The Art of the Big Bet

It was in the middle of World War II that Edwin Land, the head and co-founder of Land-Wheelwright Laboratories, founded in 1932, was on vacation with his family in Santa Fe, New Mexico. Land was privately and professionally infatuated with photography. When he took a photo of his three-year-old daughter, she ran up to him and wanted to look at the picture. Land’s response that the photo needed to be developed first did not satisfy the daughter. “Why can’t I see it right away?”[1]

This only seemingly naive question got Land thinking, and after many years of research, failed attempts, a lot of money invested, and even more frustration, Land was finally able to introduce the instant camera to his board members in 1972, a whopping 29 years after that vacation in Santa Fe. As I’m sure you’ve already guessed, I’m talking about Polaroid here. Land, as owner and head of the company renamed Polaroid in 1937, was able to take the time to tinker with this technology, even though he couldn’t be sure if there would even be a market for such a product. The only customer he had in mind had been his daughter.

But Land had identified an unmet need and thus a market that market research studies had never revealed to him. In 1977, the year of its launch, Polaroid sold six million cameras and was to remain a bestseller and cult for decades.

This art of the ‘big bet’ – where (almost) everything is put on one card for a crazy idea – is what it is: risky and crazy, and if it succeeds, everyone knew later that this idea was obvious anyway and could only succeed. Founders and company bosses like Edwin Land, Steve Jobs or Elon Musk then also take pleasure in claiming that they had done no market research at all. Elon Musk said during an interview at a U.S. Air Force event, “I don’t do any market research at all.”

But that is not correct, of course. Certainly they don’t commission a study that tries to capture market needs. When you spend almost 30 years researching an instant camera, the only way you can probably maintain motivation is by getting confirmation from potential customers who express interest. Even Apple founder Steve Jobs, who stated wholeheartedly that “customers don’t know what they want,” was very much doing market research, but in his own way. Time and again, he mingled with customers in his Apple Store on University Avenue in Palo Alto, had them show him how they operated the devices, what questions they had, and, above all, listened carefully to what they asked for. Also, through interactions with customers, his design team led by Jonathan Ive had gotten a good sense that a device like the iPhone, for example, was something customers wanted, and the team took a correspondingly tactical approach to convincing Jobs, who was initially skeptical, to go for it.[2]

Tesla CEO Elon Musk, on the other hand, is known for his tweets where he actively listens to input from his users. The Cybertruck alone, a futuristic and unusual-looking electric pickup truck, may never have emerged from a customer survey, but instead he had thousands of tweets recorded by potential customers with feature requests. Within days, Musk occasionally has changes made to the software for vehicles already delivered when a customer suggests a feature that makes sense to Musk.

In other words, the above – and there are many more of them – do not do formal market studies in the classic sense, and they do not rely exclusively on the data they have for this purpose in the age of Big Data. But they are closely connected to the pulse of the times through other channels and trust their intuition that they are ‘on to something’ that has a market-changing or market-creating characteristic. “The customer doesn’t always know what he wants” became a common saying back in Henry Ford’s day.

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That doesn’t always go well. Amazon boss Jeff Bezos tried to break into the smartphone market with his own device. But the ‘Fire Phone‘ sold so poorly that Amazon has not disclosed sales figures to date. One employee was quoted as saying that Bezos intervened so much that in the end the Fire Phone had been developed for the demands of just one customer: Jeff Bezos himself.

But were the examples mentioned so far really big bets that involved a lot of risk? Many start-ups have an idea for which there is as yet no market, no customers and no business model. But the vast majority fail because of it. These ideas also required a lot of resources, but companies like Polaroid, Apple, Amazon and Tesla were able to manage this because they are successful with other products and make their money. It becomes heart attack-inducing when the company itself is at stake or the founder is threatened with financial ruin. And that’s where the current master of all classes in the art of the big bet is Elon Musk.

After earning several hundred million from the sale of PayPal, the payment service provider he co-founded, he put almost everything into three companies: an electric car start-up called Tesla, the space travel company he founded, SpaceX, and the solar cell and battery storage producer SolarCity. All companies operating in markets that either didn’t exist before or where there was supposedly no opportunity. And indeed, Musk was on the brink of failure several times with both Tesla and SpaceX. The first three SpaceX rocket launches had failed, and the company could not financially survive a fourth crash. The fourth launch succeeded and the rest is history. Tesla was on the verge of bankruptcy at least twice, and only its own last money and investors who poured in more money at literally the last minute saved the company.

This “all or nothing” approach is not for Germans. There would be no understanding for it in a culture where everything has to be planned and insured in advance. Today, people can’t even warm up to micro-investments, as German start-up investor Frank Thelen described to Christoph Keese. He would be invited again and again by owner families of large German companies to present his investment fund for high-tech start-ups, ‘Freigeist Capital’, and explain how investing in start-ups worked. But almost no family offices would actually invest, even though the amounts involved for them are comparatively small and thus involve little risk. Not only have we not mastered the art of the big bet, not even a small bet is taken.

The reasons are manifold. First of all, family offices are not entrepreneurs. They are managers of inherited family assets and family businesses. Managers, in turn, did not get to their position because they took a lot of risk, but because it was best to avoid it. Entrepreneurs take a personal risk, they are in it with all their assets. The heirs’ main fear is that their generation will lose the business built by the founders and thus ‘fail’. This fear can paralyze a family from taking action, but it can also activate them all the more and bring out the best in them.

Depending on the history of the entrepreneurial family, certain management styles dominate. Have there been near-death experiences of the company? How do the family members get along and how much conflict and disagreement is there between them? How successful is the company? Is everything going well at the moment or are there clouds looming? Even if a family office wants to trade, they may lack the knowledge to make such bets. A high-tech start-up initially needs to be evaluated with different metrics. If the market, product, service and business model are not known, ROI and profitability cannot be demanded immediately, but the start-up must be given time to identify them. However, the business metrics and procedures needed for this are not taught at our business universities.

The small bets are simple. Incremental improvements to existing products, such as a different flavor in a soup or five percent less consumption of adhesive in this production process, show immediate results with this type of change. Entering a completely new market with a new product, or even discarding the old product line and replacing it with a new one, seems like madness.

In fact, we currently see a well-known German family-owned company making such a big bet: Volkswagen. After some back and forth, and motivated in no small part by a major scandal worth billions, the company, still controlled by its founding family, has decided to consistently shift its product from internal combustion engines to electric mobility. That doesn’t come without friction in a very political company with more than half a million employees. Whatever the outcome of this bet, Volkswagen and the other major German manufacturers will definitely go down in the textbooks with it, just as Polaroid did in more ways than one. The same big bet that had worked so well with the Polaroid camera, in fact, failed miserably with ‘Polavision’, a two and a half minute self-developing video cassette. Whereas the instant camera had penetrated an unoccupied new market, Polavision faced overwhelming and more technologically advanced competition in the form of the emerging video cameras.

This article is an excerpt from my book Future Angst (in German), which will be published on August 19. It can already be pre-ordered here.

[1] Safi Bahcall; Loonshots: How to nurture the crazy ideas that win wars, cure diseases, and transform industries; St. Martin’s Press, New York, 2019

[2] Brian Merchant; The One Device: The Secret History Of The IPhone; Little Brown, 2017

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