Dead Reckoning: No Smooth Sailing for Startups

5/14/12Follow @joechung

Prior to the mid 1700s (and long before the advent of GPS receivers in every smartphone), mariners at sea calculated their position by Dead Reckoning, a process in which you simply assume that whatever course and speed you are on can be straight-lined ahead with a ruler and pencil, day after day, regardless of wind, current, and human error. As its rather ominous name suggests, dead reckoning often ended in disaster, with ships hundreds of miles away from where they thought they would be. But while dead reckoning as a trans-global navigation tool fell out of use with the discovery of reasonably accurate ways to measure time (and therefore longitude), the concept is alive and well as applied to virtually every attempt to predict the future.

I suppose it’s only human nature; we got pretty far up the evolutionary chain by remembering what happened the last time and learning how to avoid or repeat the situation depending on the outcome. The last time we ate those awesome looking purple berries we all threw up and old Grunthead died. So let’s not eat them this year. The last time we used chunks of antelope fat on our hooks we caught some huge fat fish, so let’s definitely do that again! We survived because we noticed patterns and learned from them, and the easiest pattern of all is dead reckoning—the straight-line interpolation from the past to the future.

Witness how we predict business outcomes. In 2006, home prices rose by 15 percent, so our best guess for 2007 is another 15. Last year our company grew revenue by 22 percent, so this year we’re going to do 25! The problem, of course, is that these predictions can fly in the face of reason and observable outcomes. The expectation of continuous double–digit exponential growth of any quantity is definitely going to end in tears at some point (though predicting exactly when is worth billions).

For example, take the following graph. We can’t help but see the straight line interpolation showing “trending” growth from 1999 to 2012!

But now look at a simple subset of the above graph from 2001 to 2009, and one tends to see a different picture:

In case you’re curious, the data series from the above graphs is purely random (a random walk to be precise) courtesy of … Next Page »

Joe Chung is Managing Director at Redstar Ventures, a company that creates companies, taking them from the earliest stages of ideation and growing them through their first institutional funding rounds and beyond. Joe tweets from @joechung. Follow @joechung

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