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Cheap is too expensive

Josh Quittner has an article in Time on a new type of startup he calls LILOs for "a little in, a lot out". The essence of the article is that starting a new business now is easy and cheap. The cheap part might be true, but the easy part, not so much.

The article serves as a lesson in what is wrong with venture and startups today. Let's start with Josh's assumption that "It almost goes without saying that many more start-ups fail than succeed." This is very problematic thinking: authors, entrepreneurs, and investors just assume that this is the way startups work: the vast majority will fail so investors should spread capital across lots of companies in order to find one that might succeed.

This type of thinking ends up encouraging failure and risk. And it is why venture returns are highly variable and often underperform

For example, Josh writes (quoting Joi Ito): "'The cost of failure is cheap. It's so low, you can swing the bat way more times.' In a bad economy, no one really notices or cares about more failure. That creates a better environment for risk-taking, which is the only way innovation occurs." [emphasis added] 
So according to Josh and Joi: entrepreneurs should take lots of risk in an environment where they can fail again and again and again, until maybe they succeed. This is the standard way to think about innovation: start with tons of big ideas, build stuff fast and cheap to filter out the bad ideas and see which ones work. 

But let's say we thought about the innovation problem differently. Wouldn't it be better to focus on the cause of all these failures? Suppose instead that entrepreneurs were encouraged to mitigate as much risk as possible before any product development in order to succeed consistently. 

What's crazy is that this very logical idea (mitigate risk to succeed consistently) seems crazy at all.

Josh does causally identify the problem to be solved: "All that's required is a great idea for a product that will fill a need in the 21st century." But this begs the question: what is a "need"? Companies don't even agree on what a customer need is. Without a rigorous and quantitative definition of a customer need it is almost impossible to launch a product that meets customer needs.

As a result, it is not surprising, as Josh notes, that "there's often no correlation between the assumptions in a theoretical business plan and reality." But the problem is not with planning, the problem is the type of planning. If there is no agreement on what a need is, planning to fill it will not work. And launching a product to fill the need won't work the vast majority of the time either. 
The goal should be to develop a system that rigorously defines and quantifies customer needs and consistently leads to successful innovation. But with a mindset that encourages risk-taking and failure from the outset, it will be an uphill battle.