Frozen Accidents And The Path Dependence of Startups: Part 1

Posted on October 7, 2009
Filed Under Business, Decision Making |

“Shallow men believe in luck. Strong men believe in cause and effect.” - Ralph Waldo Emerson

One of the things I have struggled with for years is the role of luck in business. I have seen plenty of smart entrepreneurs fail because of seemingly random events. But like most others, I want to believe that the world is a meritocracy.
pathdependence

Is Bill Gates the richest man in the world because of luck? I’ve read quotes from many people who have met him saying he is the smartest person they have ever known. Surely that intelligence has played some role in his success. On the flip side, you have probably heard about the day Gary Kildall went flying and wondered if he hadn’t made that mistake, would Bill Gates still be a billionaire?

A friend of mine who co-founded a company that recently made the Inc 500 has said that they started just because his brother in-law needed some customer support help and his wife happened to be on maternity leave so she had some time to help him out. Not exactly a grand vision. The first time I ever met Andy Swan, who sold his first company in his late 20s, he told me there wasn’t any noble vision in starting it. He and his brother just didn’t want to get real jobs.

What does it all mean? Is success random luck? Is success a product of skill and hard work? Is success some combination of the two? I think the answer is that success is path dependent. The path you take has an effect on where you end up, but it isn’t the sold driver of your success.

I recently finished Eric Beinhocker’s excellent book “The Origin of Wealth,” and his take on path dependence and the nonlinear dynamic aspects of the economy has heavily influenced my thinking on the topic. Actually that’s wrong. A better description is to say that he painted a detailed picture of something I had come to believe but didn’t fully realize, so that when I read the book, I found myself nodding in agreement as if someone had revealed some truth to me that deep down I already knew but had never verbalized.

In the book, Beinhocker tells the story of Annie Oakley, Keiser Wilhelm, and how a “frozen accident” could have changed the course of history. Since there is no link to that page of the book, I’ll share the story with you via this post, which repeats it.

In the late 1800s, Buffalo Bill’s Wild West Show was a dazzling display of horsemanship, gunplay and other cowboy skills. One of its acts involved the sharpshooting of the great Annie Oakley. Dubbed “Little Sure Shot,” Oakley had an amazing routine – she would shoot out lit candles, for example, and the corks of wine bottles.

For her grand finale, she would shoot out the lit end of a cigarette held in a man’s mouth at a certain distance. For this, she would ask for volunteers from the audience. As no one ever volunteered, she had her husband planted among the spectators. He would “volunteer” and they would complete the dangerous trick together.

Well, during one swing through Europe, Oakley was setting up her finale and she asked for volunteers. To her shock – and the surprise of everyone involved with the show – she got a real volunteer.

The proud young Prince (soon to be Kaiser) Wilhelm bravely stepped down from among the spectators, strode into the ring and stuck a lit cigarette in his mouth.

Reportedly out late the night before enjoying the local beer gardens, the unexpected appearance of this famous volunteer unnerved her. But the show must go on.

She took aim and fired… putting out the cigarette, much to Wilhelm’s amusement.

Thus, she also created one of historians’ favorite “what if” moments. What if her bullet went through the future Kaiser’s left ear? Would World War I have happened? Would the lives of 9 million soldiers and 6.6 million civilians have been spared? Would Hitler have risen from the ashes of defeated Germany? All sorts of questions come to mind…

Scientists call these kinds of episodes “frozen accidents” – points in time when small changes would have led to dramatic consequences.

Now backup a minute and think about your startup. What if you were on a flight to San Francisco and something came up that caused you to move the flight by one day. As a result, you get to sit next to the CEO of a company that is in a similar business. You strike up a conversation which turns into a working relationship with turns into a $20 million exit for you. Or what if the reverse happens and instead of sitting next to that guy you set next to someone who has nothing in common with you and your business and that CEO ends up buying another company. You don’t get that good working relationship that really made your business take off and as a result you have a fire sale of your assets in 2 years instead. Could that kind of small thing really have such large consequences?

I’ll talk more on Friday, in part 2, about what this all means. For now though, I will give you a little bit of an explanation of how I think about this issue. It’s complex. Hard work, a good understanding of business, intelligence, connections… all those things matter. But. Luck, or more appropriately randomness, plays a significant role. Depending on the kind of business you are in, randomness may play a larger or smaller role.

Take Bill Gates as an example. If you ran a monte carlo simulation of the world and tweaked all kinds of variables, he would probably have been wealthy no matter what path he took in life. But in most of those scenarios he probably would not have been the richest man in the world, or even a billionaire.

So it doesn’t mean that you shouldn’t try. Actually, there are some ways to tweak the system to maximize your chances of ending up in a good spot. But I’ll save those for part 2 which will look at a fascinating research project called Sugarscape and what it says about path dependence.

Comments

One Response to “Frozen Accidents And The Path Dependence of Startups: Part 1”

  1. Jay on October 19th, 2009 2:51 pm

    Luck does matter! As do the cumulative butterfly effects of tiny decisions over time, even if they might seem entirely unrelated. Great posts for CotC. Oh wait…

  • About Rob

    Rob is co-founder of Backupify.com. He likes value investing, the Rolling Stones, college basketball, artificial intelligence, economic history and people who think independently.