The First Mile

I start the book by describing an experience that I had when I was living in the first mile of an idea that we were testing in India, an idea to disrupt the men's haircut industry. So it's really exhilarating when you begin to see your idea come to life, but unfortunately it can be a really treacherous time as well, because there's lots of things that go wrong when you move from paper to reality.

Rachel Salaman: Could you tell us a bit more about that men's grooming business in India and how you approached the first mile with that idea?

Scott D. Anthony: It was essentially a barber shop business. We also did shaving as well, but the observation that we had in India is, in India you have extremes in just about every market, so if you want to get really good high-quality treatment, you want to get a great haircut or whatever, you can go to a six-star salon in a great hotel and it really is world class, but most of the market can't afford that, so the best option is going to a single barber chair on the side of the road or a dingy barber shop.

So our idea was to come in between those two experiences with something that was modern and fresh but used a single-chair kiosk format, so it was extremely low overhead and low cost, so we could charge a pretty low price point to get your hair cut or to get a shave.

And the lesson I learned from this business, and you learn again and again when you're living through the first mile, is the reason why it's so perilous is that the first thing you learn is that every idea is partially right and partially wrong. An idea that looks so good on paper, once you get into the reality of the marketplace, you begin figuring out all these flaws behind the idea.

For our men's grooming business there was in fact in my mind clear market demand for it: there's an emerging middle class in India, they're looking for the sorts of solutions that we were envisioning. The problem we had was with our fundamental economic model: we had this single-chair delivery model which looked really good in the Excel spreadsheet because you just needed about 10 or 12 customers a day to break even, but the problem with that model is that it made the barber in that kiosk the hero of the model.

What that means is in order to even get 10 or 12 customers, the barber had to develop a following – they had to develop repeat business – but once they recognized they were the hero then immediately their wage demands spiked up, so the thing we had in our Excel spreadsheet with certain wage assumptions, certain revenue assumptions just didn't work in reality, so we ultimately had to shut the business down and focus on other priorities.

And that's why this is so hard, because the things that you work so hard on and so carefully crafted can begin to fall apart very quickly when you get into the harsh reality of the market.

Rachel Salaman: So your book looks at ways to avoid that?

Scott D. Anthony: Absolutely – and the fundamental idea behind the book or that's presented in the book is that every idea has a degree of uncertainty in it, so what you want to do is to be as structured and scientific as you can in picking off the key uncertainties behind your idea.

What I'm trying to do is present essentially a third way. We all know that paralysis by analysis is bad. People understand that, yet too many people still succumb to it. I think there's been a growing movement to go to the other extreme and say let's just start doing things; let's built what's known as a minimum viable product and just launch something, and learn by doing.

I think generally that's good, but acting without thinking can be just as dangerous as analysis by paralysis, because you can waste a lot of time and money moving in the wrong direction. So what I try to do is put people right in the middle of those two extremes, where you follow a very structured approach but you've got a clear bias to action, so that you can learn not just through thought but through actually going out and doing things, and I found that taking this structured approach to manage the uncertainty behind an idea is the best way to manage the treacherous terrain of that first mile.

Rachel Salaman: I think now might be a good point for us to talk about what we mean by innovation, because it comes up a lot in your book. What's your definition of that?

Scott D. Anthony: So I define it pretty simply. I use five words to define it: something different that creates value – each of those words is carefully chosen.

"Something" reminds us that innovation isn't just a new product, a new technology, but can be lots of different things. "Different" reminds us we're not doing the same old thing, we're going to find a different way to address a problem. And most importantly, "creation of value" reminds us that innovation is different from its precursors, invention or creativity; it's the application of those things that ultimately leads to the value creation or the impact in the marketplace.

And that simple definition I think begins to help us understand what it takes to really succeed with innovation. In my mind just about everything that succeeds that ultimately creates value answers three questions positively. First, is there a need? Does anyone want it? Is there really an itch that is not being scratched today? Second, can we deliver against it consistently and reliably in the face of competitors? And third, do the numbers work – can we actually make money from the thing that we're working on?

Rachel Salaman: And what's the scientific method that you mention in the book. How does that relate to this?

Scott D. Anthony: So the basic idea here is the scientific method – I certainly didn't come up with it – this is something that the scientists have been working on for centuries, but it's a way to deal with the uncertainty that occurs in nature. So you observe something, you're surprised by it, you come up with a hypothesis for why it's happening, you go and run an experiment, you figure out whether what you thought was going to happen happened, and you run it again and run it again and run it again, and ultimately come up with a theory for what's going on.

Now, this notion of the scientific method to deal with natural uncertainty is appearing in more and more places around the world, whether it's the world of sports, you have the moneyball movement in baseball – sabermetrics is another name for that – whether it's in cooking with some of the things people are doing to be more rigorous about testing – you've got this popping up in all sorts of places.

So, what I try to argue in the book is something that works extremely well in nature has been implied in other places as well, can be a great tool to manage the strategic uncertainty that occurs whenever you're innovating. And again, this isn't a particularly new idea: there's lots of great academics who have been working on this over the course of the past couple of decades, most notably Rita McGrath from the Columbia Business School and some great practitioners too like Steve Blank and Eric Ries. So I try to build on all this great stuff that comes before and provide my own toolkit based on the fieldwork that we've done at Innosight.

Rachel Salaman: And you introduce a great acronym in the book which is DEFT, and that helps people assess an idea's strengths and weaknesses. Let's talk about that now, starting with D for Document, the verb. Why is this important?

Scott D. Anthony: This is the step that I find most innovators will miss, and it is something that's incredibly important, because it often begins to get you to realize how little certainty you actually have about your idea. So the basic idea here is to document your idea; it's to write down on a piece of paper or a PowerPoint slide or whatever you want to do it on – write down what it is actually that you intend to do.

The guidance that I give people here is to be thorough. Now, that doesn't mean you've got to write a doctoral thesis about your idea, it doesn't have to be thousands of pages, you can come up with a good idea resume, essentially describing all the highlights of your idea on a single piece of paper. But make sure that you've looked at it from as many different angles as possible. Who is the customer you're targeting? What's the problem you're solving for that customer? What's the evidence that this problem matters to them? What actually are you going to do? What's it going to look like and feel like? Who are you going to have to partner with? How are you going to distribute it? How are you going to make it? How are you going to make revenues if that's what matters to you? Who is going to be on the team? And on and on and on.

Again, you don't have to write pages and pages about each of these things, but thinking through all those different angles early in the process can save you a lot of time later on, because it can begin to surface the things that you are assuming but are uncertain about, and that's where you've got to focus as you continue to move through the process.

Rachel Salaman: So what pitfalls should people watch out for at this stage?

Scott D. Anthony: I think the biggest thing that I've seen – and I'll draw on my venture capital experience here: we have beyond our consulting business which constitutes the core of Innosight's business, we have a small venture capital investment arm that I run out in our office in Singapore, where over the course of the past five years now we've reviewed about 400 different business plans.

Many of the business plans that are presented to us present an idea: there's a technology, there's a product, there's something tangible that they're describing. Some of those also describe why that idea matters: what is the market opportunity? What is the customer need that it targets? And an even smaller percentage also talk about how that's going to lead to the creation of economic value, and an even smaller number talk about here are the biggest unknowns in what we're going to do about them.

So, the single biggest pitfall is describing only a fragment of what it is you're really intending to do, and even though you're not going to know everything, I think the discipline of writing it down really teaches you a lot, so I really urge people to do it.

Rachel Salaman: Going back to your acronym DEFT, the E is evaluation. So, what's the goal of this part of the process at this point?

Scott D. Anthony: So, the name is a little bit of a misnomer, because when you hear "evaluation" you think I'm deciding whether it‘s good or bad, and that's not what the goal is here. The goal here is to pick up an idea and look at it from multiple different angles – look at it from a numerical angle, look at it from a strategic angle, look at it from the perspective of people who are going to touch the idea to see how they'll react to it, and begin to figure out what looks good, what looks bad and what looks uncertain.

So it isn't really to make a decision should we do it or should we not do it, it's really to get a more grounded sense about what you should be most worried about.

Again in our venture capital arm, we've got a 20-question list that appears in the book that we use when we look at an idea, and it's not really to decide are we going to invest or are we not, it's to give us a greater sense if we are to move forward with the entrepreneur, what are the areas that we really need to understand more deeply before we're confident putting our money in the business.

Rachel Salaman: And in this part of the book you get a bit technical and you talk a lot about spreadsheets and software in terms of evaluation. How technical do we need to be when we're evaluating the potential of an idea?

Scott D. Anthony: Well, I don't think you want to get too technical, because again remember, every idea is partially right and partially wrong, and if you want other quotes to remember there's the Edisonian "Genius is 1 per cent inspiration, 99 per cent perspiration," and my personal favorite from the great American philosopher, actor and occasional boxer Mike Tyson, who once said, "Everybody has a plan until they get punched in the face."

So one of the biggest mistakes you see people make is they come up with these really intricate business cases where they really have run circles around Microsoft Excel. They've done what if analyzes and pivot tables and all sorts of things to built this beautiful spreadsheet. One of the things you just have to remember is no matter how beautiful the spreadsheet is you can't cash it. As Scott Cook, the great founder and chairman of the U.S. software company Intuit put it, "For every one of our failures we had spreadsheets that looked awesome."

So, I think it's really important to do the basic exercise of how you think you're going to create value with your idea, so how are you going to earn revenues? What are the costs entailed in earning those revenues? What are the costs entailed in running the business? How is cashflow going to work etc? At least having hypotheses about those things is really important, and there are a lot of tools out there to describe for entrepreneurs who just aren't trained in these areas how to do very basic income statements, balance sheets and cashflow statements.

But I think you have to always remember a spreadsheet is nothing more than the mathematical relationship between largely made-up assumptions. By doing the analysis you're trying to figure out again what are the assumptions that I'm making that I want to go and test before I'm really confident that I should move forward with my idea.

Rachel Salaman: Moving on now to the F of DEFT which is focus, and here you talk about the need to distinguish between fact and uncertainty. So this relates somewhat to what you've just been saying: can you talk us through that?

Scott D. Anthony: Absolutely, and this is one of the things that seems kind-of obvious when you hear it, but our brains are really bad at distinguishing between these things, and we often assume that we know more than we actually do, which leads to all sorts of problems when you're out innovating because you run into what Donald Rumsfeld – no political commentary here – famously called the "unknown unknown": the things that you didn't know you didn't know.

So essentially, a fact is something that has happened: it is historical, it's not something where there's any room for discussion about it. So, as an example of this, Steve Jobs was the CEO of Apple. I think – unless the world is pulling one of the greatest con jobs of all time – we can be quite confident that the statement that I just gave you is true.

Uncertainty is something where we can't be sure, where there's something that leads us to have error bands around things or we have probabilities around things or we just don't know for sure, and one of the things that I think is a challenge in life is there are many things that feel like facts to us that aren't really. So, as an example of something that feels like a fact but might have some degree of uncertainty around it, imagine that someone asks you what the population of China is. You probably Google it, go look at a Wikipedia listing. You'd have a number that would look really specific, but is that actually a fact? The reality is there's uncertainty around it, because that number might not be realtime; it might have changed in the time that it's reported in Wikipedia and what it is today; it might be something that's reported by an agency that tried to track that number as best they could, but made some errors in its sampling or misreported the number for one reason or another.

This is the reality when you're innovating: there are many more things that are uncertain than are facts, so one of the things you have to recognize is that you have to know or be humble about how little you actually know when you're innovating and pick out those uncertainties that pose the greatest threat to your business and really use them as the focal point for the next part of the process. So this is the key part of the F in the DEFT process, focusing in on the uncertainties that matter the most.

Rachel Salaman: And then the T of DEFT is test. What do people need to test?

Scott D. Anthony: So in the T part of the process – which in my mind is by far the most important part of the process – you want to test rigorously and adapt quickly, and you want to make sure, based on what you've done before this, that those tests are focused on the uncertainties that pose the greatest risk to the business.

Those usually come in two different categories: one is what we call "deal killers" – these are things where if they aren't true, forget about it, there's no hope that you're going to move forward with your idea. As kind of a silly example, you mentioned that I'm here in our headquarters in Lexington, Massachusetts. A few days ago my oldest son Charlie said, "Hey, while we're here, I'd love to go see a Red Sox game." So, the first thing you want to do if you want to actually have that happen, is you want to make sure there are tickets available, because if there are no tickets available nothing else matters after that.

Now the good news is that's a pretty easy thing to test these days, you just go onto a couple of websites and you see lo and behold there are a bunch of seats available because the Red Sox are not doing all that well this year, but we can do that without too much difficulty.

The second thing you want to look for are what we call path dependencies. These are things that impact the direction in which your business goes. So, if we keep thinking about our desire to go see a Red Sox game, we need to think about what time the event is going to be; we need to think about what are the other things that are going on on that day and are there things that I can move around if I want to make sure that I've got time in my calendar to be able to actually go and see the game.

So, if you find those deal killers and you find those path dependencies, those are the areas that you really want to test around. The third thing you would think about at least for testing is are there things that you can knock off really quickly and cheaply, run in a really bad consultant-friendly phase – high return on investment experiments where, even if they don't address the biggest uncertainty behind your idea, they allow you very quickly to get that extra spring in your step for making progress. As just one example of this, when Reed Hastings, the founder of Netflix, was working on his idea, which, for those who don't know Netflix, today it's the largest provider of streaming video services. Its legacy business was allowing people to rent DVDs through the mail. One of Reed's big questions is could I actually send a DVD through the US postal service, because if I have to send it through Federal Express or DHL that is a very expensive proposition, so he ran a $3 experiment which is get a CD, put it in an envelope and mail it to himself.

Now you're not going to invest billions of dollars based on something like that, but it gives you that much more confidence that you're moving in the right direction, and that's what the name of the game is at this stage.

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Rachel Salaman: Also in the book, you highlight four challenges that people might face in the first mile, and the first one of those is that they might make a wrong turn. So how do you know when that's happened and is it irreversible when it does?

Scott D. Anthony: This is a really big challenge, and there's a challenge behind the challenge as well. The challenge behind the challenge is you never in my experience can be 100 per cent sure that you're lost – that you have no hope of success. Every once in a while you might be working on something where you're trying to treat a medical condition and it just doesn't work: the molecule doesn't do what it's supposed to do. OK, that happens sometimes, but most of the time when you're out there innovating the data is unclear, it's almost always unclear.

So one of the bigger pieces of advice that I give people is make sure whenever you're trying to step back and decide should I keep moving forward? Should I, in the parlance of the lean startup movement, pivot and move in a different direction, or should I stop? Make sure that you've got someone who is a little bit dissociated from your idea, someone who is a little bit outside the trenches that you're in, who can look at it with a degree of honesty and clarity, because it's very easy when you're in the soup to have all sorts of biases that lead to you just plowing forward when the preponderance of data suggests it's time to stop.

So I just keep coming back to these big three questions. Is there a need? Can you deliver against it? Do the numbers work? And you will find in many cases, you start out by moving in the wrong direction. Almost every business that succeeds follows a process where there are twists and turns and trials and tribulations, so having early failure is not a bad thing; in fact, that's almost necessary on the journey to success. As a simple example of this, I consider Innosight to be a successful business: we've got about 75 people around the globe, offices in the U.S., Europe and Asia, we have about $30m of revenue a year in our consulting business, we do incredible high impact work, but that wasn't where we started. Our first idea was to create a software business. We were founded by Clayton Christensen from the Harvard Business School. The idea essentially was to shrinkwrap his brain. An interesting idea – it didn't work.

The next business was not a consulting business, it was a business where we would run conferences: that business didn't work. The third business was not a consulting business, it was a business where we would write newsletters: that business didn't work.

Out of that emerged a workshop business, which led to a consulting business which did ultimately work. The thing that allowed us to persevere was that we were very confident all along that journey, we were working on a problem that mattered, bringing greater predictability to some of the dilemmas of innovation, we just hadn't quite figured out the business model yet.

So I think the key thing to remember here is the first mile will be tough. You are going to have challenges, you are going to make wrong turns, you are going to encounter road blocks, but keep persevering because every successful business has been through a journey like that as well.

Rachel Salaman: The second challenge that you highlight in the book is that you might run out of fuel or money. Tell us about the importance of planning in this type of project.

Scott D. Anthony: Absolutely. There is only reason a business fails, only one reason, and that's that it runs out of money, and it's the only thing that ultimately causes a business to have no choice but to shut down, and one of the things that I have seen 100 per cent of the time in our venture business is it always longer than people think, and it always costs more than they expect, because their idea is partially right and partially wrong, and they haven't really planned for all those twists and turns and course directions.

So I think the thing that is very important when you're an innovator standing at the precipice of the first mile is to understand that, to recognize that as much as you think your plan is solid, expect it's going to take longer, expect it's going to cost more. Guy Kawasaki, thought leader in Silicone Valley, has a rule of thumb: whenever he sees a plan by a startup he adds a year to development time and multiplies revenue by 0.1 to figure out what the actual projections are. So I think if you recognize that and you plan for plan B, plan C, plan D, then you also try to decrease the costs of the early things you do as much as possible, you're just buying yourself more time to go through those course corrections.

Rachel Salaman: You also warn against picking the wrong driver. So how can you be sure that you've got the right people leading the project?

Scott D. Anthony: You never can be – that again is one of the big challenges here – but what I would suggest you do is to think about essentially the two phases that an idea goes through as it goes through the first mile and beyond. The first phase is what Steve Blank, the legendary entrepreneur who now teaches at Stanford and University of California at Berkeley, what he calls the "search phase." What he reminds people is a startup is not a small version of a large business, it is a temporary organization that is searching for a scalable and repeatable business model.

After that there is the scale phase, where you've discovered that business model and you execute against it. When you're in the search phase you want people who can make adjustments, who can deal with the punches that Mike Tyson is going to throw, that recognize that their idea is partially right and partially wrong. Many times Silicone Valley investors won't hire the CEO for a business until they've gone through the search phase, because that CEO will bring the business model that they used the last time they ran a company, and if it turns out that's the wrong model they're in trouble, so in that search phase you want people who are just ready for everything that's going to come, and then once you discover the right business model, that's when you want to find the people who have got the most pertinent experience to go and successfully execute that model. It's a really tough challenge though.

Rachel Salaman: Then there's what you call "spin out," which is premature scaling when the company grows faster than its business model can sustain. How can you avoid that?

Scott D. Anthony: We encountered this challenge in a couple of our businesses – one that I'll describe briefly as another one that we tried to start in India called Village Laundry Services, and the idea was kind of similar to that men's grooming business, the barber shop business that I described before, but instead targeting on people who wanted to wash and dry clothing.

Again, if you're relatively wealthy, you've got all the things you would experience in the west, washers, dryers, etc. If you are not, the best option you have is to hire the local village dhobi who will pick up your clothes, bring them to a communal pool, wash them using harsh chemicals, beat them against rocks, and bring them back seven to ten days later.

So we said, there's got to be a middle way, so we had this idea of coming up with a kiosk that uses modern washers and dryers, 24-hour turnaround, modern chemicals, provide much better services, yes at a premium to the dhobi, but much cheaper than if you went to a higher end place. So, a really interesting idea on paper. And we got people really excited about it, we put some of our own money into it, we raised some external capital. All told about $1.5m invested into the business in the very early stages. In retrospect, raising that much money that quickly was one of the worst things we could do, because what we immediately began to do was roll these kiosks out all across Bangalore, Mysore, and Mumbai. We were so busy fighting fires – literally fighting fires: one of the rigs caught on fire once – that we could never actually figure out all the operational details of the business. So I include in the book this little table that I call the "first mile certainty table" that looks at those three questions – is there a need? Can you deliver against it? Do the numbers work? – and try to give simple guidance about how confident you should be in each of those areas.

On the far right, you've got other people or customers advocating for your idea. That shows that there's a real need, you've delivered it at scale, and you actually are making profit. In that circumstance, by all means step down on the gas and go as fast as you can, but until you get there, recognize that you still have a hypothesis, you don't have a business, and you want to still focus on careful testing until you figure out some of your key unknowns.

Rachel Salaman: What happened to your laundry business in India?

Scott D. Anthony: So it still exists, so the business is now about six years old, and we ultimately said there still is a need here but we got the model wrong, so we have now changed the business from something where we provide services through kiosks to having a central location where we can send out an army of people in cars or scooters to go to people's homes, pick up their clothing and bring it back. So along some dimensions it's kind-of similar to the dhobi model where everything gets done centrally, but it's just done in a much more modern way, and we've now really focused on Mumbai as the city where we're going to make the economics work, and we're driving to make the business as successful as possible, and I think it's still got a reasonable chance of succeeding. I think we would have gotten there a lot faster had we not opened up 30-plus kiosks within 18 months; I think we just tried to scale too quickly.

Rachel Salaman: So what are your tips for leaders in "The First Mile"?

Scott D. Anthony: I think leaders have to recognize that they have a fundamentally different challenge when they're leading in the first mile than what they're used to, and the unfortunate thing, particularly inside large companies, is they just aren't ready for it. How do you get to a position of leadership within a large company? You do your job exceedingly well, then your role is along some dimensions pretty easy, because the people who are reporting into you, well, they're doing the job that you did before, so you know when they're saying something that's not true; you know how to solve their problems because you were in their shoes before, so you can use all the tools that modern management has and everything works fine.

When you're in the first mile, no one knows what the right answer is, so the role of a leader in the first mile is to help the experiments bring the right answer to the surface, which is a very different sort of role. You're playing more the role of a coach, you're trying to wrestle with the same data that an innovator or an entrepreneur is wrestling with, and you're trying to really help be a problem solver as opposed to a problem spotter, and many leaders – again particularly those in large companies – they're just not used to this. It's a very different set of challenges.

I think the reality is given the rate of change in today's world, leaders are going to face more, not less, of these types of challenges, and I really suggest everyone think about how they can begin to get ready to deal with the ambiguity they're going to face.

The basic advice that I give people is to number one adopt what a Zen master would call a "beginner's mind": put yourself in a situation where you don't have the tools to answer a question, and force yourself to remember what it's like to be in that circumstance. So, if you're inside a company, that could be working on a new product launch, it could be going to a new geography, it could be taking a role in a function you've never been in before. If you're outside of work, it could be picking up a musical instrument or learning a new language or whatever it is – putting yourself in that situation that you were in when you were younger, and remembering how you have to discover and how you have to learn could be one way to begin to wire your brain to handle these things.

The other thing that I suggest is to diversify your network as much as possible. In this day and age we are taught to network with people who look like us, who went to the same schools as us, where we can leverage that common connection so that we can form a bond with them. If you don't know the problem you're going to face tomorrow, you want your network to be as diverse as possible, you want different geographies, different backgrounds, people who lived on the frontline of ambiguity, venture capitalists, artists and so on. Or even inside your company – one of my friend's daughter August affectionately calls aliens – the people who look a little different, who talk a little different, who make weird comments at meetings, who get shunned most of the time. You want to go give those aliens a big fat hug, because they can be some of your biggest friends when you're confronting the challenges of the first mile.

Rachel Salaman: Scott D. Anthony, thanks very much for joining me.

Scott D. Anthony: Thank you very much Rachel. I really enjoyed the conversation.

Rachel Salaman: The name of Scott's book again is "The First Mile: A Launch Manual for Getting Great Ideas into the Market." You can find out more about him and his work at www.innosight.com.

I'll be back in a few weeks with another Expert Interview. Until then, goodbye.