Little Bets Summary (7/10)

The Philosophy of Little Bets

Little Bets by Peter Sims is about making many low-cost experiments and investing in what works, rather than investing in one big idea from the start.

This philosophy isn’t new, it has been discussed in other books including The Learn Startup by Eric Ries and 4 Steps to Epiphany by Steve Blank, but the examples in the book that are interesting stories to think about, especially when you consider how successful people from completely different industries have profited from this method of working.

A lot of people are afraid of failure when starting a business. To avoid this, they only launch their idea when they think they have figured it out. They delude themselves into thinking that after enough brainstorming, they will come up with the killer idea that will bring them success. But this rarely happens in the real world. To understand why this is the case, think about a key mismatch that many people ignore, particularly if they have oversized egos. The map of the world that they have is highly inaccurate, there is too much that they don’t know, including how customers will react to their idea.

Under uncertainty, the most logical thing to do is not to live in your head, but to go out and experiment. This means making many little bets and watching out for what works and what doesn’t.

The Story of HP

When HP designed the HP 35 scientific calculator (their first), they wanted to sell it at $400. They hired a market research firm to tell them if this was a good idea. The answer they got was that there was simply no demand for such an expensive calculator. But Bill Hewlett, the founder of HP, thought it was still worth make a small test. So HP did a test run of 1000 calculators to see what happens. After doing this, they ended up selling 1000 calculators per day.

In 1972, HP designed the HP 35 scientific calculator- their first scientific calculator. They wanted to sell it to the market at $400 each. They hired a market research firm to understand if there was a market for an HP calculator. This became HP’s strategy, to make many small bets, and then identify the best ideas after testing, and make big investments in them.

Pixar

The equivalent of this strategy in the movie industry is Pixar. Their way of experimenting was using storyboards. Between 1998 and 2008, their use of storyboards quadrupled. Instead of experimenting less, they experimented more. They understood that time was not making them smarter about what they had to do, but only taught them that they had to do more tests.

You cannot think in isolation, you can only think after doing.

Chris Rock

If you listen to a Chris Rock standup special, you would be forgiven for thinking that everything he says is funny. But Chris Rock is mostly unfunny. Like any business that lets go of its ego, Chris Rock knew that what he thought was irrelevant. There were many jokes that he thought were hilarious that landed flat, and other jokes that he thought were corny that people lost their minds over.

To figure out what people liked, Chris would write as many jokes as he could, and would perform in small comedy clubs. And as he did his performance, he would watch the audience closely, he would take notes about what got the biggest laugh, snicker, and sigh. To come up with a great hour-long show, Chris needed 6 months to a year of experimentation.

Google

Another interesting story is Google. Page and Brin were looking for a way to prioritize information based on how many other citations refer to it. This is how Google basically functions today.

Int 1997, they had no idea that Google would develop into the behemoth it is today. In fact, Page tried to sell the technology to Excite for $1.6 million but was turned down. Since no one wanted to buy their software, they decided to start their own company. At first, they tried making money from banner ads like all the other businesses, but they figured out that this wasn’t making them enough money. It so happened that at the time, a company called Overture was around, it was run by serial entrepreneur Bill Gross.

Overture introduced pay-per-click advertising to the world, and used an auction-based system. Even though the company was losing money, they made $26.8 million in 1999. Google’s founders realized that this business model could be the answer they were looking for. That was how Adwords was born.

Don’t Ask People What They Want

Some people make the mistake of asking people what kind of product they would want. But this is foolish. People don’t know what they want. There is a saying, “Watch what they do, not what they say.” If Ford relied on what people wanted, they would have looked for ways to breed faster horses.

Create something first and then get feedback. Embrace shitty first drafts.

If you’re an entrepreneur and you want a quick guide to know what to think about before launching you business, check out The Myth of Entrepreneurship.