The balancing act of exploration and exploitation

How do we lead in a world where success is equally determined by things we don't do /know than by the things we do/know?

This week’s post is inspired by three different conversations the last 2 weeks:

1.) Fellow investor: Our careers on a 10-20 year horizon are more dependent on things we don’t know than the things we know; in the context of missing out on generational companies and trends. So, how do we as young investors go beyond our inboxes to find those trends and companies?

2.) Founder (who’s not in our portfolio): I’d kept delaying fundraising trying to get my numbers right, but most VCs seem to care more about my articulation of market dynamics and landscape than my numbers. How do I get up to speed on this?

3.) Head of Strategy: I’m more worried about losing out to a disruptor that’s not yet born than to an older competitor of ours. How do we balance the culture between scaling and experimenting with new things?

Some of this anxiety is due to pandemic-fueled FOMO - The subconscious psychological effect of missing out on something that’s happening out there, that we aren’t a party to.

But some of this paranoia is also very real. Unlike the past, every new company today is tech or tech-enabled. Look around your network and think of a friend who’s starting or working at an organization that’s not tech or tech-enabled. Moreover, this compounding inflow of talent working on technology is shortening the time between tectonic technology shifts (semiconductors, PCs, software, smartphone, maps, payments 2.0, marketplaces, cloud, remote work, etc.,). In the past, it meant companies and people had more time to adapt:

• In the past, once a company finds product-market fit, it will likely get disrupted only several years into its existence; most likely few years or decades after going public. Not when it’s at the growth stage doing blitzscaling. e.g., A “Shopify” like offering deplatforming a thriving marketplace.

• Investors had time to study trends and evaluate companies in-depth to uncover the driving force behind that 10x growth. Not anymore. DD now takes days or weeks instead of weeks and months; and every day, there’s a new frontier in technology that opens up great opportunities.

• Leaders had time to change managers and cultures from a focus of “exploitation” (which requires talent specializing in operational excellence and scaling) to that of exploration (which requires diverse teams with a lot of ‘slack’ built in to experiment). They now need to do the “10 to 100” journey while keeping the pedal on “1 to 10” and “0 to 1” projects. It’s incredibly hard to do both.

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All of this made me think of this amazing, decade-old but evergreen article on the evolution of business strategy. Here is the link to it. It outlines how different schools of business strategy around the “right to win” evolved over the last few decades, and below is a summary.

As a student of business history, I have a big gripe with the way media and business school case studies characterize disruption. More often than not, some media portrays leaders of the disrupted company as oblivious or incompetent. I staunchly believe that it’s neither in most situations. It’s more to do with wrong judgment by the leadership on which quadrant of strategy applies to that stage of the company.

To elaborate, I think most of those situations fall into two categories:

1.) The leaders and the organizations have assumptions that get shattered due to a tectonic shift. e.g., IBM’s leadership had a rational argument that the market size is limited for personal computers, especially at the price points where it’s feasible. However, the pace of technological and design innovation - especially software development - dropped costs, increased utility, and raised the willingness to pay. Thus, increasing the addressable market size dramatically. It was too late by the time IBM realized and caught up. Similarly, a lot of stories of VC firms that passed on Uber include heavy reliance on expertise that the cab industry is a nightmare, and personal transportation has a small market size. But those assumptions got debunked because of technology developments (google maps, smartphones, cheap 3G/4G internet, online payments) and a shift in consumer behavior in favor of the gig economy.

2.) The organizations couldn’t evolve in time: Brad Stone says that Fire phone failure is one of Bezos’s biggest regrets. It failed not because of Bezos and Amazon not knowing about the technology wave, but because they couldn’t launch and scale the right phone in the short time they had to catch up before app store ecosystems become too big to break into. Culture, capabilities, and processes need a lot of tweaking to get there. (I admire Bezos a lot for his systems thinking and how “many waves” he rode and won - despite not being the first to innovate in that wave. He is arguably the best systems thinker of this century. However, this is one of those few misses as Amazon’s culture of experimentation and letting data decide doesn’t work under time pressure - it should be more design driven - as Apple did, marketplace driven - as Google did).

It’s not that people didn’t know, it’s that people misjudged the timing and balance between exploration and exploitation. You explore too much, you leave things on the table. You exploit too much, you are left out in barren land that customers moved on from. People don’t evolve as quickly as markets, and staying too long in one of those quadrants without agility makes you miss that window of opportunity.

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So, what does this mean to us? How do we, as young founders, VCs, and companies get this balance of exploration and exploitation?

I don’t know have an answer, and I don’t think the stalwarts of our industry would either. As it’s a personalized answer for each one of us. But I’ve managed to compile some guiding principles from good examples and role models. Broadly, they fall into two buckets.

• Process: Consciously schedule time periodically to do explore methodically. e,g., Bill Gates’s think week; or Bezos’ S-team retreats with an agenda item on this¹; or more mundanely, switching up the routine of inbox and calendars managing us vs. us blocking time to think and hit priorities first before inboxes and calendars. (This tip is courtesy of Vamsi from Vedantu when I asked how he managed this year of 5x YoY growth in scale and managing hundreds of people. He starts his day with a dedicated hour focused on key priorities and thinking time than emails and messages or meetings. As we speak, he’s on a 3-day thinking trek on longer-term priorities).

• People: Surrounding ourselves with people who are outside our networks and day-to-day work.

  If you’re an operator, consciously have those “20% projects” and do those courses to pick up new skills.

  If you’re a VC focused on one geography or sector, go out of your way to build relationships with those from other spheres. I, for one, am trying to learn about crypto and what decentralized internet 3.0 might look like.

  If you’re a founder, form relationships with consultants, VCs, or tech journalists, especially those at mid-and junior levels whose day-to-day job involves studying the landscape. Public company CEOs have this help from bankers, consultants, VC friends, etc., As a young company without that reach and resources, you can still construct your own sources of learning. If you have a top-tier VC already on your cap table, then you should leverage that relationship.

When most careers are defined by less than a handful of decisions², there is no more important task than making sure that we have those decisions before us and make those calls right. It’s even more pertinent for founders and companies when the opportunity before them is once in a lifetime opportunity (<1 in 1,000 companies hit that jackpot PMF in a generational trend).

Consequently, I believe the path to being an effective VC depends on me doing this well and supporting our teams to get this balance well. I’m early in this journey and would love to hear your tips, tricks, and wisdom!

Thank you and have a great weekend!

1. Most notably, an S-team memo titled “Amazon’s future is crap” accelerated its entry into grocery commerce and eventually led to the $13.7Bn acquisition of WholeFoods. Source: Amazon Unbound by Brad Stone, a highly recommended book on this topic of exploration and exploitation as it chronicles Amazon’s and Jeff Bezos’ rise in the last 10 years of going global, entry into media/grocery/devices, and pressing on a compounding advantage.

2. I believe this a lot. Think of a loved colleague who’s left your organization, and reflect on the impact they had on the organization - It will most likely be only 2 or 3 things that dramatically moved the needle.