Foundations: The Founder’s Dilemma
Explore to learn, or exploit what you’ve learned. You need to do both, but getting the balance wrong can be catastrophic
Hey! It’s Andreas from Monetisation Matters, the home of in-depth articles and actionable insights on Strategy and Monetisation. Built for Founders, Product, and Product Marketing leaders as they navigate their $1m to $100m growth journeys.
This month’s article looks at a foundational concept called explore-exploit. A dilemma all organisations, individuals, and living things face, critical to survival and growth.
Why this is important
Start-ups are learning machines, accumulating information about their environments over time. Putting that information to work is what drives growth, but they face a trade-off between how much effort they allocate to learning vs. making use of those learnings. This is known as the explore-exploit dilemma, relevant to every organisation, individual and living thing. It needs constant management and adjustment over time. Getting it wrong wastes time and resources, and at worst poses an existential threat.
Give me the highlights
Balancing exploration and exploitation ebbs and flows over time, depending on how much you’ve learned, and how quickly the environment is changing.
Exploration is disorderly, it isn’t efficient, but action creates useful information that we can later exploit.
Explore-exploit drives the dynamics of growth; misdiagnosing a lack of growth and then exploring too much or too little can be catastrophic.
A balance that shifts over time
Balancing exploration and exploitation over time follows a predictable pattern1. In the embryonic stages of a new business, product or market opportunity, you know very little. The focus is therefore entirely on exploration. Establishing a basic level of understanding which can then be exploited.
Early exploitation is inefficient but necessary to fuel further learning. Consider a new product launch, and winning initial customers. More effort than you’d like is spent on making things work; that customers are happy. Once unanticipated issues are resolved and crises averted, more effort shifts back towards customer discovery as you become more efficient at exploiting what you learn.
There’s always more to discover; the learning never stops. This is the continuous customer discovery needed even for mature products. The environment also changes over time, which destroys information. So some effort is always reserved to maintain information.
All effort should only ever be allocated to exploitation if a product or business is coming to the end of its life. There is no point wasting effort learning more if you are about to go bankrupt.
The phases of exploration and exploitation aren’t strictly linear; you may need to go back to an earlier phase if you see significant environmental change such as the emergence of disruptive technologies or market liberalisation. It’s also not the case that a business is operating along only one of these curves. It naturally varies by function, product and market. The dilemma is not only relevant to management, but to all individuals and their roles. Not least for a founder who must continue to adapt as the internal environment he is a steward of rapidly changes.
Action produces information
“Action produces information. Just keep doing stuff.”
Brian Armstrong
What a wonderful quote. It gets to the heart of the disorderly nature of exploration. You don’t know what you don’t know. So the only way to uncover the insight you need to fuel growth is to continually bump up against the reality of the world.
“Unless you have a tolerance for failure, you will never experiment, If you don’t experiment you won’t innovate, and if you don’t innovate you won’t succeed”
Jensen Huang
Exploration requires a high tolerance for ‘failure’. But failure should be cheap. Testing a new product opportunity leveraging Customer Success is a cheap way to test and fail. Investing development time without contact with reality first, and then failing, is expensive.
The larger implication for founders is that burn should be as low as possible during times of intense exploration, this could be early in the life of the business, or when considering a major pivot of go-to-market strategy or proposition.
One of the challenges for founders and operators is knowing when the time is right to shift from disorderly exploration to focused and intentional exploitation. For example, when should they shift from exploring multiple segments to committing to one. This isn’t easy to answer, I think there is an art to it, based on feelings of conviction not just hard data.
Part of Stephen Millard’s pre-mortems with all new Notion Capital investments is to identify the things the business needs to learn and prove. Reflecting on those two questions regularly is a useful primer to guide explore-exploit decisions. Being able to answer fundamental questions such as those listed below should help to rule out committing to bigger bets when you are not ready.
Do we know who our best customers are?
Do we know why our customers choose us?
Can we identify which prospects will be good customers?
Can we predict our ability to win a prospect?
If I increase quota carrying headcount, can I predict the impact on growth?
Do I know how to onboard customers systematically?
Do we know what success for our customers looks like?
Etc.
Up and over the sigmoid curve
We spend a lot of time thinking about s-curves and inflection points at Notion Capital. Growth isn’t linear: it accelerates and decelerates over time. It’s frustrating and surprising in equal measures. A major driver of those dynamics is the nature of explore-exploit. The low growth that precedes explosive growth are periods of concentrated exploration. The inflection points are driven by shifts from exploration to exploitation. Deceleration can signal the need to return to exploration to fuel the next phase of growth.
Danger lies in misdiagnosing why growth is stagnant or decelerating. It could be the result of insufficient exploration or exploitation. Exploit too early and you will burn through runway you can’t afford to waste. Explore for too long and you won’t show the traction you need to. Get it just right, and you’re off to the races.
Intelligent organisations build growth off multiple s-curves, mapping to parallel explore-exploit processes. They manage a portfolio of bets, matching resources to conviction. Through a go-to-market strategy lens this could be pursuing multiple customer segments simultaneously, but taking a different explore-exploit posture in each. Exploiting segments they have high conviction in, whilst exploring lower conviction but high opportunity areas. The strategy drives concrete resource allocation decisions, targets, and differentiated actions. Product, Marketing and Sales all play an important role here, exploring and driving learnings into the business, but it’s the founder’s responsibility to ensure those learnings result in a coherent strategy, striking the right balance between exploration and exploitation.
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https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3995763/#pone.0095693-Uotila1