Misdirected X-Rays
Do the constraints that markets put on innovation help or hurt? The reigning consensus has been that they help. The constraints help presumably because they force innovators to husband scarce resources properly. Trying to scratch every possible itch in every possible way would be just too expensive. But any set of constraints in a human setting has unintended consequences.
Joseph A. Schumpeter
Let’s look at market constraints related to how money is invested and how results are vetted. To allow enough exploration to go on, investments have to be spread among as many choices as possible. To be fairly sure that experiments aren’t stopped prematurely, the size of the investments need to be adequate. A tiered approach to investment has evolved to address these constraints: invest progressively larger amounts in a large enough sample of attempts. Going from one tier to the next is a gate-keeping event; each gate forces a kind of Schumpeterian destruction. This all sounds well and good, if the destruction is not, well, destructive.
The difficulties, like the devil, are in the details. In a social environment with real people, many human factors come into play at the investment gatekeeping events. These factors include, not surprisingly, those pointed out by Cialdini in his “Influence” book.
Every self-respecting entrepreneur, therefore, knows that influencing and selling to investors is even more important that selling to potential customers. Most entrepreneurs then train their itch-detecting X-Rays on investors. Sometimes this works out, especially when the investors’ view of the market is essentially accurate and they reflect those views faithfully. Often, the entrepreneur ends up with an offering that pleases the investors more than it does customers.
There are, of course, many other devilish details at work here.
