Systematic Innovation

When I first encountered the term systematic innovation it created a cognitive dissonance. The notion that innovation could be a process excited the deliberate thinker in me. However, I’ve worked in startups for over a decade and it seems like an oxymoron. Innovation is that bright spark or random event, not some derivative of Taylorism. Yet the possibility excites me, so I started doing some research.

First, it makes sense to explore the definition of innovation. The famous economist Joseph Schumpeter used the term 'creative destruction' he popularized in the 40’s. Clayton Christensen coined ‘disruption’ at the turn of the millennia. According to Schumpeter, the "gale of creative destruction" describes the "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”. A process which he thought to be driven by technology. Ken Norton, prodigious product leader at Google, thinks that innovation is a paradigm that requires a different way of thinking. Through attempting to improve a product or process by an order of magnitude are you forced to frame a different solution. 10x is a mindset, but a useful test for gauging whether an idea is innovative. Peter Drucker, the famous business and management guru, believed that innovation can be defined in terms of entrepreneurship. ‘The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield’. That’s a dry interpretation and Drucker much preferred to avoid the theoretical, but he coined the term systematic innovation. He believed that there was a methodology by which opportunities could be found and exploited:

Inside an Industry:

• The unexpected - the unexpected success or the unexpected failure
• The incongruity - between reality as it is or reality as it's assumed to be
• Innovation based on process need
• Changes in industry or market - that catches everyone unaware

Outside the Industry

• Demographics
• Changes in mood, meaning, and perception
• New Knowledge, both scientific and unscientific

If Peter Drucker was extremely conservative in risk taking, Mervin Kelly, former head of Bell Labs, was the opposite. R&D is a spectrum from pure research, to applied research, to exploratory development, to early stage development. Mervin Kelly relied on more fundamental forms of research that could then be piped into development. “Inventing the future wasn’t just a matter of inventing things for the future; it also entailed inventing ways to invent those things”. He believed that R&D could be a formula and worked to create the proper conditions for innovation:

• the world’s best scientific minds
• thinkers and doers under one roof “a physicist on the way to the cafeteria was like a magnet rolling past iron filings"
• trusted people to create and encouraged idle curiosity
• record everything in notebooks
• a problem rich environment

Many methodologies have ties to each other. For example, Bell Labs relied on good problems. Lean Startup begins with the problem definition. Clayton Christiansen relies on the ‘jobs to be done’ mindset and Kelly, thought innovation was a job to be done ‘better, cheaper, or both’. 10x thinking is present in many contemporary writings on startups. It’s where the commonality exists, I find value. Great thinkers build on those of the past and the right way of framing a problem has permanence, but is utterly simple. When Charlie Munger was asked why others haven’t followed his methodology, he quipped “because it’s too simple".

My research into systematic innovation has left me with practices of my own. When I read, I take notes. I choose what to read carefully. I write down what Drucker would consider key opportunities to exploit. I’m aware that innovation is a balance of passion and methodology. Passion can create a blinding bias I commonly refer to as ‘founder syndrome’. Methodology will keep you on the right track, but won’t keep you persisting if you don’t have passion. I look for good problems, not good ideas. I use the 10x filter. I believe that entrepreneurship is a tool. When you think you have a good idea, there are practices that can bring that notion to market effectively. Innovation requires with a proper framing of the problem, but it takes a keen mind to spot opportunities.

An Original Work

For the last couple of years I’ve been curious on the nature of original work, or invention, in so far as software is concerned. I’ve had the fortune of speaking with inventors, patent holders, fresh PhD graduates, and entrepreneurs. Each time I meet these people, I feel engaged. Engagement is that notion of true interest and focus that I’ve lost perspective on over the years. Work turns into momentum and somewhere along the way I lost my engagement. I can't remember meeting someone who holds a PhD that wasn’t engaging. Perhaps for 2 reasons: first at some point they opted out of the comfortable, but traditional path of private industry and, second, they’ve spent considerable time devoted to more graduated and critical thinking. More than once I’ve considered going back to school. I even took the GRE last fall. Ultimately, I couldn’t settle on a field of study that I was excited enough about to devote a period of my life to. My favorite summary of why to get a PhD: "Pursuing a Ph.D. is the only way to spend 4 to 8 years being paid to work on something that the market does not directly value in the short term." I haven't found anything yet that I'd like to make that long of a bet on, but there are a few questions that could be good canidates: how can machines interface directly with the physical brain to expand cognition, can machines ask good questions, can nuclear energy be safe and affordable. I believe all of these to be in the realm of possible...it could be now or in 50 years. I’ve had some conversations with PhD students, over many beers, who were disillusioned with the process of choosing a focus for their studies. My limited impression is that you apply to school thinking you’d love to study X. But then you realize that there are only Y professors taking on new candidates, even fewer with whom you have a chemistry, and even fewer who have funding to support your work. A lot of work to not be doing what you’d like to be doing. Additionally, you have to enjoy the process, and having been a pragmatist most of my working life, the idea of research is much different than engineering/development: your work is not a means to a specific end.

For now I’ve put my academic ambitions on hold. I've turned my attention towards inventors and/or entrepreneurs. I believe there are 2 broad notions of producing an original work: academic or hacking. I’ve been a hack for sometime. Make it work, make it right, make it fast. The lack of discipline in that approach can have it’s own pernicious effects. In fact, if you watch this fantastic talk on the background behind the recent resurgence in neural networks, you can draw a line to Geoffery Hinton who can draw a line to many other researchers going back to the 70’s. Geoffery makes a strong argument for the case of pure research. But the very nature of how he came up on this discovery proves that his research could easily have not produced something so applicable outside academia. For decades neural networks were a mostly academic exercise until he found a couple of key revelations. The previously mentioned article on research vs tinkering strikes a chord and makes me want to be more disciplined in my hackery. Not to long ago I did some of my own hackery on LDA as it relates to travel blogs. Likely, somebody has already done similar work, but I did little research to build on previous work. I also was quite sloppy in execution. However, my aim was to address a basic premise: was this problem solvable? To that end, I enjoyed the process very much. A personal challenge of sorts, similar to the reason do long distance triathlon, speak publicly, or venture into surf outside my comfort zone: I aim to push myself and grow.

There are innumerable ways for me to produce an original work. I've decided to focus on 3 tenants: the work should be applicable at some point in the near future (less than 2 years), that work must be distinct enough from other works which can include how that work was executed, and, finally, I’d prefer to leverage my existing talents that exploit knowledge across unique domains. My current expression of that original work is through a new startup that aims to disintermediate traditional retailers and advertising by connecting brands more directly with consumers. If you are one of the 2 followers of my blog, you'll note this is a departure from my consulting adventures. With good reason, I need to scratch an itch to create something from nothing. There are many interesting machine learning challenges to tackle in this new startup adventure: recommendation systems, identifying unique products and their variations, and reinforcement learning. Within that space, I aim to do some exciting work that will, no doubt, leverage lots of other’s work. Perhaps I might be able to leverage the work of an academic whose efforts haven't yet seen production. A marriage of academic and entrepreneurial endeavors seems a fitting compromise.

Investor CTO

For the past 6 months I've contributed my time to 2 startups. In that time, I've become keenly aware of two things: 1) there are a lot of startups that need technical and management help and 2) my background in software development and executive leadership enables me to provide valuable advice and hands-on implementation to help those startups. The model is simple: I take a reduced compensation rate in addition to an equity stake in the company that has an attached pre-defined equity maturation event. Now my time is limited, so 2 or 3 startups constitutes a full book at the moment. It pays to be selective like most investors are.

I've taken alot of meetings with founders and would-be founders. Building a pipeline of potential clients is as much work for me as it is the startups I work for. I see founders that fit in 2 camps: those that have deep expertise in a domain and decide to take a run at making a business out of it. We'll call them domain founders. Then there are those that have deep experience working for companies and are trying to make a go at a market that is new to them. We'll call them experienced founders. With domain founders, it's important to be able to work with someone who knows that they can't do it all and is open to "coaching up". I tend to provide input well beyond technical aspects and more into how to scale or growth-hack various parts of the business. Experienced founders typically underestimate how the lack of knowledge in a new market will hinder their path. I call them experienced founders because they know how to scale at a certain point, but they lack that zero to one growth experience. With these founders its key to emphasize how risk is viewed differently in a startup. Getting to market fast, cutting scalability corners, honing in on your hypothesis, and testing the market in various ways is key.

My most selective criteria is whether I can work with the team. I'll take an initial meeting and a first engagement at no cost. It's worth it to invest my time upfront for free if there is an opportunity. What makes a good team? Proper role definition and open mindedness go a long way in my book. They say you need a hacker and a hustler. That's a good attempt at initial role definition. Often times, I'll come into a company that doesn't fit that mold, and you have people stepping on each others toes. That's fine, but it needs to be sorted quickly. And that process is never ending. Being open minded, is a must-have. Nobody can predict the future, as Daniel Kahneman states "experts are no better at predicting the future than dart throwing monkeys". If there is contention, state how you intend to objectively move through that disagreement and what the risk is associated with you being wrong. I've been hugely wrong. But in the end, I was glad to be proven wrong, because that was a big win the for business. Third, I'm a fan of the no asshole rule. I've met founders that are bullies and run over a conversation. They interrupt their people and generally think they are God's gift to free market enterprise. You spend more time working with people than you do your family, so my investment is more than fiscal. I need to enjoy working with these people, and assholes just won't cut it. Finally, I need to work with competent people. Both intellectually and emotionally competent people. There is a famous TED talk that says "people don't buy what you do, but why you do it". Often times that 'why' can get distorted and convoluted . I would restate "people buy who you do it with first over what you do and why you do it". Team is number 1 in my book. And it seems that I'm not the only one. In a recent survey of software devs, culture and colleagues rank above building something significant.

Second to the team, is knowing how my skills can help this business succeed. If you're working with hardware, I'm not a great fit. If you're working with enterprise software, I'll pass. If you need to build an MVP, I'm interested. If you need help managing your development team, I'm all ears. If you're trying to raise capital, I can help you scope your efforts and be an experienced asset on the team. It pays to tell people 'no' and be specific about my value-add. After all, I'm expecting these fledgling companies to give me a longer term stake in their business and I have to feel that I can provide value.

As the team and product grow and scale, I get to see who isn't pulling their weight. I don't time for passive equity holders. A new startup will go through phases. Maybe there are more technical needs in the beginning, and marketing needs to hold off. This is why role definition (which changes over time too) is important. Accountability needs to be clear. Startups go through phases: building an MVP, getting early adopter traction, scaling past $1 million, raising capital... I like to have a good sense for who is going to contribute and how much. If I see passive equity holders along the way, I will voice my concerns. After all this is an investment for me, and I don't need dead weight pulling down my investment. Warren Buffet's model is simple "estimate an investment’s intrinsic value, handicap its risk, buy using margin of safety, concentrate, stay in the circle of competence, let it roll as compounding did the work.” I believe as a partial investor in a company I can provide much more value for the long term and decrease the odds of failure substantially.

One aspect of this position that I enjoy more than I ever thought is the creative thinking you can apply to building a business. Tech is full of business models that never existed. In fact, the concept of "business model" didn't really exist until the dot-com tech bubble. Adjusting to the constantly changing field of information: competitors, market, capital...is full of opportunities to exploit. If you can't see the opportunity in things, startups are the wrong game for you. As John Maynard Keynes states "A large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation”. I enjoy the possibilities of the game. And that is likely the biggest draw for me. I could make more money in a corner office, but I much prefer the wild west of startups. As Warren Buffet states "we enjoy the process far more than the proceeds".

Being an investor-CTO is as much a new adventure for me as the startups are for those I consult for. I still have alot to learn. But Boulder is a burgeoning town for startups. And I'll never close the door on joining one of these teams fulltime.