How To Use Probability To Your Advantage

A few weeks ago I read this post from Eric Stromberg. It inspired me to write what you are now reading.

Eric admits the matrix isn’t exhaustive. But it gives you a general sense of which consumer markets (shopping, media, and finance in this case, I did the math) are the most crowded ones in general.

The matrix also shows there are very few people innovating in areas related to security, seniors, or healthcare. And no one, I repeat, no one innovating in the parenting consumer market!

This reminded me of CB Insights’ “MGI Industry Digitization Index” (shown below) where you can see which industries are most and least “digitized.”

The red dots clearly show which industries are screaming for innovation, so why are they the least talked about? I mean when’s the last time you heard anything about a startup in the hunting sector?

This got me thinking.

Generally speaking, this seems odd to me. Entrepreneurs constantly talk about “going off the beaten path”, yet when it comes to action most stay in the smooth asphalt. Maybe this is why 92% of startups fail? After all the main cause is no product/market fit (maybe they die from going after a saturated market?).

So what’s the solution?

I’m not sure there’s “a” solution but I know there are several. What follows is just mine.

As you can tell by my personal finance series, I’m quite a fan of numbers. I believe everything in life is guided by probability.

It’s simple; drive a car without a seatbelt and you’re unlikely to survive a crash. But put the seatbelt on and your chances for survival instantly go up 50%.

Have healthy friends and you’re likely to remain in healthy shape. But have an obese friend and your chances of becoming obese go up 57%[1].

With startups, have a product no one needs and you’re gone. But build something people want and you’re in business. Make it look great and your chances of winning go up. Add to that a great team, great execution, a growing market, and treat your customers like kings, your snowballing chances keep growing and growing and growing.

Remember. Your decisions affect your results.

Life is a game of probability.

I’m sure you’ve already guessed where I’m going with this.

Why isn’t that same, probabilistic thinking applied to business ideas???

It’s not like we don’t have the data.

I’ll give you an example. There are 1,226 Virtual Reality startups, but only 31 Vertical Farming ones. Where do you think you’d be likelier to succeed?

I’ll give a hint. Peter Thiel talks about competition being for losers. But somehow hordes of people race every year to compete in the latest trend.

The thing is, history has proven them wrong. Those who have a higher chance of success do so because they avoid competition.

• When all the computer companies were trying to make better hardware, Microsoft focused on selling software. That was a good decision.
• When the major computer companies were working on desktops, Apple took a different turn and released the iPod. That was a good decision.
• When the hot thing in Silicon Valley was photo-sharing apps, Uber looked at cars. That was a good decision.
• We can look at any market. Look at fashion. When everyone else was trying to make better-looking dresses, Spanx focused on hosiery. That was a good decision.
• Ok, let’s try another industry. Armies of people move to Los Angeles every year to become famous actors, but when Tony Horton decided to try something different he created the world’s most famous workout program, P90X. That was a good decision.

If you’re currently working in Artificial Intelligence, Blockchain, or VR, you’re in trouble.

But if you can somehow improve the dreadful DMV experience, take my money.

Even Y Combinator will request people for different solutions (innovate in News, Jobs or Democracy). You are likelier to get into YC if you go after markets no one else is working on!

Adam Robinson, advisor to some of the world’s largest hedge funds and family offices, humorously calls it the “ball bearings” philosophy.

“Ball bearings has not had it’s Edison. No one’s gone into ball bearings. No one’s ever thought about ball bearings. Go look at something no one’s ever looked at. I mean look at Uber, who thought about taxis? Go look at Airbnb go look at all the most successful companies, they’re all using the ball bearings philosophy.” — Adam Robinson

I love this philosophy, and now I hope this brings you value and a new perspective.

So, how could we build a better pencil?

P.S.: I don’t mean you won’t succeed if you’re working on the latest trends, clearly some do. I’m just saying your chances of succeeding go down with every competitor. Remember life is a game of probability.

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[1]One reader, David Aldous, pointed out “No-one doubts there is a correlation, but the notion of causality in ‘have an obese friend and your chances of becoming obese go up 57%’ is junk science, according to real statisticians.” I looked up the link David suggested and, although I wanted to read more, I couldn’t because it costs $30 for the full study (that’s half how much I spend on food for an entire week). I do, however, happen to own a copy of Darrell Huff’s book “How to Lie With Statistics” (which you can buy for $6). I will dust it off and do my best not to point to “junk science” in my articles.

There is currently an enormous spread of fake news. No one can fully escape it, even my little blog. But we are all doing our best to be transparent (hence this footnote).

However, I won’t remove what I wrote because although the exact number might be wrong, even David admits there is a definite correlation between having obese friends and being obese yourself so the point remains the same.

Besides, no one doubts that your environment affects who you become. The reason I wrote about obesity is because I experienced it myself; I lived in Los Angeles where all my friends were actors and models (so I weighed 210lbs). But when I moved to Silicon Valley and lived in a hacker house, our staple diet consisted of coffee and pizza (so my weight jumped to 265lbs). There is a definite connection between your friends and your weight. And of course none of it is 100%, but it’s not 0% either. So changing my 57% to anything else would still leave unanswered questions, and yet, no matter what, the point will always remain the same.

I hope this giant footnote helped. Thanks for keeping me sharp, David!

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Also shared on Medium.