“All I wanted was the opportunity to fail” – Jack Goeken, Founder of MCI

You can’t have successes without risking failure

When medical students are taught about appendicitis, we are taught that 20% of the appendectomies should find that the appendix does not need to removed. In other words, we should have such a low threshold for surgery that in 20% of the cases, we should be wrong. If only 10% of the surgeries are wrong, we are killing patients because we are underdiagnosing appendicitis. This is called having a high index of suspicion.

In other words, a certain rate of failure is expected, and is a sign that you are taking the appropriate level of risk.

In a risk-based endeavor, you can’t have successes without failures. Drug development is one of them.

There is an apocryphal story about a very senior person in R&D at a major pharmaceutical company who would always vote against every project because he knew that 95% of projects fail and that he would be right 95% of the time if he voted against everything.

You will often find this kind of behavior not just in people who are overly political like the R&D executive but also in the people who are inexperienced and are not yet competent. The mark of an expert is the ability to gauge and manage risk.

For example, when I was a resident, I would see brand new interns right out of medical school ordering every lab test available, because they had no idea what the diagnosis might be. The doctor who have been practicing for a long time will often order two or three tests because she knows what the diagnosis probably is, and just needs to confirm it.

Similar things apply to other fields. I was talking to a friend of mine today. He is the managing director of one of the mot prominent law firms in UK. One of their advantages is that they say yes.

What do I mean by that? I mean that they are so good at what they do that they can do a risk assessment of a proposed course of action and determine when there is low enough risk to proceed. They work for a lot of internet giants and their clients love them. They will often say yes even when internal counsel says no, which is a win-win-win. The companies know they can proceed. The law firm makes money. The internal counsel can say no without being obstructionist and if things go wrong can blame the outside firm.

I’ve worked with outside counsels who always takes the conservative view. They always recommend against doing anything risky because they look bad if things go south. This is the exact same philosophy that weather forecasters have. They always over-predict rain because people are much more upset if they expect good weather and get bad than the reverse.

You often find similar behavior in consultants, like regulatory consultants. They tend to predict that the regulatory agencies will be more conservative than they actually are, because clients are more upset if the regulatory agency is more strict than the consultant.

Of course, this kind of action is wasteful at best and disastrous at worst.

The point is that when you’re in a business where risk-benefit analysis is important, the mark of someone who’s really good is that they have a certain rate of failure that is greater than zero. Someone who has no failures could be really really good, but in certain industries, it just means that they are terrible at assessing risk and that they take no risk. As I’ve said before, the only way to have no failures in an industry like pharmaceuticals is to have no successes. This is probably why in the Silicon Valley, having failures under your belt is considered a positive, rather than a negative thing.

Learning from failures

Most people when they want to learn how to succeed, try to find out what successful people did. For example, people who want to make a lot of money might try to find out what people like Buffett and Gates did, and how they became so rich.

There are several problem with this approach. The first is that you can’t tell what makes rich people successful only by looking at what they did. You have to compare them to what unsuccessful people did. For example, here are the things that all rich people do: they eat, they sleep, they ride cars, they talk, etc. That is not very helpful, is it?

This is why in the drug development course I teach, the major assignment I give the students is to do a case study on a failure. A failed drug, a failed device, or some other failure. That’s because drug development is very easy if everything goes well. But it almost never does. The art of drug development is anticipating failures and issues and taking action to address it. It’s like surgery–I could take out your appendix easily if there are no complications, even though I am a physician and not a surgeon, but if there are problems during the procedure then both you and I would be in trouble. I have heard that pilots spend most of their training learning how to handle emergencies. You can learn to be successful only by understanding what causes failures.

The problem is, that in drug development, we don’t learn from failures. When there is a catastrophic failure–let’s say an Alzheimer’s Disease drug failed in Phase 3 after $700 million investment–we should be spending a lot of time and money investigating why we thought it was going to work when it didn’t. We should have what doctors call Morbidity & Mortality, where doctors talk about some mistake or disaster they experienced and the other doctors critique. Or what the army calls After-Action Reviews. 95% of drugs fail, so at least 95% of the learnings are in the failure. But instead, what we do is to expunge all memory and history of the failed trials–no one, especially at big companies, wants to talk about the failed program ever again.

As Charlie Munger likes to put it, “invert, always invert.” (For summary of his philosophy, see here and here.) Charlie like to say that if he knew where he was going to die, he would never go there. Failure is a specific, and one of the most important, ways of inverting the problem you’re trying to solve.

Now let’s turn back to rich people. Even if you ask them how to be successful, they may not know. It’s like asking a lottery winner, “how can I become rich?” and his answering, “it’s easy – you go to the corner store and buy a lottery ticket. Just do what I did, it worked for me.” They have only lived their own lives, so it may not be apparent to them what they did differently than other people. I remember reading an interview with a Nobel Prize winner who said that parents should let their kids run free and do whatever they want because that’s what his parents did with him. It might have worked with him, but I doubt that is the right parenting style for all children.

Second, many things that make people wildly successful are the exact same thing that makes other people wildly unsuccessful. Some people at in a way that increases their “beta” as investor would call it. Certain life strategies consist of “go big or go home.” For example, Steve Jobs (one of my heroes) had a very strong personality and several other traits that under other circumstances, in other societies, in other times, might have made him an abject failure. In fact, it got him tossed from Apple at one point. But he was born at the right time, adopted by the right parents, and had a string of lucky breaks that made him the success he was. Of course, he was very talented as well, but there are many people who are as talented as he was, but never make it so big because of the circumstances they were born into and probably, because they are more accommodating and conventional. Those people are likely modestly successful, but unlikely to be completely unsuccessful. But many people of Job’s unbending personality probably end up as completely failures.

You see that with certain stressors. For example, Malcolm Gladwell talks about how people who lose a parent at a young age are often extremely successful. But he neglects to mention that people who lose a parent at a young age are also more likely to end up in prison. A stressor like that seems to make people take a higher risk strategy that can pay off big or cost big.

Third, different strategies probably work for people of different talents and under different circumstances. If you’re a contrarian, your investment strategy is probably going to be different than someone who goes with the crowd. And furthermore, certain strategies are likely to only work when very few other people are taking the same strategy and others are likely to only work if everyone else is using the same strategy.

Fourth, some things are just beyond your control. And I don’t mean things like living through a bull market. I mean things like the fact that longer you live, richer you can get. Many of the ultra-rich people, especially investors, are quite old, because of compounded returns over time.

But let me go back to the first point. My interest is in building a healthy, successful company that builds a lot of value for all stakeholders. So I have an interest in reading not just about companies that have been successful but more about companies that have failed. Unfortunately, there are very few of those books – people tend not to write about failed companies. But here is a list of the few I have found, each one a treasure trove of learning.

• DEC is Dead, Long Live DEC
• Boo (about boo.com, a spectacular internet flameout)
• Hatching Twitter
• Losing the Signal (About Blackberry)
• Stealing MySpace
• Dead Companies Walking (Fearon’s entertaining and incisive look at companies he’s shorted)