Tuesday, January 24, 2017

The Mathematical Formula for Success

If failure is more likely than success, what is the formula for success?

If you're really lucky, you might succeed right away.  In that case, you could retire immediately and rest on your laurels.  But this seems unsatisfying.  Very few people have the willpower to walk away from the roulette wheel right after they win, and even if you do, you have to put up with hearing the "L" word (lucky) being used to describe you for the rest of your life.

Most people concentrate on maximizing their chances of success.  "If I just think hard enough," these folks say to themselves, "I can plan my way to success."  Yet while intelligence, hard work, and brilliant insight can increase the chances of success, they certainly don't guarantee it.  As the smart, hard-working, and very-successful Mark Pincus likes to say about his startup Tribe, "I started one of the first three social networks, and I still managed to fail."  There doesn't seem to be a way to tilt the odds fully in your favor.

The best strategy seems to be to increase your number of attempts to succeed, or "shots on goal" as they might say in soccer (football) or hockey.  Yet while this increases both your expected number of successes, and reduces the chances of getting ended up with zero successes, the numbers game doesn't change the expected value of each attempt.

To make the numbers game work, you have to do two other critical things, in additional to increasing your shots on goal:

First, you have to reduce the cost of failure so that even a string of failures doesn't take you out of the game.  If you're forced to leave the table when you're down, you'll never end up in the black.  Reducing the cost of failure can also improve your expected value.

Second, you have to aim high (though not so high as to eliminate the chances of success) so that the rewards of each success far outweigh the costs of the failures along the way.

We can write this equation as follows:

Success = Sum (1 to N, where N = #Attempts) for f (Chance of Success * Benefits of Success - [1 - Chance of Success] * Cost of Failure)

(Feel free to offer a better mathematical statement in the comments; I'm not a mathematician!)

Successful venture capitalists try to solve for this equation.

VC funds invest in 20+ companies per fund, giving them a very good chance that they'll have at least one success, and a good chance to have more than one.

But funds also reduce the cost of failure by investing smaller amounts up front and doubling down on what appear likely to be the winners in the portfolio.  The option value to abandon investments that don't seem to be working helps reduce the average cost of failure in the portfolio.

Finally, venture capitalists focus on "venture scale" investments--startups that could conceivably be worth billions of dollars.  These outside outcomes (such as Amazon, Google, and Facebook) can make up for a multitude of failures.

(Note that VC firms also try to increase the chances of success by providing useful advice, key introductions, and useful services, but these efforts supplement, rather than replace, the three principles outlined above).

Nor do you have to be a wealthy venture capitalist to follow this strategy.  I'm employed it in my own life, by being open to interesting and unusual opportunities, avoiding any that risked my financial or professional ruin, and prioritizing potential upside over what I believe is the illusory sense of safety.

I have failed many more times than I care to remember, but because I kept the costs of my failures low and stayed in the game, people only seem to remember my successes!