Sunday, May 29, 2005

Insights into who successfully identifies new market opportunities

The author of Blink, The Power of Thinking Without Thinking, explores how intuition works.

The Met in NY buys an ancient Greek sculpture. To authenticate it, they ask art experts in NY to opine, and even have scientists examine the patina. Comfortable that it is real, they pay a small fortune for the work.

At an exhibit of the sculpture in Athens, experts who deal in Greek antiquities on a daily basis look at the sculpture and instantly identify it as a fake. Further tests conclude that the Greek experts are right. The author's question is, how did the Greek experts have the intuition to instantly know, when other experts didn't?

Part of the author's answer is:
We take it, as a given, that the more information decision makers have, the better off they are. ... Quite the opposite: ... all that extra information isn't actually an advantage at all: that is, in fact, you need to know very little to find the underlying signature of a complex phenomenon.

Through years of experience that had developed intimate familiarity with Greek antiquities, the Greek experts had developed fine filters which allowed them to quickly find key features of a work and assess its authenticity. This process is known as "intuition." The Greek experts themselves might not even be entirely sure what clues trigger their intuition, because much of their thinking occurs deep in their subconscious.

Academic research by Geoffrey Smart demonstrates that venture firms that have the best track record of success in picking people have a rigorous methodology for assessing and improving the management teams of portfolio companies. They use multiple sources of data from past oriented interviews, reference interviews, and work samples. They carefully review a candidate's accomplishments, his failures, what negative feedback he thinks references might give, and his reasons for leaving prior companies. The objective is to accurately assess the candidates past behaviors that have led to their success or failures as the best indication of future behaviors that can be expected.

The challenge of creating new markets is that it is impossible to do conventional research on markets that do not currently exist. The best entrepreneurs, who have highly developed skill in identifying and developing new markets, progress through a series of incremental milestones to learn what the new market is and how to serve it.

Blink points out that it can be futile to ask experts how their intuition works, because they probably do not know themselves. Likewise Smart's research indicates that it is not very illuminating to ask potential entrepreneurial leaders what they will do to make a company successful, as they probably don't know either. Smart's research indicates that the best venture capital firms have a methodology for selecting leaders who have the best intuition, by depending on an entrepreneur's past track record in similar situations as the best indicator of an entrepreneur's future success.

Like the Greek experts in Blink, great entrepreneurs have spent a career honing the power of their intuition, which is to a large extent what venture capital firms are investing in.

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