companies such as eBay, failure ratios are often set too low. "When you're successful, everyone wants you to keep doing what it was that made you successful," Omidyar said. "That's everybody from your customers, to your employees, to your management, and even your board of directors. But in a fast-changing environment, you have to fight against the desire to just keep doing what worked before."

Individuals come to realize that making mistakes by pushing boundaries and testing new ideas actually might be wise.

In 2005, Eric Schmidt, then CEO of Google, outlined his 70-20-10 formula for management efforts: spend 70 percent of man­agement's time at Google improving its core business of search and advertising; allocate 20 percent to adjacent businesses related to the core businesses such as Google Earth; and spend the remaining 10 percent exploring completely new ideas. This metric helps manage­ment prioritize innovation while focusing on existing operations. Google engineers may devote 20 percent of company time to pursuing side projects of personal interest. Some of Google's most renowned products, such as Gmail, have emerged from the engineers' experimental time. "Our goal is to have more at-bats per unit of time and effort than anyone else in the world," Schmidt said.

For venture capitalists who fund creators of new companies, failure ratios can surpass 70 percent. Of ten investments, only one or two typically produce significant returns. "What we are looking for are winners to be ten-times winners or more," Menlo Ventures partner Shawn Carolan said.

"So we are looking for big markets and a dynamic that can lead an entrepreneur to grow really fast." Carolan was ah early investor in Siri, the voice-command personal assistant now owned by Apple. He also backed Uber, the on-demand transportation company that connects passengers with drivers of vehicles for hire through a mobile app.

Re-printed with permission from Simon& Schuster India. Copyright 2015 Amy Wilkinson. All rights reserved

 

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MEET THE AUTHOR

• Amy Wilkinson is a strategic adviser, entrepreneur and a much sought-after speaker. She frequently addresses audiences on entrepreneurial leadership and advises start-ups and large corporations on business strategy
• Her career spans leadership roles with McKinsey & Company and JP Morgan. She was also the founder of a small foreign-based export company. Wilkinson has served as a White House Fellow in the Office of the United States Trade Representative and as a senior fellow at the Harvard Kennedy School

Amy Wilkinson
Strategic adviser & lecturer at the Stanford Graduate School of Business