Yesterday, I wrote about how difficult it is to make decisions based on either business analysis or product vision. It’s a tension most large technology companies struggle to balance.
Of all the leaders I’ve read about, Larry Page of Google seems to have the best approach to addressing that tension with his moonshots strategy.
A quick recap: “moonshots” in Google are projects that aim to achieve 10x improvements vs. say, 10%. 10% means you’re doing what everyone else is doing. You probably won’t fail, but you won’t break new ground either. To disrupt an industry, you need more than a 10% increment, you need a 1000% quantum leap. The only way to do that is to re-think everything, re-examine assumptions everyone else forgot to challenge.
Gmail is the classic example of a moonshot. Before Gmail, email providers like Hotmail and Yahoo offered only 2 or 4 MB of storage. If you wanted more, in the case of Yahoo you can pay to get 25 MB of storage. Gmail launched with what was at the time a stunning 1 GB of storage at a price of free. Even if 25 MB is the starting point, that’s 40x more storage. Google was able to pull this off due to know-how of servers from search, and because they could generate revenue through advertising. Today, on Android alone, Gmail has over 1 billion unique accounts.
10% strategies will often have the following cash flow profile:
This is the “hockey stick” you’ve probably heard about. A company invests X dollars into a project which results in negative cash flow in the first few years. In the example above, by year 3, the losses lessen and by year 5 the project is cash flow positive. If things go well, the company can then comfortably vest its return, earning back what it invested by year 7 (ignoring net present value).
This is an example of a successful 10% project. For companies that are judged quarter-to-quarter, the pressure of earning back your investment as soon as possible is intense.
What might the cash flow profile of 10x strategies look like?
In the 10x scenario, a company will likely need to invest far more. So much more, that the project may never break-even over the same investment horizon as a 10% project.
Looking at the above, you can see why most executives default to the 10% strategy: the risks are far lower. If you don’t succeed in the 10x strategy, the losses can be steep; this is the kind of thing people get fired over.
But wait, you might say, the losses are exponentially decreasing from year 6 onwards in the 10x example. What if we extend the horizon?
In the above chart, the 10x strategy is rapidly outgaining the 10% strategy; a matter of exponential vs. linear growth.
You must also consider the reliability of future profits in the 10% scenario. Competitors are likely to react and reduce your margins. Linear growth could easily turn into a linear decline. Whereas in the 10x scenario, you are so disruptive that competitors struggle to react.
10x strategies might get managers fired. But in tech, 10% strategies could get companies killed.
That is the essence of moonshots. If you can disrupt an industry like Google did, you can gain out-sized returns that no industry convention can reliably predict. You’ve essentially changed the rules of the game.
The moonshot philosophy bridges business analysis with product vision, the link that make the two logically consistent. To achieve disruption, you need vision (and excellent execution) beyond the status quo. The long-term pay-off is what makes perfect business sense.
Postscript: A couple caveats. Consistently going for moonshots doesn’t make sense in every industry; usually only in ones with rapid change and innovation. Also, some companies can’t afford to invest in moonshots. Google is fortunate to have one of history’s fattest cash cows (search) that can fund all these crazy projects. Like driverless cars.