Andrew Chung at Khosla Ventures argues that successful entrepreneurs and investors should invent the future, not extrapolate the past. He cites Lord Kelvin dismissing heavier-than-air flight, Steve Ballmer doubting the iPhone, and McKinsey's 1980 forecast that wildly underestimated mobile phones. Philip Tetlock's research shows expert forecasts perform no better than random guesses.
Chapters
We're gonna— so what attracted me to Khosla Ventures, and in general, why I like venture capital in the first place, is because it defies the usual notion of how innovation happens in a lot of large companies and in most startups, unfortunately. Most entrepreneurs think about the past, and they figure out how did a market develop, how did the market get from point A to B, and then I'm gonna try to get to point C by drawing a line. Maybe it's linear, maybe it's exponential, But it's in general about extrapolating the past. And at— Vinod's philosophy is very different. And I'd argue Tim's philosophy is very different. It's a lot about inventing the future. It's about coming up with something that no one has come up with before that transforms and revolutionizes a market. So we're gonna talk a little bit about the folly of extrapolating the past and what that means. And then we'll talk a bit about how we try to create a systematic approach to inventing the future. So let's talk about what some of the experts have said over the years. Now, if you were an entrepreneur in 1895 and you were thinking about building an airplane, you might have consulted Lord Kelvin, who was the president of the Royal Society and one of the most well-known scientists of the day. And he said heavier-than-air flying machines are impossible. In 1876, the Western Union said the telephone has too many shortcomings to be seriously considered a mode of communication. Ken Olsen in 1977 was the chairman and founder of DEC, Digital Equipment Corporation, the most, you know, foremost computing authority at the time. He said there's no reason for any individuals to have a computer in their home. And then more recently, Steve Ballmer, CEO of Microsoft, said there's no chance that the iPhone is going to get any significant market share. Now, if you're an entrepreneur like the Wright brothers or Alexander Graham Bell, Steve Jobs, and Steve Jobs again, These would have been the people that you would have consulted. You would have died for 5 minutes of time with these experts to tell them about your great startup idea or your great invention, and they would have put you down. They would have told you that there's no way this is going to work. And of course, some of the greatest inventions of our time would not have been invented. Let's talk about predictions. The Energy Information Administration is the foremost authority in the US on a lot of energy markets. And so this is what they had to say in 2005 about the development of the wind market. So they, over a 20-year period, this is the projected gigawatts of wind deployed. A year or two later, they had to adjust their forecast because there was an unexpected blip in the first 2 years of their original forecast. They had to do that again in 2008 and 2009. This time they finally shifted the slope a little bit. And by 2009, 2010, they were just horribly off. Completely irrelevant data that came in 2005. So if you're an entrepreneur, large company owner, or someone focused on R&D in the wind segment, you would have been horribly off in terms of making decisions about how a market would have developed. Because you would not have expected what to happen during this time? China. China became an aggressive developer of wind, put a lot of policies, tens of billions of dollars into the development of this industry. And no one sitting in Washington, DC could have ever expected that. And it took them a while. I mean, you can obviously see that they're going to be wrong again. But they could not have expected that shift in the market that was enabled by a large power that was willing to invest in the technology. Technology developments that were happening in China that weren't expected. The top 10 wind developers in 2005, only one of them was Chinese. In 2010, 4 of them were Chinese. So no one could have expected that. I used to work at Bain, so of course I'm gonna bust on McKinsey. In 1980, they had a 20-year-ahead forecast for the development of the mobile industry. Now of course you guys probably are too young to remember in 1980, the mobile phone was a little bit different. It was a suitcase, it was, you know, the battery life was terrible, there weren't a lot of people using them, and it was like the Gordon Gekko, actually even Gordon Gekko was like in the late '80s, right? So they were trying to make a forecast for this technology and how it was gonna develop. They were a factor of almost 100 off. So almost 2 orders of magnitude off from what they originally projected. So if I'm a large telco, if I'm a startup that's sitting in a place on your side of the shoe, and you're making a decision based on what the foremost authority— McKinsey maybe, right?— but experts saying about how a market's going to develop, you would have missed a major opportunity. And of course, 2000 is just the tip of the iceberg. Obviously, between 2000 and now, mobile phones are much more ubiquitous in developing countries and so forth, right? What they couldn't have counted on was the dramatic pace by which technology changed. So your suitcase turned into a more tablet-sized thing. Your battery life started to improve. The Gordon Gekko version of the phone turned into a more Star Trek kind of communicator-sized phone, StarTAC. More people started to use it. And then something interesting happened, which was People started to realize you can use it for purposes other than to talk on the phone. You can actually do things like text or surf the internet. And right now, only 15% of the amount of time that you spend on your phone is for talking. No one in 1980 could have ever projected that. And they could not have seen how technology would have dramatically affected the development of this industry. So why is it that forecasters keep forecasting? It's just such a— there's a professor named Philip Tetlock who actually spends a significant amount of his time studying how badly people forecast things. And this is the S&P index for 2013. All the top banks that get paid tens of millions, hundreds of millions of dollars to make these projections, it grew 28.2%, but the firm that projected the highest was off by a factor of 2, and then most of the firms were well short of the actual amount. So why do they keep forecasting? Because people pay for it, and people generally feel like they need to lean on an expert opinion in order to have conviction to do anything. And what Tetlock showed was across 10,000 different forecasted efforts, some of these experts and their rate of success was worse than if you just had a dart-throwing monkey throw things at a chart as yes or no or like picking a stock or whatnot. And of course, with a lot of the developments over time, Time and again, the analysts have missed the biggest changes in our time. In January of 1985, when you guys were either really young or before you were born, there wasn't a PC in every home. In 1995, internet was not ubiquitous. January 1st in 2000, despite the last chart that I showed you, mobile wasn't even pervasive yet. Not everyone had a cell phone. In 2004, no one knew what Facebook was on January 1st. So for all of you guys that are gonna do a status update during the course of my talk on your cell phone, that did not even exist at that time. And of course in 2007, there was no iPhone. And Steve Ballmer, when it came out, thought that it was gonna be a, not gonna take off. So as you can see, over time, so much has changed just in your lifetimes and just in the last few years that have completely rocked our world. It gives me a lot of optimism, I guess as I stand here in 2015, not '14, that as a venture capitalist, I have no idea what's going to happen in the next 5 years. That's what makes me excited to be a venture capitalist. And that's why the notion of extrapolating the past is just not a good philosophy if you want to start a company or work with a company and develop something that's truly groundbreaking. Because the experts don't know what they're talking about, and no one really knows what the future holds in a lot of these industries. Thank you.
