Startups and the Black Swan
08.05.13 - What do natural disasters and unusually successful high-tech businesses have in common? They are both statistical outliers, and they both have outsized impact. This is the concept of the “Black Swan.”
Nassim Nicholas Taleb created the concept of the Black Swan while doing research on risk, and then popularized it in a book that sold more than 3 million copies. In an essay entitled “the Fourth Quadrant,” Taleb introduces it like this: “There are two classes of probability domains—very distinct qualitatively and quantitatively. The first, thin-tailed: “Mediocristan,” the second, thick tailed, “Extremistan.”
Before I get into the details, take the literary distinction as follows: In Mediocristan, exceptions occur but don’t carry large consequences. Add the heaviest person on the planet to a sample of 1,000. The total weight would barely change. In Extremistan, exceptions can be everything (they will eventually, in time, represent everything). Add Bill Gates to your sample: the wealth will jump by a factor of >100,000. So, in Mediocristan, large deviations occur but they are not consequential—unlike Extremistan. Mediocristan corresponds to “random walk” style randomness that you tend to find in regular textbooks (and in popular books on randomness). Extremistan corresponds to a “random jump” one. The first kind I can call “Gaussian-Poisson”, the second “fractal” or Mandelbrotian (after the works of the great Benoit Mandelbrot linking it to the geometry of nature). But note here an epistemological question: there is a category of “I don’t know” that I also bundle in Extremistan for the sake of decision-making—simply because I don’t know much about the probabilistic structure or the role of large events.”
The Black Swans are these unknown events in Extremistan. They are very, very rare, and completely unpredictable. But they have enormous impact. Ironically, we tend to rationalize them after the fact. The fall of the Berlin Wall, the September 11 attacks, and the Fukushima nuclear accident are all examples of Black Swans.
The world of high-tech entrepreneurship is particularly well described by Taleb’s concept. There are hundreds of start-ups in Switzerland, and thousands are created around the world every year. But relatively few of them grow and survive. An even smaller number will be wildly successful. In Switzerland, Logitech, Swissquote and Actelion are examples of this. But using the term Black Swan implies much more than just business success.
Take Google and Apple, for example. These two companies are true Black Swans. The magnitude of the success and impact of these two start-ups was simply not foreseeable. Many experts have tried to rationalize and explain the success afterwards – and failed, in my opinion. Apple market capitalization is about twice as large as any other company. Steve Jobs, an unlikely entrepreneur, founded it in 1976 at the age of 21 and even more incredibly, he saved it from disaster with his return to the helm in 1997. Read the new book "I'm Feeling Lucky" about Google's first steps, and you will understand the extraordinary exceptionality of its two founders, Sergei Brin and Larry Page. Google is less than 15 years old, but it has more than 50,000 employees and an annual revenue of nearly $40 billion.
Taleb is a very provocative and controversial figure. He criticizes statistics, saying that it lulls us into believing that all risk can be avoided. He hates the “wisdom” of experts, going so far as to attack them personally at times. I remember one conference in which the session chair reproached me for my enthusiasm for high-tech start-ups; in his opinion, they represented just a small fraction of companies and didn’t merit so much excitement. But I wasn’t trying to hide my bias. I explained that their impact is far from marginal, and they’re equally fascinating because their success and impact are so hard to predict. Sometimes passion has to overwhelm reason…
Taleb drove the nail home with the November 2012 publication of his book Antifragile: things that gain from disorder. This is a multifaceted, frequently messy book that praises artisans, souks, and experimenters and often criticizes experts, who are over-rational. Here again, Taleb’s ideas fit perfectly with innovation. “The fragility of every start-up is necessary for the economy to be antifragile, and that’s what makes, among other things, entrepreneurship work: the fragility of the individual entrepreneurs and their necessarily high failure rate.”
The Black Swan might have a very simple explanation. Its origins often lie in the vulnerabilities (for the disasters) and genius (for the wonders) of human beings. Albert Einstein, Leonardo da Vinci, Lionel Messi and Steve Jobs are all creators with genius. It’s possible to quantify many phenomena through science and technology, but the measure of true human potential will always elude us.