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Small companies explore crazy ideas that larger companies shy away because they’re too risky. The same companies, when they grow bigger, become risk-averse. What causes this? It’s not the culture of the organization but the structure of how teams are designed and how people are rewarded. Safi Bahcall tells us how larger organizations can birth good ideas while containing failure: the Loonshot.
What we learned from this episode
How you design your team’s structure can greatly impact the amount of good ideas that come out your business.
There are two opposing forces at work: stakes and perks of ranks. The balance between these forces causes companies to suddenly change from embracing wild new ideas to rigidly rejecting them.
When you take allegedly risk-averse people from larger companies and introduce them to an environment that’s wildly innovative, they become one too. It’s wrong to classify people into risk-averse and risk takers. Though there’s a predisposition, everybody has a duality. The environment brings out the behavior.
What you can do right now
Create a culture that rewards risk taking, ideas, and results instead of one that rewards rank. You will create an innovative culture.
Take one day a week to explore crazy, wacky ideas where quantity precedes quality. Try lots of stuff quickly. Expect a high rate of failure but contain it in such a way that you have your core ideas steady and only invest an acceptable portion of it int he wacky ideas.
Teams and companies will go from embracing wild new ideas, typically when they’re small, to rigidly rejecting them, typically when they’re larger.
…fixing culture is very hard. But changing structure can be much easier.
Today, our guest is Safi Bahcall. He’s a physicist, entrepreneur and author of the book “Loonshots: How to Nurture the Crazy Ideas that Win Wars, Cure Diseases, and Transform Industries.” Today, we’re talking about Work Minus Killing Good Ideas. Hi, Safi. How are you?
I’m great. How are you doing?
Excellent. Very excited to talk about this topic and specifically your book. Why don’t you start off just giving us, this is going to be difficult. You have a very interesting history. But a little bit about who you are, how you got involved in this kind of research.
I originally started in academia. I came from a pair of academic parents, scientists, physicists, and I thought I would be a physicist when I grew up. But eventually, I think I was right in my late 20s when I got curious to see what else was out there in the real world. And I realized that probably 99.99+% of people were not theoretical physicist or mathematicians. And so, I wanted to see what they did for a living. And it sounded like fun. So, I then joined a consulting firm called McKinsey in New York, which was a halfway house for helping academics transition into the real world, getting rid of some bad academic habits, but keeping some of the good things about curiosity and problem solving, but teaching you the skills of working in teams, and managing, and leading, and probably most importantly, learning from seeing other people, especially other people’s mistakes, close up. That was probably the most useful thing. You rarely get to see that as a manager or leader, being able to travel broadly and across a lot of different industries, very senior people, and get close enough to them to understand, not only what they do well, but more interestingly, what they wish they had done differently.
I eventually got interested in what can I do that could make a big difference to other people, to serve other people, to help other people because as an academic, there’s a noble purpose, you’re looking for truth. In a consulting firm, you’re solving problems, which are interesting problems in a different world, in a business world. But your job is to make companies more successful. And I wanted to do something that would bridge both worlds, science and business. I’ve had developed enough that I was bilingual. I could speak to scientists in their language and I had worked in trading floors and investment banks and private equity shops and I could speak to pretty senior people in the finance world in their language. And I wanted to be able to bridge the two. I had scientist friends and colleagues and people who were doing really interesting things in the lab that had very promising ideas that could potentially help people, help patients. But they were stuck there for whatever reason. It didn’t work out or they weren’t interested in working with venture capitalists. And so, that’s what I decided I wanted to do. If I could get involved in a project where the work that I was doing might lead to people spending more time on earth with their loved ones, that felt very meaningful for me, especially as I experienced my father dying from a rare type of cancer, I got involved in starting a biotech company that was developing new drugs for cancer. So, that got me started. That was a transition from science to business.
Nice. And now you’re in the place where you have written this book called “Loonshots“, which I really enjoyed. And we were talking before, I really like your writing style and you present your ideas very clearly. It just flows off the ideas, but why don’t you share with us what you mean by loonshot and how that’s different than a moonshot?
Everybody knows what a moonshot is. It’s a big goal or a destination that’s expected to have a lot of significance. When Kennedy said in 1961, we’re going to put a man on the moon, that was the original moonshot, and he was widely applauded. But if you look back in history, the big ideas, the ones that really changed the course of science, business, or even world history, rarely arrived with blaring trumpets and red carpets, dazzling everyone with their brilliance. They were generally dismissed for years or sometimes even decades and their champions written off as crazy. And since there wasn’t any great word in the English language for that, I just made one up.
So, walk us through why is it that this topic so interesting? The idea of a loonshot being something that’s initially rejected, initially thought this is just crazy. It’s not going to work. Why is that important for us now in the current climate we’re in?
What got me started, especially when my father was sick with cancer and I was in the field of working in medical research, and specifically in cancer research and developing new drugs, was a frustration that I would see inside companies, whether they were small, medium sized, or large, all these promising ideas that were stuck, including ideas that I felt could potentially make a difference for people with the type of cancer that my father had. And it wasn’t the superficial reason like, oh, they’re bad guys depressing these ideas. That was ridiculous. I mean, everybody involved certainly in my industry has a relative or someone with a severe disease and wants to go home and tell their spouse or their significant others or their families that they’re doing something to change the world, to help people, to cure cancer, or whatever. There was something else going on. And I realized that something else was a property of groups, of teams, of companies that just hadn’t been very well explored. There’s so much focus today. And the stuff that we read about culture, culture, culture, and I devoured those books when I was a first time manager leader in my early 30s. But that misses something that’s incredibly important. And that’s the aspects of structure of how you design your teams or companies. And if you get that wrong, all those great ideas, those products that could save lives, will stay buried in the basement of these large teams or companies. And so, I wrote this book in part to help people liberate those promising products, or ideas, or projects that can make a big difference in the world.
So, let’s go on to this idea of structure versus culture. What’s an example of how a company could have, say, we really value innovative ideas, all these concepts that bring us to new places, but their structure inhibits that growth?
I’ll start with something that seems bizarre, maybe a little crazy, but I’ll start with a glass of water. Imagine you have a glass of water and you stick your finger inside. You can swish it around and the molecules just slosh around your finger. It’s always true for any liquid, except as you lower the temperature. All of a sudden, the behavior of those molecules will completely change. You can’t stick your finger anymore. The water freezes. Instead of sloshing all around, those molecules lineup rigidly. Why? They’re exactly the same molecule. So, how do they notice suddenly change? There’s no CEO molecule with a bullhorn saying it’s 33 degrees Fahrenheit so everybody slosh around. Now, wait a minute. It’s 31. Everybody stop what you’re doing and line up rigidly in place. Oh, it’s 33 again. There’s none of that. So, you can think of cultures, the behavior that you see, the patterns of behavior that you see, for example, the molecules are sloshing around or they’re completely rigid. No amount of yelling or forcing people to watch videos or sing Kumbaya is going to change culture. Culture is very difficult to change, just like no amount of yelling at the molecules in a block of ice is going to make them suddenly melt. But a small change in temperature can get the job done. A small change in temperature can melt steel.
So, you can think of culture as the patterns of behavior that you see on the surface. And structure as the small changes, like changing in temperature, that can completely transform those behaviors. And there are many of those kinds of variables. For example, when you sprinkle salt in water, what does that do? It actually makes the water more likely to melt, less likely to freeze. That’s why you sprinkle salt on your sidewalks at night. It lowers the force that makes them want to line up the binding energy between molecules and makes them want to line up rigidly in place. It weakens it. So, they slosh around more. So, what makes this interesting, as I mentioned, is that fixing culture is very hard. But changing structure can be much easier. And that allows us to better design the teams and companies for the behaviors that we want. So, right now I’m talking about molecules, which sounds a little like what could that possibly have to do with people? But, in fact, what we’re talking about is a principle of science called emergent or emergent behavior. You see properties of the whole that don’t depend on the detail of the parts. And so, when I’m talking about liquids, well, it turns out every liquid does what I just said, every liquid flows when it’s warm, and freezes when it’s cold, and it goes through a sudden change, which is called the phase transition.
And there are certain properties of the whole that apply independent of what those details are because that’s true whether those molecules are shaped like soccer balls, or atoms, or they’re dirty. They’re all sorts of stuff. So, we see that pattern all around us if we know what to look for. For example, if you’ve been driving on the highway, and all of a sudden, you come into a parking lot of stalled cars, and there’s no on ramp. There’s no accident. And you wonder what just happened, well, you’ve just experienced a sudden phase transition between smooth flow and jammed flow. Now, it doesn’t matter what kind of cars are on the highway, what kind of people are driving those cars, highways will always have transitions between smooth flow and jammed flow. Financial markets are the same. They go between bubbles and crashes. And it doesn’t matter whether people are buying tulips or they’re buying stocks, or they’re buying this thing, they’ll always be these same kind of changes.
And so, what I talk about in this book is about how innovating well is an emergent behavior. Teams and companies will go from embracing wild new ideas, typically when they’re small, to rigidly rejecting them, typically when they’re larger, just like the glass of water will go from sloshing around fluid molecules to rigid ice, typically as you change the temperature. So, understanding that those forces and what causes that allows us to manage it, allows us to control it. It gives us the power to design the better kinds of behaviors that we want. So, what’s an example? Because that’s kind of a general statement. Those sudden changes, those phase transitions are always a result of two competing forces. So, in the case of water, there’s one force that wants to lock everything rigidly into place. It’s called binding energy, just a fancy word for wants to lock everybody, all the molecules rigidly in place. And another force that wants to have all those molecules run around and be free. It’s called entropy. But again, it’s just a fancy word that means run around and be free. Now, whenever you bring people together into a team or company, whether that’s a 5 person, a 20 person, a 200 person, or a 2,000 person team or company, you also create two forces. What are those two forces? Number one is stake and outcome. That means what’s everybody’s stake in the mission of your team or your group or your company?
For example, when I started a small biotech company, everybody’s stake was tied to the success of the drug that we were working on. So, that was a huge stake. If that drug worked, everyone’s going to be a hero for the rest of their life and a millionaire. If that drug failed, everyone would be unemployed. That’s a huge stake. What’s the second force? Perks of rank. So, let’s say you have a five person company, well, one person might be the team captain. The other might be team members. How important is that perks of rank? Not very important. If you’re at a five person company, you’re a team member or a team captain, it doesn’t matter very much, those perks of rank don’t matter very much compared to that giant stake and outcome. Now, let’s fast forward a bunch of years. Let’s say you’re a 10,000 person company. Now you have many layers of rank. And each time you get promoted, your base salary might go up by 30%, or whatever. But your stake and outcome is now much smaller. If you’re working on one project, it might be one of 500 projects. You barely moved the needle of your group. So, all the sudden, when you’re much larger, the perks of rank start to outweigh the stake and outcome. So, now you have this balance between two forces and they shift.
That’s what causes groups to suddenly change from embracing wild new ideas to rigidly rejecting them. Those are the examples of underlying structure. What are the incentives that people don’t talk about as much. They just talk about trying to fix the stuff on the surface, the culture. So, the bottom line is, if you reward rank, if you have a team or a company and people’s primary reward is around rank, you’re going to create a very political culture. If you reward intelligent risk taking and ideas and results, you’re going to create a very innovative culture. So, no amount of yelling at people to be more innovative and less political is going to make a difference. You need to step back and say what are we truly rewarding here? So, that’s what I mean by culture versus structure
I like it a lot. The idea that you have to think about what you’re creating around, what are the structures that you’re making, how do you reward people, how are they thinking about their work. To come back to the idea, you also mentioned that the same person is going to act differently in both situations. You put somebody in a place where the perks of rank are more important, that same person will act differently than if they’re in more of a stake and outcome position. So, it’s not necessarily the person is more innovative but the situation is more innovative.
That’s a myth that bothers me a lot. And it probably bothers me because I believed that myth when I was a younger manager or leader. When I was a younger entrepreneur, we’d get together at the end of the day with other entrepreneur friends, and we’d have a beer and pat each other on the back on how we were the real innovators and the best ideas came from small teams and companies like ours because we were risk takers. And all those people at large companies were these big risk averse types. And then you grow up, and as you mature, you start working with some of those large companies, you often need to partner with them, or if you’re a sales business, sell to them, etc. And when you get together with them after work, and you sit and you talk, you find out they’re just like you. They’re no different you. They’re just as excited about the latest gadget, they want to go home and talk about what’s cool, they want to be involved in making something new. Yet in their system or environment, once they get together in these big groups, they’ll start rejecting those same ideas. Why? Because if you look at the underlying incentives, they’re being rewarded by rank, their perks of rank totally outweigh their stake and outcome.
You can think of it coming back to that glass of water. If you think about a molecule of water, when you drop it in a glass of water, what does it do? It just sloshes around with the other molecules. But if you drop that molecule on a block of ice, what does it do? It freezes. Same thing with those big allegedly risk averse types of larger companies, when you take them out, and eventually, we started hiring some of those people and brought them into our company. When you take those people and you put them in your environment, off goes the suit, off goes the tie, and they start pounding the table, just like anybody else, just like anybody else around you, some wild entrepreneur. And then you put them back inside the large company and the suit goes back on and the tie goes back on. So, it’s just like you said. I don’t believe that people are fundamentally risk averse or fundamentally risk takers. There’s some predisposition, just like with everything. Some people are a little bit more prone and some people are a little bit less prone. But I think everybody has that duality. Everybody has both inside inside them. And it’s up to us. If we’re managers or leader, it’s up to us to design the right environment to tease out the behavior that we’re seeking.
Let’s talk to the person who’s a manager of a large team right now and they have a fear that the best idea that’s going to move their team forward is hidden somewhere in all of the mess or in the ice that they’ve been in. What’s a way that they can try to uncover those ideas or create a space where they can go back and find those loonshots and try to encourage them and create a situation where they can come to a good idea?
It’s got to start by spreading an idea, spreading a principle, spreading a concept, the concept that there are three types of projects. Essentially whatever industry, whatever team, whatever company, you want to think there are three types of projects. I remember things visually, so I think if it is battleship, speedboat, and helicopter. So, battleship is your core franchise business. You’re barreling down some primary lane, and those are your customers, those are your products. The speedboats are the things that are nearby. You veer off the mothership, explore some adjacent lanes. Let’s say you’re doing Google search, that’s your primary franchise, and now you want to search images. That’s an adjacent lane. The helicopters are the ones that pick up and go explore distant lands. Those are your loonshots. For example, if you’re doing Google search as your primary franchise and Google Image search as your adjacent lane, building a mobile phone operating system, Android, is your helicopter. That’s a loonshot. In fact, Gmail, sending messages, started within Google as this crazy loonshot idea, someone doing it in his spare time.
So, the reason you need to start by that is the fear of failure. The fear of failure is what suppresses new ideas. People are inside a group, inside a team, you have this core franchise. Franchises are run as they should be to high execution, to high discipline. We want 100% here are our goals and we expect you to make those with low failure rates. The problem is that if you want to explore distant lands, if you want to nurture loonshots, if you want to nurture radical breakthroughs, you need to expect high failures. You expect lots of failures and a high failure rate. Why? Because if you’re not getting a high failure rate, you’re probably not radical enough. So, the first thing you have to do is start by syndicating a principal or an idea that there are these three types of project. People may say, and I’ve seen this a lot, oh, we’ve got a really wacky idea. We’ll explore this adjacent thing, like we’re doing Google search on text, let’s a explore images. That’s not a really wacky idea. That’s an adjacent. That’s a speedboat. What you’re looking for are the helicopters. And so, the helicopters to do those loonshots, to nurture those crazy ideas, you need to take some crazy risks. So, you need to start by clarifying what you’re talking about and then creating separate buckets so people understand, yes, of course, we want to continue with our franchise, and all this stuff about high execution and low failure rate applies to the core franchise.
But at the same time in parallel, we want to be exploring some crazy ideas. And to do that we have to put on a very different hat. I think of one is the soldier hat. You’re barreling down the primary lane of high execution, high discipline, absolutely, you want your soldier hat on. And then you want to take off the soldier hat from time to time, or have someone else be the artist, but typically, with smaller groups or teams, it’s the same people, they just wear different hats, and we say, listen, one day a week, or one weekend a month, or one week a year, we’re going to explore wacky ideas. And there we’re going for quantity, not quality. We want to just try lots of stuff and try it quickly. We want to experiment. So, the first thing is you want to syndicate, spread widely this idea of three separate projects, just to get people comfortable that you’re going to have different expectations. In one case, you want low failure rates, that’s your battleships, your speedboats. In the other case, you expect high failure rates and that’s okay.
Two is you want to make sure everybody understands there’s a portfolio of projects. By saying we’re going to explore crazy ideas, it doesn’t mean if you have 100 people, 98 of them are going to each rush out and do 98 different crazy ideas, and two people are going to be left to pilot that battleship of the core franchise. No. It means you have some portfolio and very commonly as something like 70% are on your businesses invested in keeping your core franchise going. And maybe 20% is adjacent areas. But there’s a little 10% that’s devoted to loonshots. So, that second thing is you establish the portfolio. And the reason you do that, again, is a certain kind of psychological comfort. You want to get everybody, whether it’s your CEO, or your board of directors, or management, or leadership team, or stakeholders, investors, comfortable with the idea that you can explore crazy stuff, loonshots, without taking your eyes off the ball about the main thing that’s bringing in revenue to your business. So, you can do both simultaneously. And the way to do that is you separate and say, look, we’re going to make an investment in crazy ideas and then they’re going to be very risky. And we expect most of them to fail. If we have 30 ideas, and we get two or three winners, that’s a success.
I love the idea of the portfolio of projects, like coming up with the idea, and the fact that it’s open for everyone else to know that we are still focused on this big battleship idea. But we are exploring these other lands, too. And we have some things that are nearby, something’s far off. And having that public and having everyone to be able to contribute to those and to be aware of what’s going on. I think it’s a great idea, too.
And I think that by framing it in the language of a portfolio, it helps everyone get buy in, but it also helps establish, again, the thing that you need there, which is a sense of comfort with failure, that it’s okay to fail. And by saying, listen, we will be doing crazy ideas, but you know what? They’re going to be 10% of our portfolio. Then everybody gets comfortable that, you know what? There’s a big risk there. But it’s a contained risk. What’s the worst that could happen? 10% of our investments, if none of them work, if you have 100% failure, then we spent 10% of our money. But you know what? That’s a good investment in 10%.
Safi, there’s so many other questions I can ask, but I’m going to direct people just to go check out the book. There’s a lot of good information. If you’re interested in how to explore this idea on your own team to put it into practice, definitely check out the book, check out his website, and look more there. Where can people go to learn more about the ideas?
We’ll put those links in the show notes. Safi, thanks so much for sharing your ideas with us and for giving us a lot of things think about.
Absolutely. Thanks for having me, Neil.
Safi is a second-generation physicist (the son of two astrophysicists), a biotech entrepreneur, and former public-company CEO.
He received his BA summa cum laude from Harvard and his PhD in physics from Stanford, where he worked with Lenny Susskind in particle physics (the science of the small) and the Nobel laureate Bob Laughlin in condensed matter physics (the science of the many). He was a Miller Fellow in physics at UC Berkeley (the school of the many).
After working for three years as a consultant for McKinsey, Safi co-founded a biotechnology company developing new drugs for cancer. He led its IPO and served as its CEO for 13 years.
In 2008, he was named E&Y New England Biotechnology Entrepreneur of the Year. In 2011, he worked with President Obama’s council of science advisors (PCAST) on the future of national research.
Safi regularly speaks with leadership teams about applying the ideas in Loonshots (more here) and has presented at industry conferences, investor events, medical meetings, and leading academic institutions around the world.
Loonshots, Safi’s first book, has been translated into 18 languages; recommended by Bill Gates, Daniel Kahneman, Daniel Pink, Adam Grant, Malcolm Gladwell, and Tim Ferriss; and selected as a best business book of the year by Amazon, Bloomberg, Business Insider, Financial Times, Forbes, Inc., Medium, Strategy + Business, Tech Crunch, and the Washington Post. It was the most recommended book of the year in Bloomberg’s annual survey of CEOs and entrepreneurs.
Safi lives with his wife, two children, and roughly 37 Gerald + Piggie books in Cambridge, MA.