It would be great if investors could develop a formula to be able to determine which startups will be successful. We’d become rich extremely quickly, and wouldn’t have to waste so much money on those which fail. One would expect that over so many years, after investing so many billions of dollars in startups, the super-smart people who run venture capital firms would have been able to come up with a formula for success, so that we could determine which startups we should be investing in.
However, the fact is that we still don’t know which startups will do well. A lot of it is still hit-and-miss, and most investors will accept that there is a major element of relying on gut-feeling when they decide which startups to back. This is not because investors are stupid – it’s just that startups are complex adaptive systems (CAS), which means they are unpredictable and unknowable.
Two of the most prominent properties of complex systems are self-organization and emergence. This means that no individual agent in the system (either the founder or the VC) is able to control the outcomes in the system, as these are a consequence of interactions within the system. Complex systems by nature are unpredictable and generate surprises, which is why investing in them can be such a roller-coaster ride.
The startup ecosystem has lots of players – employees, customers, other startups, investors, large companies, established competitors, government policies and regulation. The complexity relates to the unexpected emergent behaviour of the overall system which can not be predicted from the behaviour of an individual player, nor understood by decomposition of the system. In a complex system, cause and effect follow a non-linear relationship where small changes can potentially have a big impact. This is why complexity has been dubbed the “science of surprise” and startups have surprised lots of established players in a variety of markets – for example, the Apple iPhone disrupted the incumbent mobile phone players; and Google transformed the advertising industry.
Paradoxically, a startup has no command and control structure, so that even though it may seem that the founder is in charge, in reality it is the initial core group of early employees who are forced to create rules and make things up as they to run the business on the fly. Execution as learning becomes the DNA of successful startup cultures, because there are no readymade processes which they can follow. This is why startups follow a chaotic process of discontinuous growth, and the glue which holds them together is the vision and passion of the founder, which guides the activities of the employees during their early journey.
Complex adaptive systems are dynamic self-organsing systems which are able to adapt in and evolve with a changing environment. This is one of the strengths of a startup, which gives it the agility, resilience and flexibility it needs so that it can be far more innovative than a traditional large company.