Second Order Discovery

Introduction

Second order thinking is hard.  It’s not a natural way of thinking.

First order thinking refers to the most simplistic method of analysis.  You can think of it as a form of thinking that most people engage in.  As most people have the same thoughts, which are automatic and go without any questioning, they come to the same conclusion.

Second order thinking is much rarer and only a small subset of people sit down to think about topics deeply and then come to conclusions which may be different from the majority.  Obviously, if you have unoriginal thoughts, then you will have the same actions as other people which is why second order thinking is so important.

An example of first order thinking would be how most of my patients think.  “I am depressed, therefore I need medication.”  Second order thinking is much deeper and takes into account a lot of different important aspects.  Second order thinkers may start to question their role in society, the role of society itself, value creation, what they value, being valuable, family, relationships with family and their neighbours and so on.  These people end up coming to conclusions which are different and most of the time (especially when it comes to more complex topics) more correct than first order thinkers.

I want to write today about second order discovery.  Something that I haven’t seen written about anywhere.  However, I think it is very relevant to business and entrepreneurship.  As this essay itself is a form of second order thinking (although much of it is derived from empiricism) it is quite axiomatic; reading the whole thing is the only way that you will be able to understand what I am trying to say.

Innovation & Entrepreneurship

There is a widespread misconception that “innovation” is the same as “entrepreneurship”.  It is not.  Many of the world’s most famous innovators died poor.  It’s not people’s fault that they presume “entrepreneurship” is the same as “innovation”.   These two terms are conflated by the popular press and in the public discourse.

However, if you look at the history of technological advancement, it is shocking to see how little entrepreneurship has contributed to it.  There is a very interesting page on the NASA website which shows the number of real life-changing innovations NASA have created as a result of space travel such as the development of artificial limbs and ventricular assist devices.

The reason entrepreneurship necessarily doesn’t lead to massive technological advancement is very simple: Entrepreneurs create businesses which have to be economically viable.  However, real impactful innovation most often occurs as a result of continuous government funding and experimentation by technologists in government institutions such as Universities.  The modern PC and the Internet for example arguably are the technologies that have had the most impact in the world in the last couple of decades.  These were both borne out of government institutions.  Once the technology is available, it’s up to entrepreneurs to then create products and services which the market will want to pay money for.

Note that also technological advancement and the discovery of its applications is always the result of random experimentation, serendipity and luck.  Most of the technologies we take for granted today, such as antibiotics were discovered by luck, not by design.  Indeed the technologies that NASA created are a perfect example of how random experimentation leads to useful byproducts.

A Word About Cognitive Dissonance & Political Leanings

When I speak to others through this line of thought, people usually fall in to two camps.

They either use it as more evidence that business and private companies are evil and simply extract money from consumers.  They argue that we don’t need private interests involved when the government can do everything.

Or they fall in to the camp of people who try to bring up private companies who have produced a lot of valuable technology and are therefore the only solution society needs.  They claim that Private Companies can solve all of the problems faced by society and that the government should step aside.

Yes, there are entrepreneurs out there who are truly innovative and are creating valuable technologies (Jeff Bezos springs to mind), but if you think about it, these types of entrepreneurs have billions of dollars at their disposal to start interesting side projects (e.g. Blue Origin, which is Jeff Bezos’ space programme), while also running a viable business (Amazon).  These entrepreneurs are in the minority.  Most entrepreneurs are in the game of running businesses and “Value Creation”.  And also, keep in mind that Jeff Bezos himself says that Amazon is such a success as all the “heavy lifting” had already been put in place such as the infrastructure for the Internet, roads, railways, delivery processes and worldwide travel, a lot of which is a result of government investment.

The point is that this observation is not a case for or against capitalism / socialism / private companies / government organisations.  It is just that; an observation.

Another observation is that it is the entrepreneurs who take the technology which has been created, make products and services for the market, distribute it and encourage widespread adoption.  This is what Apple did with the iPhone – the technology already existed for the first iPhone, but Apple put it all together in a marketable way.  As a result they created new value and therefore new wealth for society.

And yet another observation is that private companies and government organisations go hand in hand.  Without the private market, technology would just sit unused in government organisations and society as a whole would not benefit from technological advancement.

The argument that private companies can solve all the problems and create all the technologies needed to solve the worlds problems is the same as saying that governments can do it all by themselves.  They are the same in so far as that these are both “theories”.  What I have written about above is an observable fact which has been going on for centuries.

The Domain of the Entrepreneur

Peter Drucker once said that if the technology is not robust, well-tested and proven to work, then it is not ready for the market.  It is out of the domain of entrepreneurs who are concerned with making a marketable product.

Thinking of things in these terms is helpful.

Startups which are trying to create AI in the hopes of replacing physicians will likely fail as the technology behind AI is nowhere near marketable at present.  They have finite resources, unlike government organisations, so they will run out of cash before getting to those important discoveries.

So as an entrepreneur your thinking has to go along the lines of “what problem can I solve with technology that is accessible to me, which will also solve the problem in a better way than how it is solved now?”.

This is a very tricky question to answer as most businesses and entrepreneurs are on the lookout for them most of the time.  This is the reason that if you encounter an obvious problem that a lot of people will give you money for, it is likely a bad business idea.

Peter Thiel once said that the best startup ideas look like bad ideas, but actually they are really good ideas.  The reason is that if a business idea is obviously great, then a lot of entrepreneurs and businesses with a ton of capital backing them will have already created solutions or will be in the process of creating solutions that you, as a lone entrepreneur can’t compete against.

This leaves entrepreneurs with smaller, non-obvious problems to solve.  If it is non-obvious then the larger companies won’t be aware of the business opportunity.  If it is small, then large companies won’t even go after the business as the profits they would make would be too small to make business sense.  However, if you are a lone entrepreneur, then a small win (which could be up to a few million a year in profits), is likely more than enough encouragement needed to pursuit the idea.

First & Second Order Discovery

Paul Graham wrote an essay about having good startup ideas.  It can be summarised in a sentence: “Build cool stuff.”  He goes on to say that building cool stuff, will likely mean that you build new stuff.  If you do build cool and new stuff which solves a problem in your life then it is likely many others also have the same problems for which they will give you money for.

When I started my startup, this is exactly what I did.  I built something cool to solve a problem I experienced as a doctor.  I soon found out that no one would give me money for it.  The problem wasn’t serious enough for most organisations, although they did certainly think I was “cool” for building my own app which my patients now use.

However, what no one had told me when I started my startup is that this is actually the best way to discover something people will give you money for.  This is also the way to discover the elusive “bad idea which is actually a good idea”.

The fact is that coming up with an “idea which seems bad, but is actually good” is a form of second order discovery.  You start something which seems cool, but is likely a really bad business idea.  However, merely the act of starting the journey will get you to a place where no one else has ever been before – almost like an adventurer discovering a new land.  When you get to that place where you’ve built something cool, it is incredibly likely that you will discover problems and then come up with solutions which not only has no one thought about, but certainly that no entrepreneur/business has even addressed.  They simply don’t even know about it!

Let’s take the example of AirBnB.  The founders of the company needed to pay rent, so they put up their living room for rent online.  They figured that people would pay to stay in their living room when there was a convention on in their city and that they would provide their guests with an air-bed to sleep on and serve them breakfast in the morning (thus the name Air Bed & Breakfast).  They couldn’t believe it when it actually worked – so they decided to try to make it into a business.

Many years later, they discovered that they could actually disrupt the hotel market.  There was this whole new market of unused space that people had been looking over for years.  They didn’t have a clue at the beginning that they’d end up with a business worth $30 billion (and counting).

Is anyone in doubt that if Hilton Hotels knew about this untapped market that they wouldn’t have poured all their resources into this opportunity?  The fact is that as it seemed like a bad idea with a small market at first, they didn’t even attempt to address the problem.  But the fact that they wouldn’t address the initial problem meant that they never got to the position to discover this new market.

The myth is that there are geniuses out there who can predict the future and as a result they become wildly successful.  The fact however is that entrepreneurs discover things out of curiosity and luck.  These discoveries then lead to new discoveries and new markets which then puts them in a position to win.