“In the strict formulation of the causal law – if we know the present, we can calculate the future – it not the conclusion that is wrong, but the premise.” – An overview of the “Heisenberg Uncertainty Principle” from Uncertainty: The Life and Science of Werner Heisenberg
It’s common parlance to suggest that venture capitalists are in the business of “predicting the future.” Investments are referred to “bets,” and there’s a material uncertainty about the future. Case in point – a VC primer from The New Yorker’s 2015 profile of Marc Andresseen, “Tomorrow’s Advance Man”:
In venture, it’s not batting average that matters; it’s slugging average. Boldness is all. When Google Glass appeared, a16z joined a collective to seek out investments, and Andreessen declared that, without the face shield, “people are going to find they feel, basically, naked and lonely.” Google withdrew the product in January. But, he would argue, so what? His thesis is that such a16z failures as Fab and Rockmelt and Digg and Kno are not merely a tolerable by-product of the risk algorithm but a vital indicator of it. It’s fine to have a lousy record of predicting the future, most of the time, as long as when you’re right you’re really right. Between 2004 and 2013, a mere 0.4 per cent of all venture investments returned at least 50x. The real mistakes aren’t the errors of commission, the companies that crash—all you can lose is your investment—but those of omission. There were good reasons that a16z passed on buying twelve per cent of Uber in 2011, including a deadline of just hours to make a decision. But the firm missed a profit, on paper, of more than three billion dollars.
At Chicago Ventures, we are often discussing and brainstorming which factors or precedents we can identify that are predictive of future success. But over the years I’ve come to believe that venture investing isn’t the act of betting on the future; on the contrary, investments are a test of how well we truly understand the present.
Over the weekend I was re-reading William Duggan’s Strategic Intuition, a book I first read in business school, and which goes to lengths to demystify the unplanned creative sparks that underpin legendary strategic insights. Early on, Duggan takes a deep dive into understanding the scientific method, using Thomas Kuhn’s The Structure of Scientific Revolutions as a guide; and while I expected to mostly skim that section, it set off lightbulbs for me as regards our challenge as investors:
Kuhn goes on to explain that a breakthrough is part of both the past it came from and the future it starts, in the same way that a bend in the road serves as the end of one direction and the beginning of another…The common idea of how a lap of progress happens is a leap of imagination. Kuhn gives us an alternative to imagination that we can apply to realms of achievement other than science. He shows us in detail how the bend in the road happens: a selective combination of elements from the past makes something new. The elements themselves are not new.
This sequence for paradigm shift – achievement, than theory – is exactly backward from common ideas on how progress happens. In the typical notion of the scientific method, first you posit a theory, and then you conduct an experiment to test it. If your experiment works, you have an achievement. But this is the experimental method, not the scientific method. The experimental method is part of the scientific method, but it’s not the first step.
Scientific advance does not come about by a leap of thought to a new theory, but rather from combining specific achievements that lead to a theory, which explains them. It’s an act of combination, not imagination. Specifically, it’s the selective recombination of previous elements into a new whole. Pieces of the past come together to make a new future.
I think as entrepreneurs and investors consider the future, they should be singularly focused on the question: what has actually been achieved?
For example, Webvan – one of the public failures of the dot com era – was predicated on the assumption that the web (html/desktop) was a sufficient enough technological achievement to enable on-demand last mile delivery. It turned out that while the internet did facilitate real-time transfer of information, the opex of managing trucks and warehouses was prohibitively expensive (communication was not yet ubiquitous enough to enable crowdsourcing). The working assumption for this decade’s last mile players (Deliv, Postmates, Doordash) is that the GPS-empowered smartphone is a strong enough achievement to enable cost-effective crowdsourced delivery.
This take on experimentation versus achievement touches on broader themes I’ve been struggling with such as bitcoin and virtual reality. Is Facebook’s acquisition of Oculus an achievement for VR or merely an incremental step in its experimentation period? I am of the belief that VR is still deeply experimental and that technological progress, especially for consumer facing technologies, are rarely “achievements” until their presence has become ubiquitous through a native or modular platform layer (web, and more recently mobile are the two ultimate examples of this).
Bitcoin, on the other hand, may actually be somewhat silently transitioning into its achievement phase. Were historical increases (or recent surges) in bitcoin’s market price “achievements?” No, of course not – bitcoin is a commodity – the price is utterly irrelevant. But I’ve begun encountering increasing number of companies that have integrated the blockchain for accounting, certification, escrow, location or identification, often without advertising themselves as “blockchain companies,” but simply because blockchain tech enables them to optimize a process they couldn’t without it. While price is largely irrelevant, broad adoption of platform is not.
As entrepreneurs and investors, it’s a heck of a lot of fun to imagine the future. But bets on the future need to be predicated on a discerned analysis of the present. This approach was a new, nuanced insight for me into the question of “why now?” and I hope its helpful to readers as well.