By Drue Freeman
What do the SPAC craze, lidar valuations and the notion of big companies spending millions on markets in which they are uncompetitive all have in common? They are all business manifestations of what I call “acute Shiny Object Syndrome,” or aSOS for short.
I define acute Shiny Object Syndrome as the tendency to pursue business strategies based purely upon the ‘shininess,’ or surface-level attractiveness, of the underlying opportunities.
In this context, I define acute Shiny Object Syndrome as the tendency to pursue business strategies based purely upon the “shininess,” or surface-level attractiveness, of the underlying opportunities. By this definition, aSOS implies that the “object,” or target, is being pursued without regard to any number of relevant and critical factors ranging from the true value of the object itself to the feasibility and cost involved in “capturing” the object. In some cases, the opportunity is extremely valuable, but for various reasons the pursuer lacks the capability or attention span required to capture it. In other cases, a deeper and dispassionate assessment of the opportunity would reveal that it is not nearly as attractive as it seemed at first.
Acute SOS differs from the conventional, and better-understood, phenomenon of Shiny Object Syndrome in one important way. Conventional SOS tends to be a repeatable behavior, sometimes to the point of being chronic, in which people or companies chase any new shiny object that comes along. The defining characteristic is the movement from one activity to another in pursuit of newer, shinier objects. Acute SOS, on the other hand, is not defined by repeatability, but rather by the severity of the consequences of chasing an object simply because of its shininess. And while aSOS can develop into a chronic condition if the behavior becomes habitual, the consequences of aSOS, even in an isolated instance, are serious enough to warrant a closer examination.
Into the abyss
One recent example of how aSOS can have disastrous consequences is Katerra, the erstwhile unicorn architecture, engineering and construction startup, which declared bankruptcy in 2021. The shiny object in question was the $10 trillion construction industry, which is dominated by antiquated business practices and seemingly ripe for a Silicon Valley digitally driven disruption. Founded by the former CEO of a hugely successful electronics contract manufacturer, Katerra attracted nearly $3B in funding from large investors, including Softbank, which were equally enamored with the size and luster of the opportunity. However, as is often the case with SOS, the decision-makers had minimal actual construction experience and they paid little attention to the realities of why the construction industry operates the way it does. As a result, their entire business case, while seemingly well-constructed and supported with excellent analytics, proved to be largely counterfactual.
Katerra’s innovation was to apply to construction an end-to-end manufacturing process similar to the one that works so well in the electronics industry. Katerra would buy materials, supplies and fixtures in bulk and attempt to sell finished manufactured products directly to general contractors. However, when that model failed to gain traction with the contractors, the company concluded it needed to vertically integrate and take over the general contracting role, and ultimately the architectural role as well. By streamlining the entire development process from plans to finished construction, leveraging its own proprietary software and using in-house manufactured products, Katerra was theoretically able to complete an entire commercial project, such as an apartment building, hotel or office building, in as little as 30 days.
After demonstrating its capability with a few pilot projects, the company’s shiny object of choice appeared to be even bigger and shinier than previously imagined. The company raised significant expansion capital and proceeded to charge full-steam-ahead into uncharted waters without the requisite skills to navigate those waters. Katerra began acquiring competing general contractors and taking on an increasing variety of projects. Unfortunately, the projects turned out to be much more complex than the company was capable of managing. Furthermore, its in-house manufacturing was not yet able to meet the cost or schedule requirements created by the company’s aggressive sales teams during the bidding process. Voices of caution from the relatively few people with construction industry experience inside the company were ignored.
It became clear that the CEO had been chasing new product and market strategies every time a shinier opportunity came along. Each pivot created a distraction for the sales team.
In hindsight, the collapse of Katerra almost seemed inevitable. However, it is hard to imagine that the company’s analysis of the market would not have been fairly sound. Certainly, the investors who poured billions of dollars into the company would have done their own detailed diligence. Perhaps the issue was in the probability of the assumptions being valid that ultimately resulted in some of the counterfactual thinking: “If we can streamline the supply chain process, contractors will flock to our solutions.” Or maybe sound judgment was utlimately clouded by an abundance of unhelpful attributes: greed on the part of management and investors and an environment that made it difficult for contrary voices to be heard. Or possibly, as is often the case, with aSOS, it was a combination of both.
Another example of aSOS hit a little closer to home, contributing in part to the bankruptcy of one of my own portfolio companies. To be fair, other factors contributed significantly to the downfall of this company, including a major investor backing out of an agreed term-sheet and, ultimately, a failed M&A. However, in my debrief with the involved parties, it became increasingly clear that the CEO had been chasing new product and market strategies every time a shinier opportunity came along. Each pivot created a distraction for the sales team, and sometimes caused the engineering teams to hit the reset button on projects that were already in the works. The CEO’s inability to stay focused on a core strategy left the company strapped for the cash that would have been needed to remain resilient when the growth funding failed to come in as planned.
Objects and squirrels
Shiny Object Syndrome, in the broad sense, is not a new concept. Much has been written about people’s tendency to chase the latest fads, or for companies to apply trendy techniques to their business. There is a real risk of this kind of SOS in marketing, for example, where staying fresh and relevant is important. However, doing so should not come at the expense of measurable performance. The tendency for a business to be distracted by new, “shiny,” opportunities is a common manifestation of this conventional definition of SOS. For startups, these opportunities can come in the form of new business ideas or new products outside of the scope of the company’s business plan. Founders with chronic conventional SOS often have a new strategy every time you talk to them.
Chronic SOS can also be an extension of a closely related habit that has been referred to as Squirrel Chasing Syndrome (SCS). Think of Doug, the dog from the movie Up. Doug is generally well-behaved, arguably smarter than the average dog, and he goes about his normal routines as he should – until the moment he notices a squirrel. Suddenly, all hell breaks loose as Doug takes off in a mad and desperate attempt to catch the squirrel, to the exclusion of all other priorities and often with disastrous results. And of course, he never actually catches the squirrel.
Some business managers behave very much like Doug. Like most business managers, they set their companies onto the task of executing a particular strategy, with a set of focus customers and markets. Likely that strategy was carefully developed through a time-consuming process involving various stakeholders. Then one day, seemingly out of the blue, the manager informs everyone that the business is now going in a completely different direction. If the new direction is perceived to be better, bigger and therefore “shinier” than the previous strategy, the “squirrel” is in effect a “shiny object.” Sometimes, however, the squirrel might be nothing more than a new fascination on the part of the CEO, with economic value not even factoring into the decision-making.
A nimble organization can cope with the occasional pivot or strategic reset. Sometimes, a well-executed pivot can be transformational for an early-stage company, allowing it to identify that perfect product-market fit required to achieve scalable growth. However, if such changes in direction happen too often or without proper consideration of the ramifications and critical success factors of the pivot, it confuses the team, undermines trust in leadership, wastes time and money, and ultimately leads to a mismatch in the required skill sets for success in whatever the current direction happens to be, since many of the team members would have been hired with a different strategy in mind.
As damaging as Squirrel Chasing Syndrome and chronic SOS can be for a fledgling company, they are easy to diagnose since the manifest behaviors tend to be transparent and fundamentally irrational. When evaluating startups, investors often look at clarity of thought in addition to technical and execution capability. Distractibility, or the inability to stay focused – which is a clear symptom of SCS and SOS – should be readily apparent after spending enough time with a business manager. Acute Shiny Object Syndrome, on the other hand, is more insidious because aSOS involves an element of counterfactual thinking that, in turn, often forms the basic assumptions behind some very detailed and logically consistent analyses. The counterfactual assumptions and the supporting analytics often mask the underlying root cause of the aSOS, whether that be something relatively innocuous like Squirrel Chasing Syndrome or something emerging from more base and destructive human traits like fear, greed or envy.
Darker side of the mental construct
Acute Shiny Object Syndrome, as a mental construct, is closely related to several well-known mental constructs including FOMO (Fear of Missing Out), “Keeping up with the Joneses” and the “Grass is Greener” syndrome. Psychologists and social scientists have extensively studied all three of these constructs and their accompanying cognitive and affective components. The cognitive components tend to build upon social comparisons and they tend to be counterfactual, meaning that they focus on what is not yet an actual reality but might become reality if certain, different than current, conditions are met: “We would be happier if we had a bigger house,” “Did you see the neighbors’ new EV? I want one of those!” or “I’m so afraid I might not be able to get Taylor Swift tickets for my daughter, she’s going to be devastated.” The affective components associated with these constructs are typically driven by a negative emotion such as fear, anxiety, envy, jealousy or greed.
In all cases of acute SOS, dispassionate objectivity is given over to strong emotional ‘gut’ feelings that may even be reinforced by opportunism.
While FOMO, “Keeping up with the Joneses” and “The Grass is Greener” typically influence individual behavior, acute SOS, as I have defined it, is about business and financial behavior. With aSOS, these, or similar, mental frameworks inform business decisions. Essentially, the shiny object of desire becomes an organizational strategic imperative that derives its luster, and therefore its perceived value, primarily by being observed through the distortions of cognitive and affective lenses similar to the mental constructs described above.
These lenses may exist solely in the mind of a key decision-maker. On occasion, they become institutionalized throughout the entire organization. Institutionalization of aSOS is more likely to set in when there is an environment of fear, anxiety or greed, or when there is a strong organizational culture that is dominated by particularly strong or charismatic leaders who may be prone to aSOS themselves. In all cases of aSOS, dispassionate objectivity is given over to strong emotional “gut” feelings that may even be reinforced by opportunism. The “gut feelings” are often supported by well-argued, but still largely counterfactual, data analytics.
The aSOS gold standard
Acute SOS is analogous to the Gold Rush of 1849. Many thousands of Forty-Niners sacrificed their homes, families and previous livelihoods to make the perilous journey by land and sea to California to prospect for the ultimate shiny objects, gold nuggets and flakes, which had been discovered in the foothills of the Sierra Nevada Mountains. A few of the earliest miners were immensely successful. However, most came away empty-handed or ended up working as waged labor in corporate mining operations. If a prospector did manage to pan, pick or shovel his way to a bucket full of shiny objects, it was more likely to be pyrite (fool’s gold) than actual gold.
In the case of the Gold Rush, luck played a significant role in the fate of many of the prospectors. However, upon closer inspection, it could also be argued that many of the Forty-Niners, especially those who arrived after 1850, simply missed the “market window” as competition grew more intense. For others, staking a claim and digging in the wrong place may have been much less about bad luck than about the miner’s inexperience, lack of prospecting skills or inability to distinguish between a rare and highly valuable shiny metal and a similarly shiny, but much more commonplace, and therefore worthless, mineral.
It may be worth noting that, on average, the people who made the most money during the Gold Rush were the merchants and bankers, and not the miners themselves, suggesting that some sort of thought-out business plan is better than simply chasing the shiniest objects. (I will stop short of claiming that the merchants had actual business strategies, when most likely they were just clever enough to know that selling supplies and whiskey to the prospectors was better business than prospecting itself.) In modern business terms, one might say that most of the prospectors did not have the required competencies to execute on their business strategy (locate a viable source of gold, secure the land rights, extract and sell the gold, get rich) and win against the competition or, for the later arrivals, that the anticipated market opportunities were much smaller than originally expected because the larger mining corporations had already secured the rights to most of the productive sources of supply.
Shiny bubbles
Two recent examples of aSOS that are reminiscent of the Gold Rush are the proliferation of overvalued lidar (and other, similar technology) companies for autonomous driving and the special-purpose acquisition company (SPAC) bubble. As with the Gold Rush of 1849, the early pioneers in lidar and SPACs created genuine value and were rewarded accordingly.
The Gold Rush represented a new frontier for speculators and dreamers as well as highly skilled prospectors and merchants who ventured into the “new” territory on the fringes of an expanding nation. Technological innovations like lidar promised to disrupt the century-old automotive industry, ushering in a new frontier of self-driving cars. Valuations of lidar startups and other sensor and autonomous-driving software companies swelled, attracting newer innovators and new investors to the market, resulting in a spate of unicorns and decacorns. Similarly, SPACs were intended to be a less-bureaucratic and less-costly way to bring innovative companies to the public markets than traditional IPOs while providing them with much needed access to capital. The two trends emerged at nearly the same time, lining up the tech companies’ significant demand for capital with a seemingly easy way for early investors to realize a faster return on their investments.
However, like the Gold Rush, these booms also attracted a rush of speculators looking to get rich quick. The speculation pushed the already lofty valuations of good companies even higher and allowed the funding of businesses whose fundamentals would normally have made it difficult to find capital at all – which is one of the hallmarks of a bubble. Furthermore, startups with technology that might have been applied toward other, less-shiny applications, such as defense, security, industrial automation, mining, smart cities, climate monitoring and meteorology, or even just more traditional automotive applications, instead found themselves drawn toward lidar for autonomous vehicles because they believed this was the shiniest opportunity.
Ultimately, it was just a matter of time before the public markets corrected for this bubble, resulting in a significant loss in market capitalization for many companies and significant losses for many investors. The last few months of 2022 witnessed the announced merger of Velodyne and Ouster, with a focus on applications outside of autonomous driving, and the bankruptcies of Ibeo (which has since announced a merger with MicroVision), Argo.ai and Quanergy, which had also been delisted by the NYSE. In 2023 Quanergy emerged from Chapter 11 following an asset sale and a shift in focus toward slightly less-shiny applications like security, smart spaces and industrial automation.
Innovation, whether technological (like lidar and artificial intelligence) or financial (like the SPAC) is routinely the child of necessity.
Innovation, whether technological (like lidar and artificial intelligence) or financial (like the SPAC) is routinely the child of necessity. Such ideas and applications come about because smart people see an opportunity to solve a genuine problem, either by finding a new way to apply an existing concept or by creating an entirely new way of doing something. The initial innovation work typically involves significant effort and risk. However, if successful, that innovation effort results in the creation of a new, or enhancement of an existing, shiny object – sometimes of significant value. As awareness of the shiny object spreads and the perceived value increases, some of the negative traits outlined above, such as greed, envy or jealousy, begin to spread as well. These may combine with a set of counterfactual business assumptions, for example “in five years, most cars will be autonomous” or “revenue growth is a better indicator of future stock performance than profitability. When this happens, the conditions are ripe for acute Shiny Object Syndrome to begin exerting undue influence on business and financial strategies.
Investors, as a group, are not only vulnerable to aSOS, but they can also amplify it. Investors are looking to make an outsize return on their investment. If enough investors start polishing the same object, it will start to look shinier to other investors. There is nothing devious or underhanded going on here. The investors often have teams of analysts, sophisticated modeling capabilities and rigorous diligence checklists. But new disruptive opportunities in new markets do not lend themselves well to such detailed analytics. In the end, many investment decisions come down to “gut feelings” and are therefore prone to some of the counterfactual thinking already discussed. In the opposite direction, this investor herd mentality can also work to tarnish an otherwise perfectly shiny object, making it extremely difficult for companies to get additional funding once an industry falls out of favor. For example, the dramatic increase in investments for alternative meat products following the successful Beyond Meat IPO in 2019 has all but dried up in the last year, causing a number of companies to shut down.
For startups, chasing shiny objects without consideration for the company’s ability to succeed can lead to insolvency.
Why aSOS matters
Large corporations have wasted hundreds of millions of dollars chasing shiny objects, at a substantial cost to their shareholders. In 2014, Amazon decided to chase after the very shiny, and therefore very crowded, smartphone market. The Amazon Fire Phone was a spectacular failure. Despite having an extremely capable innovation organization, Amazon proved not to have the right capabilities to win against the likes of Apple, Sony, Motorola, Samsung, Google and HTC. Ultimately, the company took a $170M write-down on the project. For startups, however, chasing shiny objects without consideration for the company’s ability to succeed can lead to insolvency, as the two examples at the beginning of this article illustrated.
Looking at companies from the lens of an investor and business adviser, I view the willingness to pivot, when necessary, as a positive. However, if a company has been through too many pivots it could mean the executives have a difficult time sticking to a strategy. Or it could also mean that they are suffering from some form of SOS. If they are operating under the influence of greed or fear coupled with counterfactual thinking, resulting in an unrealistic assessment of the company’s capabilities, then they are most likely afflicted with aSOS. This is a red flag for the executive team’s clarity of thought and their ability to guide the business through challenging times. A company in the throes of SOS is at risk of running out of money before executing a potentially winning strategy. A company suffering from aSOS is at risk of adopting an entirely wrong strategy and driving the business into the abyss.
Some of what glitters really is gold
So, are all shiny objects bad? Should business leaders ignore the shiny objects they encounter along their journey as they relentlessly and single-mindedly pursue their strategies of record? Of course not. Sometimes that shiny object in the riverbed might actually be gold.
One of the hallmarks of a great entrepreneur is the ability to pivot at the right time for the right reasons. The key to success, however, is having a sound strategic process for evaluating the value of the shiny object against the risks and costs associated with its pursuit. This in turn requires the business to match the opportunity against various external threats, such as the competitive density in the market, for example, and the organization’s unique strengths and weaknesses. For a startup, which by necessity is lean on personnel and structured processes, good unbiased advisers can help the founders evaluate the new opportunity objectively. Such guidance can help keep the company on the right path and able to recognize when counterfactual assumptions are clouding the process.
Some Nuggets of Success:
- The ability to identify value-generating opportunities, shiny objects with genuine inherent value, faster than anyone else, supported by a competitive advantage in executing on those opportunities, is crucial for a company’s or an investor’s success.
- Knowing when to pivot or when to stay focused requires discipline and clarity of thought and can help prevent, or at least mitigate, conventional Shiny Object Syndrome.
- Rigorous processes and a network of trusted, but objective, advisers can help avoid the pitfalls of counterfactual thinking and the negative mental constructs that can lead to the kinds of severe cases of acute Shiny Object Syndrome that can lead a company, or investor, to failure.
Consultant Drue Freeman is an independent board director at Ideal Power and a member of the board of directors at Sand Hill Angels.
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