Execution is just the multiplier of ideas

The Red Warehouse 2003

Derek Sivers wrote a very influential post a few years ago where he suggested ideas are just the multiplier of execution. His execution first model is pretty simple.

Value = Execution x Idea

In Derek’s model the value of execution ranges from $1 for no execution, $1000 for weak execution, $10,000 for so-so execution, $100,000 for good execution, $1,000,000 for great execution, all the way up to $10,000,000 for brilliant execution. His idea multiplier ranges from −1 for an awful idea, 1 for a weak idea, 5 for a so-so idea, 10 for a good idea, 15 for a great idea, and up to 20 for a brilliant idea.

While these values are rather arbitrary, the implication is all the value of a startup is in the execution and the idea only modestly influences the final value.

Execution First Model

While I think there is a lot of utility in looking at the value of a startup as the interaction of the quality of the idea and its execution, making the execution the driver of value has a number of issues.

Discounts the importance of brilliant ideas. Why worry as a founder if your idea is so-so or brilliant if it only makes a 4-fold difference to your ultimate value? In Derek’s model the difference between so-so and brilliant execution is a 1000-fold. Faced with this logic people concentrate on execution.

Encourages a false belief in how much control you have over execution. Founders are prone to thinking that they can control execution quality when they believe execution is everything. The reality is that you are often at the mercy of events. Markets change, competitors come and go, investor interest waxes and wanes, employees leave, etc. There is little you can do except ride out the storms all the while bailing frantically to keep the ship from sinking. Any control you have is limited, often illusory, and transient.

Brilliant ideas are rare, good teams are uncommon. There are far more good teams than brilliant ideas. The level of competency required to implement a brilliant idea is within the skill range of many motivated people. It is the so-so and weak ideas that provide a team with very little room for error or skill deficits – the better the idea the more mistakes you can afford to make during its execution and still succeed. If your idea is so-so (or worse) then you need to have brilliant execution and a lot of luck to have any chance of a large success.

Brilliant execution doesn’t scale. Regression towards the mean causes your team to move towards the industry average for all companies that pay the same wages you do as you grow. When you have half a dozen people you can put together an amazing team, but when you have 600 people they will inherently be pretty close to industry average. Even worse, a team that is brilliant early is often not suited to running the business later, something many founders and investors have found out the hard way. Team and execution quality is dependant on the situation and environment.

Brilliant ideas can scale. For example, the value of the brilliant idea that allowed high quality search (Page Rank) scaled with the growth of Google. It was very valuable when Google was just Larry and Sergey and it is even more valuable today. Google has some amazingly talented people able to execute brilliantly and the average Google employee is likely to be above the industry average, but this is a function of Google’s enormous profitability powered by their ideas. This profitability enables them to pay well above the industry norms in cash and perks. Most businesses don’t have this luxury.

Encourages a belief in the “indispensable man” myth. All founders are prone to falling for this myth and it can colour how they structure and run their businesses. If you believe you are indispensable to the continued success of your startup because execution is everything then this is a problem; if your business has hundreds of employees and it is still critically dependent on you then this is a disaster waiting to happen. Always remember that the graveyards are filled with indispensable men.

Encourages lazy investor thinking. It is relatively easy to judge execution, while it is much harder to judge the quality of an idea. Any investor can listen to a pitch and ask what have you done – what is really hard is to workout if the underlying idea is brilliant or not. The best ideas are often not obvious, nor easy to understand, and doing so requires effort. Why think if you can just instantly dismiss a founder on the basis of execution – after all you can always comfort yourself by saying that nobody knows what startup ideas will succeed or not.

Idea First Model

A better model is to think of the value of a startup as being driven by the quality of the idea multiplied by execution above or below a threshold or hurdle. In this ideas first model anything above good execution is positive and anything below is negative but awful ideas are always negative.

Value = Idea x Execution Hurdle

This model has the following expected outcomes (on average):

  • weak idea x weak/so-so execution = negative value
  • good idea x weak/so-so execution = negative value
  • brilliant idea x weak/so-so execution = negative value
  • awful idea x good/brilliant execution = massive negative value
  • weak idea x good/brilliant execution = low value
  • so-so idea x good/brilliant execution = moderate value
  • good idea x good/brilliant execution = high value
  • brilliant idea x good/brilliant execution = massive value

The most important thing to remember with this model is the expected outcomes are just averages and the actual value of any startup will vary by chance. Sometimes startups with a weak or so-so idea will achieve a high value (i.e. by brilliant execution and luck), but the value of the cohort of similar startups is overall negative – all the failed startups with so-so ideas and less than good execution cancel out the few (by chance) winners.

Since most ideas are so-so or worse, examining successful startups will lead you to the false conclusion that execution is everything since only those with brilliant execution succeed. The successful startups with a brilliant idea and just good execution are just too rare to notice amongst all the successful startups with a so-so ideas, brilliant execution and luck.

The really dangerous startups are those with a brilliant team and an awful idea. These teams can convince investors and employees to commit enormous resources into a doomed concept. The quality of the team and execution can hide this enviable disaster for a long time before the loss is crystallised.

Why do so many VCs and Angels believe ideas as not important?

This is an interesting question. While of course many Angels and VCs do believe ideas are very important, many also don’t. The reason, based on my personal experience of listening to pitches from founders, is all the ideas you hear are awful, to at best, weak. If you are (almost) never pitched a good idea then the only variability seen between investment opportunities is in the execution quality. Since this varies a great deal from team to team, investors are prone to perceiving all the value difference in startups to be due to execution quality.

This model also explains why the VC industry as a whole has poor to negative returns despite putting so much emphasise on track record and team quality. They are trying to pick winners from the pool of good teams using a metric (execution) with no additional predictive value. Execution is a hurdle, not a predictive factor of success. This is similar to the way that Google found that there is no predictive value in how well a new employee performs on the job with how they performed in the interview. The interview is predicative of clearing the hurdle (i.e. getting hired), but other factors not measured in their interview process are the cause of any job performance variability. Put simply, it does not follow that any factor that can help you sort good from bad will help you sort excellent from good.

The few investors that can recognise a good idea (and not just a good pitch) are able to make outstanding returns. Andy Bechtolsheim recognised that Larry and Sergey had a brilliant idea and he reaped the rewards. How many of the show-us-a-business-with-a-12-months-track-record-of-growing-at-20%-a-week investment crowd would have backed a couple of PhD students with little more than a brilliant idea?

The bottom line is that execution is a critical hurdle (it has to be at least good or else success won’t occur), but that the non-chance variation in the value of startups is due to the quality of the idea. A startup with a brilliant idea and good team is worth far more on average than a startup with a so-so idea and a brilliant team. Brilliant ideas are rare, but if you do come across a startup with one then back it even if the team are not proven superstars. You are still going to have more losers than winners, but the winners with brilliant ideas will more than pay for all the losers. The downside is you are going to have to put in more than five seconds of thinking before deciding to invest or not.

Leave a Reply

Your email address will not be published. Required fields are marked *