What #Entrepreneurs can learn from Abraham Wald
A lot of people have never heard of Abraham Wald. Neither did we until recently. During World War II, Wald was part of a group of statisticians called the Statistical Research Group (SRG). The SRG focused on mathematical data and from it, derived theories around munitions deployment and military-related challenges in support of the war effort. One of the challenges that the group was tasked to address was the issue of where to put armor on fighter planes. Aircraft armor had a considerable tradeoff between protection and aircraft performance; the more weight applied to the aircraft, the less maneuverable it was. The challenge was, where should the armor be applied?
In order to answer this question, the military began gathering data by examining planes after they returned from missions and inventorying where the bullet holes were. They found that bullet holes generally hit the wings and the tail the most. They concluded that the armor should obviously, based on the data, cover the areas that took the most hits in order to harden them against damage.
Wald concluded that they were looking at the data all wrong. The bullet holes that were inventoried were on planes that successfully returned to their base. The more important data was with the planes that did not return - the ones that were shot down. From the data that they had, Wald concluded that the most vulnerable place on the aircraft must be where the fewest bullet holes were. There were very few bullet holes found around the engine areas of these planes. The armor, therefore, should be applied to the engine areas since that's likely where the bullets hit on the planes that went down. It was. Survivorship went up.
So what does this have to do with entrepreneurship? Mainstream business activities include countless well-intended events that feature successful entrepreneurs. Many times, there is a sage on the stage speaking or a panel of successful entrepreneurs pontificating about their success. We hear their stories. Most of the time, in the brief minutes they have the mic, they talk about something that happened positively in their business. They attribute their success to some key success factors that the lesser experienced people in the audience can apply and be successful too. We've sat on these panels.
Take these same entrepreneurs and give them a few beers at a bar and away from the crowd. Here they'll start talking to each other about their screw-ups and the unbelievable near-death experiences their businesses have endured. Most importantly, what they learned from those experiences. This is stuff not taught in school. We've been in those bar conversations too.
There is ample data on why businesses fail. We should give more attention to the mistakes we entrepreneurs make, and why companies fail. This would be analogous to thinking about the planes that didn't return to base. Most research studies that focus on why businesses fail boil the reasons for failure down to two things. First, there's no market for our great idea. The market either isn't there (think Quibi), or it was there once but shifted away (Blockbuster Video stores). Second, the business runs out of cash. Something called working capital - or the lack thereof - just stops a company in its tracks. It runs out of cash and crashes even if things are going well.
The question is, therefore, how many events have you gone to that focus on mistakes and failures? Conferences and entrepreneur-focused events are all well-intended, however less experienced entrepreneurs oftentimes walk away with a false sense of what's important. We think that's a disservice to those exploring entrepreneurship. Getting your website right, having cool business cards, touchy-feely "engagement" tips for employees, buying motivational posters and foosball tables, setting up your LLC, your social media presence, and how important maybe getting a patent are all fun to work on and talk about. But they're not what's going to put you out of business if you make a mistake.
Validating that there's a market and having a plan to keep cash (working capital) coming in are like the two engines that keep our aircraft running. Think of the fuselage as everything else in the business model, powered by two engines - cash flow on one side and market acceptance on the other. Everything else in the business can take a hit and survive, but screw up one of these two things and we're going down. Let's put our armor there. Spend time understanding and getting these two things right, and we'll return to base too. We'll have some bullet holes in our fuselage, but we'll ultimately succeed.
One more point: having lots of investor capital can cover up a bad idea. It's like running on one engine (lots of capital) while trying to get the other one started (no market). Eventually, the one good engine runs out of fuel.
The VETtoCEO Entrepreneurship for Transitioning Warriors and new Funding Academy programs are designed with this reality in mind. Veterans and current military members can sign up for the Entrepreneurship program for free; the Funding Academy is open to everyone (a donation to VETtoCEO is required for that one).