Innovation 2.0: How Big Ideas Are Born

Shankar Vedantam

This is hidden brain. I'm Shankar Vedanta.

What do you want to be when you grow up? Nearly all of us are asked this question very early in our lives. In the mid 1920s, a young man who went by the name of Fred had a clear answer. He wanted to be a writer. He hoped to live among other writers and artists in Paris or Greenwich Village.

So Fred went to college to study literature. He read voraciously and began writing short stories.

But like so many writers before him and after him, Fred found literary success elusive.

In November 1927, he read an article by HG Wells in the New York Times Sunday magazine. The article asked the reader to consider who had made a bigger contribution to civilization, the playwright George Bernhard Shaw, or the russian neurologist and physiologist Ivan Pavlov. Fred thought about it and decided the answer was clear. It was the russian scientist.

He set aside his writing aspirations to enter a PhD program at Harvard, where he trained as a psychologist. He spent the next 40 years studying human behavior instead of writing stories about it. In that time, Burris Frederick Skinner, better known as BF Skinner, became one of the most influential psychologists in the world. His work has greatly shaped our modern understanding of human behavior. Not all of us become groundbreaking scientists, but nearly all of us have had the experience of traveling down one road only to realize it is not the road for us.

Today, we kick off a new series we are calling innovation 2.0. We'll explore the science of creativity and how organizations and individuals can learn to build great things, how to set goals, launch ideas, and find your sense of direction.

This week on hidden brain.

When it comes to pursuing our goals, the path seems straightforward. Think about where you want to go, map out the steps, and get going. But this approach often fails. As we proceed toward our goals, unexpected difficulties often arise and surprises abound. At the University of Virginia, Saraswati studies how we plan and prepare for the future.

Using the lens of entrepreneurship, she's interested in how we pursue goals, launch ideas, and make decisions. Saras Saraswati, welcome to hidden brain. Lovely to be here. Shankar. Saras, you started out as an entrepreneur, not a researcher.

In the 1980s, you were living in India, in Bombay, or Mumbai, as it's known today. You launched a business involving food preparation. What was this business? This was basically a dream about starting a restaurant but not having any resources to, for example, to find a location or a chef or anything. So the idea here was to just work with what I already had, which is I knew how to cook.

Saras Saraswathi

The business became a lunch service business where basically I would cook and bring food for people downtown. I see. And how did this work? You actually would make the food in the morning and then catch a train or something and go downtown to people's offices and deliver meals to their desks? Basically, yeah.

Initially it started that way and then found a commercial kitchen very, very cheap through a friend who happened to have, like, at one of those tiny restaurant like places, and then just took a beaten down car to go deliver. And what were these interactions like when you would drop off lunch for people? You were doing this in person at the time. What kind of interactions did you have with people when you dropped off their lunch? So delivery is not just delivery like all entrepreneurs, right?

You have to become a pinch hitter. You have to do everything in the business to start with, but the most important thing is sales. So I would go in, and I would be always trying to get more people to sign up. So with the customers who already ordered, I mean, these were people who knew me to begin with. I would just bring in and talk about the day.

I'd explain about the food, and I would, of course, ask them, how is it, you know, as they taste. I would actually wait for a couple of minutes, and then I would always have a follow on ask of some kind, like, can you introduce me to the people in the next floor? And then it became the next building, and I would always bring extra so that I could give it to other people. So in the early stages, it was a mixture of just keeping the current customers engaged but always pushing for a few more orders. This strategy worked, and the business prospered.

Shankar Vedantam

Saras eventually had enough orders to keep her busy in the kitchen, so she hired a delivery driver. She expected profits to soar, but that is not what happened. Not at all. In fact, the business started going down. And you actually think, when I say business, I mean literally the number of orders, number of people ordering, everything was took a downward turn.

Saras Saraswathi

And so you start wondering, what's going on? Sarrus wanted to get to the bottom of it, so she went back into the offices where her customers worked and ask them point blank, what gives? So it turned out that, you know, and it was not the easiest thing. And I'm still even today a little. I blush when I talk about this.

It turned out that people actually were not thinking that the food is awesome, even though some of them would say the food is awesome. It turns out that there was something about my personality and the. These conversations that we had that people missed. And they were ordering it partly to see me come deliver and to this day, I don't know exactly what. But I do know that the initial success of the business was not the food, per se.

It was the food and delivery combo, to put it mildly. And so when you change the combo and you had somebody else deliver the food, they were still getting their lunch, but they didn't have the interaction, the effervescent interaction that they would have with you. Yeah, I wasn't thinking effervescent interaction. I was actually crushed that they didn't like my cooking.

Shankar Vedantam

So at this point, you've dipped your toe into the world of entrepreneurship. You're starting to get a pretty good idea of what it takes to be successful. You eventually start another business. It's related to drinking water issues in Mumbai. Start by giving me the context.

What were these water issues? Yes. So there are thousands of these apartment complexes in Mumbai, three to five stories, sometimes taller. And the way water distribution works in Mumbai is basically, water comes from the municipality, and it fills a tank at the street level or at the bottom floor of the building. And then the apartment complexes have, on their own, they have to pump up this water to the top floor or to the terrace where there is a top tank.

Saras Saraswathi

And from that top tank, water comes into the apartments. And so somebody has to go in and turn the water pump on so that the water can be pumped up from the bottom tank to the top tank. So this was a security guard, maybe, who worked at the apartment, whose job it was to turn on the pump and get the water to be pumped up to the roof. Yes. And every apartment complex usually has at least one.

We used to call them watchman. And because water doesn't flow 24 hours, that's the other issue you have to think about this. Water comes in only at certain times of the day. So the problem is the watchmen are not really always there. Right.

And some of them, they're expected to be awake all night. You know, they've not woken up or they're off somewhere having a smoke or something, and they are not turning the pump on at exactly the time that you would need early in the morning, especially when people are getting ready to send their children to school or go to work or something. So a lot of apartment complexes would have to chase down these watchmen to make sure the pumps are started at the correct time. And on top of that, there was also unpredictability when the water arrived. At the time, Saras was desperate for a new business idea.

Shankar Vedantam

Like many entrepreneurs, she knew this meant starting with a problem, find a problem that needs fixing and then invent a solution that would be profitable. So the solution was, why do we need the watchman? We actually can automate this thing. And this is a very simple thing, right? You need a gadget, an electronic gadget that will just take a look at the level of water in the lower tank, right?

Saras Saraswathi

And then the level has reached a particular height in the tank, it can start pumping it up. So all we need to do is to design a contraption that does that.

Shankar Vedantam

Along with a business partner, Saras came up with the idea for a water pump controller. She recruited electrical engineers to help design the circuitry and even spend some time assembling the circuit boards. It was a simple solution to an important problem. And so having come up with this thing, you have to find apartment complexes that are willing to install it. And, you know, just started with the apartment where we lived.

Saras Saraswathi

We told people, you know, just, let's try this out, pilot it. The watchman will still stand around, and we are here while we test it. And at least for the first couple of weeks, we made sure we were there. The watchman was there, and it worked beautifully.

Shankar Vedantam

And so you have a proof of concept. It's worked successfully in your building. You're an entrepreneur. I'm assuming the next step is how do I get other people to use my product? How do I generate sales?

Saras Saraswathi

Yeah, absolutely. How do you get other people? And of course, you tend to go to people, you know, so you can just go to the next apartment complex and the next one. And it's not quite like that in the sense that you go talk to people. And most people are like, we don't even have time to think about this.

And, you know, who are you? It was not the easiest thing in the world, but we knew enough number of people, both on a personal front, but also through the business. So we kept on talking to enough number of people. And I think I remember maybe a half a dozen of these signed up. And in each case, we really worked hard to make sure it worked properly.

And every single time, it worked beautifully. I understand sales took off pretty quickly. Yeah. As you know, as you go from one to six, you are really excited. And so you start building 60.

It seemed like a simple solution to a very, very important problem, as I said. So we went a little bit crazy. We thought we could go from six to 60 within a month. And then we were thinking 60 00, 60,000 already. And so began to talk to investors.

I mean, classic, you know, getting into the hockey stick mode here. Saras had done everything, right? Find a problem in manufacturer solution. Check. Get investors on board.

Shankar Vedantam

Check. Find customers, get them to buy, then find more customers. Check, check, and check. Sarrus controllers were selling like hotcakes, and the future looked bright. But very early one morning, as Sars had just gotten out of bed, the.

Saras Saraswathi

Phone rang, and basically the person on the other end begins to scream at me, what kind of business people are you? You have caused such a big problem for us. I don't know what to do. You come over here immediately and for a minute. I don't know who this person is, right?

So I have to ask who is speaking. So. And that person loses it. When I ask his name, he says, you know, how many people have you screwed over?

Shankar Vedantam

Eventually, Saras figured out who the man was. The secretary of a local homeowners association who had purchased one of her automatic electric pump controllers. Saras left her house and rushed across town to meet him at his building. But he wasn't alone. People are already at the entrance to the building.

Saras Saraswathi

There are people already standing around because they're waiting for me, and they're already shouting at this guy who had called me, right? And there were, like half a dozen families who had no water that morning. And so they had come to him, and they were screaming at him. So he was stressed out because there were people, there was like a mini mob there.

Shankar Vedantam

The homeowners took one look at Saras, who at this time was in her early twenties. This was the person to whom the apartment manager had entrusted the well being of their building. They lost it. Everybody was really mad. And not only that, seeing me infuriated people even further, right?

Saras Saraswathi

Because they thought the guy, the secretary of the association, was just nuts to even do business with me, let alone allow me to sell him something. So things got worse. After making her way through the angry mob, the secretary walked Saras to the pump room to check out the problem. She noticed it right away. A coil in the pump had burned out.

Shankar Vedantam

Normally, when the security guard started the pump, he would fill a little cup with water to prevent overheating. The water controller Saras had installed did not do this. And without that water, the pump burns out. I see. It cannot start on its own.

Saras Saraswathi

And we did not even know that. And we had not considered that, because none of us were big engineers. We had just worked with engineers to develop the thing, and especially none of us were hydroelectric engineers or plumbers or anything like that. It was a failure. The solution into which Saras had invested so much time and energy wasnt a solution at all, in fact, it made a big problem even worse.

I was just heartbroken, completely panicked, you know, like, sort of shaking. But I was like, mia kalpa, mia maxima kalpa. Tell me what I need to do. I will do anything. You know, I will stay with you.

I will bring buckets of water from the tank. I'll pay for people to bring the water into your house today, and I'll pay, of course, for a new pump and everything like that. So it could be, of course, that this was an isolated incident. Was this the end of the story? Was this the only problem you encountered with your water controllers?

No, this was the beginning of a shakespearean tragedy. Right. So during this encounter, I was just there, right? I was just trying to solve the problem. And it's only later in the day, after we had worked out what I needed to do to make it right, that the panic hit me that we have been installing, like, you know, several, dozens of these, and so immediately started thinking, we need to go and inspect every one of them.

And it turned out by the next day, I started getting more calls. By the time we went out to people, people started realizing that this was burning. They had made a mistake. So by the time I got two or three more calls the next day, we were already going out to every single installation and looking for the pumps that needed the priming and telling people, you cannot use this controller anymore. And so at this point, now, you know that the gizmo that you built has a problem.

Shankar Vedantam

You know that there's an even bigger problem because it's actually caused damage in many of these buildings that you're going to have to fix that damage. It's sort of a public relations disaster. What happens at this point? You're in your early twenties. You thought you were on the start of a hockey stick.

I guess it wasn't. It wasn't. And remember, this is why I said it's like a tragedy, because you have the customers who actually suffered the problem, and they're not happy. And remember, we've been talking with a couple of investors. In the meanwhile, let me tell you, they were not happy.

Saras Saraswathi

It was just one call after another. It's like doing some kind of firefighting. So all stakeholders, my family was, like, really pissed off at me, right? Because they had been trying to say for a while, don't go into business. And we are not from a business community.

We are lower middle class. You are so smart. You're getting all these job offers. Just take a job. Why are you throwing your life away?

I mean, so every minute of the day was just this confrontation and then end the day as a puddle.

Shankar Vedantam

All of us, even those of us who are not entrepreneurs, make plans for the future. But as Saras discovered with her two ventures, once you make a plan, there's stuff you don't know about. You can learn new things to address this problem. But there is also stuff you don't know that you don't know. And it's very hard to prepare for this.

When we come back where Saras went wrong and what research shows is the most effective way to pursue our ambitions, you're listening to hidden brain. I'm Shankar Vedantam.

This is hidden brain. I'm Shankar Vedantam.

Even if you don't consider yourself an entrepreneur, chances are you have ideas you'd like to see come to life. Maybe it's launching a creative project or starting a side hustle. Maybe you'd like to start an organization in your community. Maybe your goals are personal. You want to get in shape or you want to have successful relationships.

At the University of Virginia's Darden School of Business, Saras Saraswathi says there are some common mistakes we make when it comes to getting our plans off the ground.

Saurus, as you were launching your water pump controller business, you noticed there was a problem. Many apartment buildings in Mumbai were running out of water because the pump was not working properly or the security guard had not turned on the pump. I feel you were doing exactly what young entrepreneurs are often taught to do. Find a problem in the world and then devise a profitable solution. Can you talk about how common this advice is and why the advice might not be right?

Saras Saraswathi

That's a great and interesting question. When I went through my business, people were telling us things like, you know, here's the story of an entrepreneur. And the way you do it is you have to solve a big problem or. But also in a profitable way, right? And so the first problem is you can see the problem and you can solve the problem, like with my pump controller.

But then it's not clear that it is going to be profitable as a business, right? A unit of the product may be profitable. And then you go into this fantasy, okay, if I can go from six to 60 to 6000, and then you start thinking how many buildings are there? And so you go into that and then you don't realize that profitability does not work that way. Right?

That's one issue with it. And the second issue with it is, and this one I had to learn the hard way, which is a lot of businesses that get started are not necessarily solving a problem out there. And it's really much more about things like competence. What is it that you know how to do? And then how can you create more value with that?

But yes, in the beginning, I was totally bought into this idea that every business begins with a problem. It's also the case that at some level, you know, you know that there's a problem because, you know, the water pumps are not pumping the water up. And so you say, okay, there's a solution to that, but you didn't know about the priming cup that was necessary to prevent the pumps from burning out. So there was, in fact, a deeper problem that was hidden behind the first problem. You didn't even know it existed until it blew up in your face.

Yeah, absolutely. And not only did I not know that, look at why I did not know that, right? Because my competence is not in building pumps or improving pumps or innovating on pumps or even in electronics. So this is exactly what an entrepreneur does, finds a problem and then figures out a way to solve it, irrespective of whether you have the resources or you have the knowledge or whatever. When you were manufacturing these water pump controllers, you hired an electrician who came in as a consultant.

Shankar Vedantam

But you told me that you also took it upon yourself to learn how to build these electronic circuit boards. And on the surface, this seems like the right thing to do. It seems almost noble that you wanted to learn how to build these things yourself, but in hindsight, you were getting in well over your head. Saras oh, absolutely. And plus, there was nothing noble about it, right?

Saras Saraswathi

It's a cost issue. Shankar and also the reality of a lot of very small ventures or startup companies, right? And when you learn it yourself, it's easier to have employ some people to actually do it for you because you have to supervise them, and they have even less knowledge than you have, and you actually have very little knowledge compared to the expert. So that's just common in many, many ventures. And I again, experienced it in the school of hard knocks.

Shankar Vedantam

So another mistake we make is that we fail to notice signals of problems that are coming in at a much larger scale. This also affects big companies. I'm thinking about the experience of blockbuster as streaming television was starting to arise. Can you tell me the story of what happened with Blockbuster and the rise of Netflix? Saras that is a lovely question.

Saras Saraswathi

And it is, you know, also something that we have looked at in research. So you think once you have solved a problem, you think that you're riding a wave, and that wave is going to go on for a long, long time. Then along comes several other things that are also going on. But because your business is going so well, right? You look at ideas and you start thinking about, this will not work.

That's a stupid idea. That is too small a thing. And that's what happened with Netflix, right? So with Blockbuster, you are doing so well. They had like 9000 stores or something like this.

If I remember around the time that they started noticing a. There were other businesses that started. Redbox, for example, started saying, there's no need to pay this upfront fee that you had to pay with blockbusters, right? And Netflix started doing the same thing. So they just thought, these are just kind of young Turk people who are trying to compete because we have such a great business and such a great market.

They're just trying to nip around our heels, right? That's the attitude. And you think that that's going nowhere. And that is the kind of thing, because you're projecting, this wave is going to last for a very long time.

But also, blockbuster was levered up too much, right? They had debt on their books. They were accumulating debt in their fast growth. It's this perfect storm that gets created when you start projecting to the future, but also start placing big bets on that projection. Because, of course, if things are unpredictable and you're placing big bets on what's going to happen, when one of the things in the future that you think is going to happen doesn't happen, then you might be up the creek without a paddle, as they say.

It's not only that your projections are wrong, but when you're riding the wave, you do not see that the projection can be wrong at all. It's also sort of like health and life, right? In your thirties, you think you're immortal. In your forties and fifties, you are in such denial that you do everything to prove that you're immortal. Right?

Fitness, whatever. And then one day something happens and you're confronted with mortality. I mean, all of us do this all the time. And then in organizations that are doing very well and making a lot of money, there's also this groupthink that sets in, right? Everybody wants to believe it.

Everybody sort of reinforces each other's denial of these things. And so you just. You just take things for granted.

Shankar Vedantam

We can see from the blockbuster story that another pitfall even the smartest entrepreneurs fall into is not knowing when to change course. So where do they go wrong? You have to think about it. The first step you have to do is to think about the decisions that you're making. Even if it is, even if you're Coca Cola and you know exactly how many, you know you're going to sell and you're probably, your predictions are 100% correct, you still have to think about all the positive opportunities out there that you might miss by not investing in something new.

Saras Saraswathi

Right? So there is this fancy that your own, whatever you think you're doing well is going to continue, but it's also missing out on other things that could be happening that you could be a part of. So one of the ways you think about this problem is to think about the decisions that you are making, all the positive opportunities out there that you might miss by not investing in something new. Right? This is why, again, when you go to blockbuster, it's not just that you get it wrong, right.

We can all get it wrong, especially in a world of fast change. But are there other ways of building this future without having to level up, without having to ignore competition? Is that a way, for example, that I can partner with competition? Maybe I can even invest in what will become my competition in the future? I mean, there are many, many, many other techniques and strategies that we could consider.

But the idea that you can always be wrong, that is really the thing that we want to be emphasizing here. I understand you once ran a study that looked at novice versus expert entrepreneurs and how they make decisions about the future. What did you find that novice entrepreneurs typically do when it comes to looking for data? Saras, the study was really interesting in separating out novices and experts. And so novices either consist of people who have never started a company but are thinking of starting one, or people who have started their very first company, but they're in their very early stages, first couple of years or things like that.

So most novice entrepreneurs are all over the place. The first thing that we find in the thing is they are just looking for information. So if they come into like an MBA program or a business school program or they take some courses, people teach them something things, right? But then they overlearn from it, right? So they really start believing that if you go out and ask, say, survey 100 people and 75 people loved your product, or they filled out a survey saying they loved it, that means that 75% of all the people in that demographic or in that segment is going to buy your product or something like that, right?

So they think that the data actually tells you what will happen in the future. So in general, novices will sort of follow all these weird things, or they'll have a favorite entrepreneur and they will say, elon Musk does it this way, so I will do the same thing, or something like that. And then they go out and talk to a bunch of people, and then they over generalize from their data that they have collected. Now, when you look at the expert entrepreneurship, a lot of them will look at the data and really not take the data at face value. In fact, one expert entrepreneur I studied said it beautifully.

He said, you know what? Data about the past is fine, right? When somebody starts giving me data about what they will do in the future, I just ignore it because they don't believe in predicting the future. And so their attitude towards data are very, very different.

Shankar Vedantam

When we come back, what successful entrepreneurs do as they make decisions. You're listening to hidden brain. I'm Shankar Vedantam.

This is hidden brain. I'm Shankar Vedanta. In the late 1990s, Sara Saraswathi was a PhD student at Carnegie Mellon University in Pittsburgh. She was working with Herb Simon, the economist who won a Nobel Prize in 1978 for his work on decision making and problem solving. To answer the question, how do the world's most successful entrepreneurs go about solving problems and pursuing their goals?

Saras, in 1997, you took a road trip to find and interview successful entrepreneurs. Can you describe this trip for me? Where did you go? Who did you meet? So the study was about expert entrepreneurs.

Saras Saraswathi

They were looking for people who had 1015 years immersive, full time experience, starting and running multiple ventures, including successes and failures, and then taken at least one company public. But the main thing was, these are people who have been through every experience that entrepreneurship can offer, including successes and failures. The road trip was informed by research that Herb Simon and his colleagues had done some years earlier. They were trying to build a computer program capable of mimicking human problem solving. To do this, they recruited a handful of expert problem solvers, chess grandmasters.

And the method they invented was called the think aloud verbal protocol. The idea is you go to an expert in the field, like a chess grandmaster, and you ask them to play chess. So you observe them while they are playing chess, but you do one additional thing. You tell them you have to talk continuously as you are thinking about your next move. So you cannot just make a move.

So they would put two players in separate rooms so they don't know what the other person is thinking. But each player had to think aloud continuously in deciding which move to make. So that's how they could write the computer programs, right? So they were looking at which moves are they considering and rejecting and which moves, and then how do they actually come to the final decision of which move to make? And they got that data.

And I used that method to study expert entrepreneurs. The common wisdom at the time was that the chess grandmasters could simply see further ahead than beginners. If novices were able to see two moves ahead, the grandmasters could see ten moves ahead or 20. And it turned out that what really good chess players are very good at is they have a much bigger data bank inside their heads because they played thousands of games, right. Especially if they played professionally.

So their brain becomes very good at looking at a chessboard. When you and I look at a chessboard, if we are asked to recreate a chessboard, after looking at at it for, like 30 seconds, we will not be able to get even seven of the pieces, right? Right. But whereas the really good chess players can recreate it perfectly because they have, like, names for entire combinations of positions on a board, it's pattern recognition taken to the nth degree. When you are an expert in something and notice that this is not only experience, right?

Just playing chess for 40 years is not going to make you a grandmaster. You have to play, but you also have to think and learn. And you have this thing called deliberate practice. You have to push yourself to the next level. So it's a particular, you learn from your experience in a particular way, and that's how you become an expert chess player or an expert at anything.

Shankar Vedantam

Saras wondered, do expert entrepreneurs work the same way? Using Herb Simon's method, Saras asked the entrepreneurs in her study to solve a problem out loud. These weren't chess moves, but business related problems that she asked them to work through. As they talked through their solutions, Saras noticed that there were five concrete habits that distinguished how these experts approach problems differently from novice entrepreneurs. The first is something Saras calls bird in hand.

Saras Saraswathi

So normally we think we have to start with a goal of some kind or an effect that we want to create in the world. So the goal could be to solve a problem. The goal could be, I want to make a lot of money. Like in my case, I want to build a restaurant, and it would be nice to have a location and a chef and enormous amounts of money to do decor and music, but they don't have anything, right? So I am faced with two possibilities.

One is I can go and come up with a plan, I can write down my visualization of my restaurant, and I can go and try to convince somebody to give me the money, right? So I go investment route. I start with an effect. I want to create a goal. And now I'm beginning to think, what are all the means, all the resources that I need?

And I start chasing the resources. The expert entrepreneurs did the opposite. They did not start with a goal. They did not start with some big opportunity or some problem or something. They literally said, what do I have within my control?

Who am I? What do I know? Whom do I know? So even if I want to start a retail business, you know, even if I have some kind of general goal or I want to make a lot of money, this is not a very clear goal, right? Even if I have a goal.

So whether I have a goal or not, I'm actually starting with means. I'm not starting with the goal. I'm literally asking myself, who am I? What do I know? Whom do I know?

That is my burden hand.

Shankar Vedantam

I understand that you teach this idea in your classes, pointing to Airbnb as an example. Airbnb, of course, allows people to offer their homes to others for short term rentals. How did this business come about in the first place? Saras so today, if you took a course in entrepreneurship, people would tell you, you have to come up with a great idea for a business or solve a problem of some kind. Now let's go look at what Brian Chesky and Joe Gebbia, the co founders of Airbnb, what was the idea they came up with and how and why did they come up with it?

Saras Saraswathi

When you ask that question, you find that these are young people. They are in San Francisco, they have this apartment, and they're thinking about, how do we pay rent? Because it's becoming increasingly difficult to meet their rent obligations. And it turns out that the apartment had an extra bedroom that they were not using, and they had an air mattress in that bedroom. And in trying to think, how can we make a little bit of money so we can sustain ourselves and pay rent?

In San Francisco, they just look at this air mattress and say, maybe, you know what somebody would pay to come and use our spare bedroom and the air mattress, and why don't we just put up a website and see if anybody shows up? And that's how they get the idea. They're not thinking at that time that there's going to be this multi billion dollar business or anything like that. They were trying to solve their own problem in some ways, and they did what they knew how to do, and it turns out to be a business idea. They do know how to take it to the next level.

Just the next step of making a professional website. And that's what they had kind of day one in the Airbnb story. And you can see it's all like bird in hand. They're in San Francisco, they already have the apartment, they have the spare bedroom, they have the air mattress, and they have the problem, right? Which is how do I pay my own rent?

Shankar Vedantam

So there's a second habit that you found among successful entrepreneurship, and it's something you call the principle of affordable losses. What does this mean? Saras so when you start, Shankar, with the bird in hand, right, you immediately have to also think about are you going to do with things that are already within their control, you bird in hand, or are you going to go out and raise some money or raise some resources on things that you don't have? The moment you run out to try and raise some resources, people ask you for projections, right? For if you have to get somebody to invest, you start, you have to make some financial projections and tell them how much money they will make and things like that.

Saras Saraswathi

And people start predicting future cash flows and what the risks may be, and they start calculating how much money people can make. They start focusing on expected return. When you look at the expert entrepreneurs again, they do the inverse of this. They just simply ask, what can I do for affordable loss? So in the case of Airbnb, for example, it costs them nothing because they already have the extra bedroom and the air mattress, right?

So when you combine bird in hand with affordable loss, it also gives you control over the downside, because if the thing fails, you're going to lose nothing more than you can afford to lose. When the founders of Airbnb, Brian Chesky and Joe Gebbia, realized they had a great business idea on their hands, they did something else that was interesting. They recruited a friend to help them with the technological side of the business. Sara says this is another example of what expert entrepreneurs do. They find the right people to help them level up.

Shankar Vedantam

She calls this the crazy quilt principle. So the crazy quilt principle is the idea that you are going to work with whoever wants to work with you, but only if they put skin in the game. So if you go back to the affordable loss principles, one way to say is I need x amount of dollars to do x, Y and z. But when you break down the things that you're going to spend that investment on, 80%, 90% of all of those will be going to pay other people, right? You want to hire somebody to do your sales, you want to hire a CTO or you are going to pay somebody to design your brand or whatever it may be.

Saras Saraswathi

And so the way to do it is to go out and talk to people and convince them to come do this with you and not charge you any money upfront. Right. But that commitment can be affordable loss for them. And a kick ass example of that is actually Richard Branson. At that time, he was not Sir Richard Branson.

He was not this hugely successful outreach, but he did, he was young. He had started virgin records and virgin records had been successful. And suddenly he thinks, you know, he travels a lot and he thinks, I have a better idea, a cooler idea for a better airline, and how do I start this? He could have gone and raised money. Everybody tells him this is a, you know, high investment, investment intensive kind of business.

He basically calls up Boeing and he says, hey, you know, somewhere, you know, you must have some planes hanging around not making money for you. Can you let me have them for a year or two? Because I have this cool idea for an airline and, you know, if it doesn't work out, I'll bring the planes back to you in the best possible condition I can. If it works out, let's talk a deal.

So, for Boeing, though, if you think about it, to try something new and innovative, invest in it early on, it's not that expensive to lease a few planes. It's not that expensive, and it makes it completely affordable loss for Richard Branson's to, you know, go off and build an airline so it's affordable loss on both sides. There is example after example after example of this kind. There are lots of people in manufacturing, for example, you come up with a new idea for a nutrition bar. You can go to a co packer and you can work with them.

And for them, it doesn't cost much so long as you allow them to run the production during their downtime or something like that. So it becomes affordable loss for them. They will make you a minimum amount of quantity that you can get on the shelves of different stores and try it out so you don't have to do a prototype of a nutrition bar. You can do a full production run for pretty close to nothing.

Shankar Vedantam

Being a successful entrepreneur doesn't mean you'll never fail. But Sara says that when expert entrepreneurs fail, they are better at turning lemons into lemonade. So the lemonade principle is the idea that when you build ventures effectually right, without predicting the future, always doing things within your control. The fact is there are lots of things outside your control, and some of them there's hit you so the world outside hits you with lemons. And so the idea is you have to also get very good at dealing with unexpected surprises and then turn even negative surprises into opportunities.

Saras Saraswathi

The iconic case is three m, and they're always creating new products and they end up, one of the streams of new products they're invested in is adhesives. And they end up inventing an adhesive that doesn't stick very well. Right. So they usually, it would just go into the trash can as a, as a, as an attempt that failed. And Spence Silver, who was involved in, in developing the product, is not very happy that it turned out to be a failure until another colleague, art Fry, is in.

You know, he's in a church choir, and he realizes that it would be nice to have something that he can put on his music sheets to mark them, but be able to take them off afterwards. Right? So he thinks that something like a glue that doesn't stick very well would find use in that. The failure that three M inventor Spence silver experienced, we know it today as the post it note. So the lemonade principle is the idea that before you throw stuff away, in fact, most of the time, you can make a lot of good businesses out of trash.

And then it could become like a very successful product.

Shankar Vedantam

There is a final principle. Saras talks about pilots in the plane. Expert entrepreneurs dont merely react to their environment, they actively shape it. They make their own luck, if you will. Take a look at Netflix.

In the early two thousands, the company's DVD rental by mail model was in danger of becoming obsolete. Netflix pivoted to become a streaming service. The company wasn't just trying to win a share of an existing market, they were creating a new market. In so doing, they changed the way we all consume entertainment. They invented their own future.

As Saras talked to these entrepreneurs, she found that there was a presiding mindset over all of these principles. Saras calls this mindset effectuation. So effectual thinking is a way to minimize predictive information while making decisions under great uncertainty. And the way you minimize predictive information is you are always dividing the world into things within your control and things outside your control. You ignore things outside your control and continuously use things within your control to shape and co create the future.

Saras Saraswathi

That's what effectual thinking is. And so you end up creating new effects in the world, even effects that you did not begin with. I mean, in some ways, one of the lessons here is that the really successful entrepreneurs have the humility to know that the future is not controllable. And in some ways. Once you accept that, then you realize it doesn't make a ton of sense to try and figure out where you're going, try and figure out the destination, try and figure out the big picture strategy.

Shankar Vedantam

All of that in some ways is unknowable. Absolutely. You don't have to think about all of these other things that people worry about. And then the beauty of it is you actually end up achieving some of those big things precisely because. Because you were not really focusing all your time and attention on it.

Sara Saraswati teaches entrepreneurship at the University of Virginia's Darden School of Business. She's the author of Elements of entrepreneurial Expertise.

When we set goals, many of us tried to meticulously plan for the future. We then hope and pray our plan works out. Sometimes it does, sometimes it doesn't. Sarus research raises an interesting what if we took a different approach? Rather than ask what we want from the future?

What might happen if we instead asked, what do I have to offer that might change the future?

Next week we continue our innovation 2.0 series with a look at talent. We explore why we're so drawn to people who seem to be naturally gifted and how our assumptions about talent and hard work can be a barrier to success for both people and organizations.

Hidden brain is produced by hidden brain media. Our audio production team includes Annie Murphy, Paul, Kristin Wong, Laura Kwerel, Ryan Katz, Autumn Barnes, Andrew Chadwick, and Nick Woodbury. Tara Boyle is our executive producer. I'm Hidden Brains executive editor.

If you enjoyed today's episode or know a budding entrepreneur who might find it useful, please share it with them. Your word of mouth recommendations are one of the most powerful ways for us to connect new listeners to the ideas we explore on hidden brain. I'm Shankar Vedantam. See you soon.

Innovation 2.0: How Big Ideas Are Born

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1: The Story of B.F. Skinner

2: Saras Saraswathi's Entrepreneurial Ventures

3: The Principles of Effectuation

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