Reframing Little Bets as Little Informed Bets

We’ve all heard the phrase “little bets.” But without context, a catchy name for a concept can be misinterpreted.

Let’s take a look at what “little bets” really means and how it allows us to stack the deck in our favor.

During a conversation where the idea of “little bets,” came up it became clear there is some misunderstanding of this term. The person I was conversing with saw “little bets” simply as a way to spread risk. In their understanding, this was how VCs worked, they used pattern recognition combined with small investments to limit risk while looking for one or two big wins.

It is true to a certain degree that making multiple small bets knowing some of the ventures will fail, with the expectation that a few will have some level of success, and the hope for one, maybe two breakouts is how both venture capital and the music industry work. But this understanding misses an important ingredient. The one that separates innovators, entrepreneurs and venture capitalists from dart throwing monkeys. One way to reduce risk is to place many small bets, but if that is your only strategy, it is not enough.

Little Informed Bets

The bigger secret is to making little bets work can be demonstrated in the children’s game 20 Questions. In 20 Questions, you start out with a wild guess and with each guess you hone in closer to the answer. Whether you are a startup entrepreneur or an enterprise seeking to innovate, you need to find the smallest test you can to validate your hypothesis (a nice way of saying guess), based on a small amount of money or resources you can afford to lose in exchange for validation or the knowledge gained if you guess wrong. In this case, you are placing “little informed bets.” It is the “informed” part that is usually overlooked.

How do you determine the right amount to risk? Don’t use the value of the total potential revenue should your idea or venture work out—that will lead to big bets. Start with no more than you can afford to spend on learning if a single guess is correct. This is a “little bet.”

When done right, the information you learn from your first bet will lead you to the next question that must be answered, the next change to the product, or the next adjustment to the value proposition. With this information, you will place another small bet, it may be bigger, but it may be the same size or even smaller, depending on what was learned and if interest in your product or service is growing. If you keep asking questions and know you are getting closer to the answer, you can start to invest in larger bets that will lead to growth, but when you test a new market segment or a pivot, you may need to move back a smaller bet.

This is how “little bets” are explained in “Little Bets: How Breakthrough Ideas Emerge from Small Discoveries” by Peter Sims. It is also how the much-misunderstood MVP (minimum viable product) works in Lean Startup. You can see Peter Sims give some real world examples in this video.

So before you think of “little bets” as simply stepping up to the casino table and putting down multiple small bets. Think of “little bets” more like a casino with a 20 Questions table and you can place a bet of any size with each question. You will never see that table because your chances of winning are too high.

That’s not to say every venture will end in success, with this strategy, but your chances of success will increase if you use it.

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