Loonshots: How to Nurture Crazy Ideas

Published on November 21, 2019

It is Friday afternoon, around 4:30 pm, and Dan just got back to his desk from a meeting. He sees Janet, his manager’s boss, drinking coffee nearby. Dan’s son goes to the same school as Janet’s daughter and he has chatted with her before. Does Dan take this opportunity to talk to Janet or will he write some code for his project which is already late and might not be complete by its due date next week? The end of the quarter is coming up soon and about ten percent of his compensation is based on a bonus…

Disruption. This single word is among the most overused in the lexicon of business, especially in fields that are related to technology. It seems like every company under the sun hoping for venture capital funding has a hundred page PowerPoint deck ready to demonstrate how their product or service will “disrupt” the old, lazy incumbents in an industry and deliver riches to early stage investors. But actual disruption is rare. Organizations that have all the right ingredients to bring disruption to entrenched industries are very special and uncommon.

Every investor wants to understand disruption, whether from the perspective of the venture capitalist interested in spotting the next unicorn or the conservative investor worried that one of his companies might be on the receiving end of a tectonic industry shift. Safi Bahcall’s new book, Loonshots, is not a study of industry disruption per se, but it is useful for those who have an interest in the development of “crazy new ideas” that often end up being disruptive. He defines a loonshot as “a neglected project, widely dismissed, its champion written off as unhinged.” A moonshot, in contrast, is “an ambitious and expensive goal, widely expected to have great significance”. Loonshots often begin as embryonic ideas or technologies with no resemblance to the product or service that they later evolved into, and the inventors of the loonshot might have never imagined what the ultimate target market would be. Loonshots is a study of the nature of organizations that successfully nurture early “crazy ideas” that later turn out to have far reaching and often surprising implications.

The topic of loonshots can be approached in multiple ways. It is likely that most readers of this book are entrepreneurs or managers who are hoping to build or sustain highly innovative organizations. For these readers, the book offers a number of strategies that should be helpful for building organizational structures conducive to loonshots. Many readers of this article might be looking at the topic from the perspective of outside investors who want to identify companies that have characteristics necessary to nurture loonshots. In either case, a good understanding of the basic premise of the book is a necessary prerequisite.

Phase Transitions

The world is full of complex systems that exhibit sudden changes of behavior in response to slight changes to the variables that affect it. In physics and the hard sciences, a phase transition can refer to the transition point between a solid, liquid, or gaseous state of matter. A very simple example that everyone is familiar with involves water. Below 32 degrees Fahrenheit, a water molecule is in a solid state known as ice. Between 32 and 212 degrees, water takes on its familiar liquid state, and above 212 degrees, it turns into a gas and evaporates. The behavior of water close to 32 and 212 degrees represents a phase transition. Bahcall is a physicist who was trained to look at these type of phase transitions in the hard sciences and the key insight of his work is that he has adapted this mental model to the topic of organizational behavior:

There’s no way to analyze the behavior of any individual and explain the group. Being good at nurturing loonshots is a phase of human organization, in the same way that being liquid is a phase of matter. Being good at developing franchises (like movie sequels) is a different phase of organization, in the same way that being solid is a different phase of matter.

When we understand those phases of organization, we will begin to understand not only why teams suddenly turn, but also how to control that transition, just as temperature controls the freezing of water.

Loonshots, p. 12

At first glance, the idea of adapting rules governing the state of matter to complex human organizations seems suspect. “Physics envy” is a common affliction in social sciences, such as economics, where academics attempt to bring more structure and order to the human condition than is warranted in reality. However, Bahcall makes a strong case for his theory based on a number of case studies demonstrating the success of organizations that carefully managed phase transitions, as well as examples of those that did not. He shows that small changes in the structure of an organization, as opposed to its culture, can transform a rigid company into one that simultaneously fosters loonshots while also protecting its existing franchises.

Polaroid’s Rise

Edwin Land fits the modern prototype of a technology visionary, from his eccentric personality to his technical genius. It is easy to picture Land transported to the current age operating comfortably within the modern-day technology ecosystem. It is not an exaggeration to characterize Land as the Steve Jobs of his era, as Bahcall points out in his account of Land’s introduction of the groundbreaking Polaroid SX-70 in 1972. The Polaroid SX-70 was the first instant camera that was easy to use and had broad-based appeal to consumers. Those of us who grew up in the 1970s and 1980s can easily recall the ubiquity of these cameras and the instant gratification produced by having a print in hand in as little as a few minutes.

Bahcall’s fascinating account of the rise and fall of Polaroid begins during Land’s childhood half a century before the Polaroid SX-70 changed photography. Land was the prototypical child prodigy who experimented with complex scientific projects at an early age. At age 13, he became obsessed with creating a polarizer in order to “unlock the mysteries of light”, a goal that no one had yet achieved. By age 19, he had accomplished his goal. His love of the scientific process drove those early accomplishments, and only later did he turn his focus toward practical applications, such as coating car headlights and windshields with polarizing filters to reduce glare.

Land’s first big hit had a major impact on America’s ability to wage war. Polarized sunglasses improved the ability of soldiers and sailors to deal with the glare of sunlight and adjustable shade goggles helped pilots to quickly adjust during the transition from low light to bright conditions. Although Land’s invention did not provide as great a contribution as the invention of radar, which is another case study presented by Bahcall, it clearly helped allied forces during World War II and provided Land and Polaroid with financial success.

After the war, Land turned his attention toward the application of his technology to photography. After his three year old daughter asked “why can’t I see them now” after Land took some photos on a vacation, he had a “lightbulb moment” that led him down the path that eventually resulted in the Polaroid SX-70 instant camera thirty years later. And financial success followed as sales grew from less than $1.5 million in 1948 to $1.4 billion in 1978.

Types of Innovation

This is a good point to take a step back and consider Bahcall’s distinction between two distinct types of innovation. The innovations created by Edwin Land were product breakthroughs which Bahcall refers to as “P-Type Loonshots”. P-type loonshots are technologies that, at one point, were widely dismissed or viewed as not having practical value before finding an application and achieving success. Even Land himself had no idea that his childhood fascination with polarizers would lead him, half a century later, to introduce a groundbreaking technology that would change consumer photography forever.

In contrast, there are loonshots that involve a breakthrough in strategy. New ways of doing business or new applications of an existing product, without the use of breakthrough new technology, are called “S-Type Loonshots”. Bahcall points to the example of Sam Walton as an S-type innovator. Walton did not invent any new technologies, but he found a way to deliver products to consumers at much lower cost. The same is true of Herb Kelleher’s S-type innovation that led to the success of Southwest Airlines. And, surprisingly, Bahcall characterizes both Facebook and Google1 as S-type innovators as well since they did not invent the concept of social networks and search, respectively.

Both P-type and S-type loonshots are often characterized as crazy ideas that have no chance of working. Until they do. And the disruption caused by S-type innovation can cause havoc for firms that are led by P-type innovators who fail to manage their organizations in a way that both fosters continuing innovation while protecting existing franchises. Such was the case for Edwin Land and Polaroid.

Polaroid’s Fall

For three decades, Land’s leadership produced one product innovation after another:

Polaroid followed the first sepia prints in 1947 with black and white (1950); automatic exposure (1960); instant color (1963); non-peel-apart firm (1971); the SX-70 all-in-one, foldable camera (1972); sonar auto-focus (1978); and countless other advances in between.

Loonshots, p 109

Edwin Land was at the top of his game as a visionary genius and, in addition to his role as the driving technological force at Polaroid, he was also the man responsible for running the entire enterprise. Land loved technology and loved making risky product bets. He acted primarily based on his love of loonshots rather than focusing on the strengths of overall corporate strategy. Polaroid was falling into what Bahcall refers to as the “Moses Trap”, which he defines as follows:

When ideas advance only at the pleasure of a holy leader — rather than the balanced exchange of ideas and feedback between soldiers in the field and creatives at the bench selecting loonshots on merit — that is exactly when teams and companies get trapped. The leader raises his staff and parts the seas to make way for the chosen loonshot. The dangerous virtuous cycle spins faster and faster: loonshot feeds franchise feeds bigger, faster, more. The all-powerful leader begins acting for the love of loonshots rather than strength of strategy. And then the wheel turns one too many times.

Loonshots, p. 93

Land turned the wheel one too many times.

How many of you fondly recall family vacations saved for posterity using the Polavision home movie system? Probably very few people remember the system because it was a commercial failure. However, the product received glowing reviews2 at the time. Edwin Land had done it again. Except he had pushed the envelope too far this time. No matter how marvelous this P-type innovation was, it could not overcome the cost. The Polavision player retailed for $465, the camera cost $210, and each Phototape, which provided just two and half minutes of recording cost $9.95. Translated into 2019 dollars3, the basic system cost nearly $2,600 and each tape cost $38. Especially compared to median incomes at the time, this marvelous recording device was out of reach for the vast majority of consumers, no matter how great it was. However, in anticipation of commercial success, Land insisted on building a new plant to produce over 200,000 Polavision machines, and a film assembly line produced ample supplies of consumable Phototape cassettes.

The end of this movie followed in predictable fashion when Polaroid’s management was forced to write down the value of unsold Polavision inventory just one year after Land’s splashy introduction. Land’s comment that the accounting write-down “was accounting jargon, a cruel misuse of language” mirrors what modern-day visionary leaders often say on Twitter when faced with bean counters who stand in the way of their grand visions. Land had allowed his zeal for elegant P-type innovation to cost his company over $200 million. Even worse, as would be borne out in the coming years, he had entirely missed the move to digital photography even though he was aware of the technology. His passion was in film, and so were Polaroid’s profits. He was forced to resign soon after Polavision’s commercial failure.

Having Your Cake and Eating It Too

The world needs men like Edwin Land, and in more important ways than having the latest and greatest consumer technologies. Bahcall presents other fascinating case studies in the book regarding loonshots that had vital roles in the allied victory in World War II as well as medical marvels that have saved millions of lives. We need P-type innovators, and we need them badly, for society to progress in the decades and centuries to come.

Society might benefit from the Moses-type leader who creates groundbreaking P-type innovations regardless of financial consequences, but those of us who either run companies or invest in them also care about harnessing these type of innovators while also ensuring the long term survival of companies. How can we create “loonshot nurseries” while simultaneously keeping a company’s core franchise alive and well?

Bahcall provides practical advice to leaders that he refers to as the “Bush-Vail Rules”, inspired by the management philosophy of Vannevar Bush and Theodore Vail, both of whom are discussed early in the book. The Bush-Vail system involves four key rules, the first three of which are outlined very briefly below:

  1. Separate the phases. This goes back to the concept of phase transitions. It is extremely difficult for one organization to both come up with loonshot innovations and to operate an existing business. Bahcall advocates creating separate groups for “artists” and “soldiers” rather than hoping that they can coexist within the same organization. This involves more than opening up a loonshot office in a San Francisco loft. One must tailor the organization structure to the purpose. Generally, loonshot groups should be managed with a flatter organizational structure and looser controls while franchise groups benefit from a more centralized structure with stricter controls. Bahcall also believes that organizations should not focus exclusively on P-type innovations because doing so can create blindness to S-type innovations that can upend a franchise built exclusively on P-type innovations.
  2. Create dynamic equilibrium. A creative genius like Edwin Land naturally favors the “artists” while thinking less of the “soldiers”, as his attitude toward accounting write downs demonstrated. While it is not impossible for a creative genius to eventually love his “artists” and “soldiers” equally, doing so requires concerted effort. Bahcall notes that Steve Jobs, early in his career, was very much an Edwin Land style leader but through hard experiences, had a second act at Apple where he treated artists like Jony Ive and soldiers like Tim Cook as equally important. Bahcall recommends that the leader of an organization should manage the transfer of technology between the loonshot and franchise groups without excessive intervention which he likens to acting as a gardener rather than as a Moses.
  3. Spread a system mindset. Bahcall advocates maintaining a system mindset in which one is constantly asking why certain outcomes occurred, analyzing both success and failure, rather than taking a simplistic view. It is more important to analyze the quality of decisions than just individual outcomes. It is very possible for a good process to result in occasional bad outcomes, just as it is possible for flawed systems to occasionally create good outcomes. This notion is very similar to the second-level thinking that investors such as Howard Marks advocate.

Getting Past 150

The fourth Bush-Vail rule is one that I consider the most important and deserving of more in-depth discussion. It has to do with a number that I have seen mentioned in many places as having special significance.

That number is 150.

Yuval Noah Harari’s book, Sapiens, which I reviewed last year, observed that for much of human history, the maximum size of a society was approximately 150 individuals. This seems to be the maximum size of a group that can operate effectively in a cohesive society when the group relies primarily on personal relationships. Harari pointed out that only when society developed larger concepts such as nationality and religion could groups of individuals larger than 150 take on elements of cohesion required for large societies to survive.

Just as nationality and religion binds together very large groups of people, far in excess of a couple of hundred, it is possible for companies to bind together larger groups as well. However, anyone who has been involved in companies of radically different sizes knows that small companies have dramatically different structures and cultures compared to large companies.

In a small company, the management span tends to be very wide – meaning that there are few layers of management between the CEO and individual contributors. The nature of small companies also creates an environment in which the incentives of individuals is to focus intently on the success of the overall organization and its mission. What difference does it make if one maneuvers politically in an organization in which there are few layers of management and survival depends on the success of the project?

In a larger company, management span tends to be narrower – meaning that there are many layers of management between the CEO and individual contributors and the number of direct reports for each manager is lower. The line of sight between the success of an individual’s project and the success of the company is much more diffused. There is a higher return for those who can maneuver politically because there are more layers of management and, typically, the pay gap between layers is larger than in a small start-up.

As an organization increases in size past the 150 mark, Bahcall believes that a phase transition typically results in which an organization shifts from one that is conducive to producing loonshots to one where the return on politics begins to exceed the return on actual achievement. However, he believes that there are a number of ways to raise this “magic number”. Still, beyond a certain size, a group will inevitably shift from a “loonshot mindset” to a “franchise mindset”, and this is why it is important to nurture your loonshot nursery as well as your franchise groups and to deftly manage the transition between the two.

“Here’s to the Crazy Ones”

Loonshots provides fascinating case studies that show beyond any doubt the returns to society that come from the types of people Steve Jobs would often call “the crazy ones“.

Jobs himself is a case study in how a “crazy one” can evolve from a Moses-like figure similar to Edwin Land into the executive who found a way to successfully manage loonshots while also sustaining his company’s core franchise. Today, Apple is run not by an “artist” but by a “soldier”. Tim Cook is an operational genius, not a product visionary, yet he has so far seemed adept when it comes to sustaining the “loonshot nursery” at Apple. With the recent departure of Jony Ive, Cook’s job has become more difficult. It will be fascinating to see how Apple evolves over the next decade.

Dan weighs his options. His bonus is based on something the company’s CEO mysteriously calls “community adjusted EBITDA” for the current quarter and he is one of three hundred engineers in a company of ten thousand employees. He has no clue what “community adjusted EBITDA” even means or how his project’s success will influence it. There is only one level of management between him and Janet – his direct supervisor – and rising up just one level in the hierarchy would mean a raise of around 30 percent. Dan saw his manager browsing LinkedIn before the meeting and has a feeling that his boss is looking for a new job. Dan decides to walk over to the coffee machine and strike up a conversation with Janet about the new principal at their kids school. After taking with Janet for 15 minutes, Dan leaves the office to catch an early train home, feeling good about his relationship with Janet and his prospects for promotion.

Loonshots: How to Nurture Crazy Ideas
  1. I am not sure that I agree with Bahcall in the case of Google. While search existed before Google, one can argue that the utility of search before PageRank was limited and that Larry Page’s invention was a P-type innovation. []
  2. Polavision was hailed as a technological marvel, with the reviewer clearly in awe: “Once put into the player (like stuffing a slice of bread into a toaster), the Phototape is whisked to its starting position and, within 90 seconds, the fully developed color image appears on the screen via light shining through a prism in the cassette. The player produces an amazingly bright image, easily viewed by several people in either daylight or a darkened room.” []
  3. Source for conversion of 1978 dollars to 2019 dollars: BLS CPI Calculator []
Tagged on: