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Loonshots: Making room for innovation as your business scales

Editor's note: So much great business advice, so little time to read. That's why each month we’re reading a business book or bestseller so that you don’t have to. We'll give you the gist, you'll take away a few key points and, if inspired, you can rush to your local bookseller.

A "loonshot" is described as a neglected, "widely dismissed" project. Often its champion is written off as unhinged, writes Safi Bahcall, physicist turned entrepreneur, and author of Loonshots: How to Nurture the Crazy Ideas that Win Wars, Cure Diseases, and Transform Industries. But sometimes a loonshot shouldn't be so easily dismissed. Some notable examples include radar, the movie Toy Story, and cholesterol medication.

In his book, Bahcall brings to life these examples and others, ones that people may know tangentially but probably haven’t considered in the context of "impossible" projects that were expected to fail.

The crux of Bahcall’s argument is that most organizations start small with passion, energy, and a willingness to experiment. This fosters the kind of innovation that sparks revolutions or disruption or works of brilliance. Over time, though, trends show these innovative companies becoming increasingly rigid in structure as they grow and focus resources on producing “franchises” rather than loonshots.

His logic is based around the principle of phase transitions, where molecules in a certain state—liquid water, for example—may suddenly shift into another state, like freezing into ice, due to changes in the microscopic tug-of-war between two competing forces—entropy versus binding force, in the case of water.

Phase transitions, Bahcall argues, happen not only on a molecular level but also in organizations, companies, and nations. The competing forces in organizational phase transitions are described as “rank vs. stake.”

When companies are small and loosely structured, the stake of employees in each project tends to be much higher. He uses car manufacturing as an example: If the car we design sells well, we all get paid higher dividends.

When companies are small and loosely structured, the stake of employees in each project tends to be much higher.

Yet once organizations reach a certain stage of growth—“The Magic Number” Bahcall calls it—a shift in motivation occurs. Bigger companies require more hierarchy, and with that comes more individual investment in rank. So if there are seven teams designing seven cars, the success of your car may not mean much for the equity of the entire company. That means dedicating time to office politics and working towards promotions, rather than putting all your energy into current projects, becomes a logical individual move.

Bahcall writes: “Individually rational decisions can lead to irrational collective decisions,” similar to how a single water molecule cannot be solid nor liquid, but a group of water molecules may combine to produce these states.

[Read also: For startups, the customer is more important than the product]

What is the magic number?

Throughout history, groups thrive when they remain below 150 members. When Brigham Young led the Mormons from persecution in the late 19th century, he had companies of around 150 travel together. Similar observations have been made about group sizes in hunter-gatherer societies and in military soldier clusters.

It may seem like an arbitrary cutoff, but Bahcall ensures the reader that the number itself is not the be-all and end-all of organizational structure. By examining the combined salary and equity incentives for individuals, he finds there is always a critical size at which the balance flips from favoring a project to focusing on politics. That critical size is the threshold above which innovation begins to dwindle.

“We intuitively understand that something changes inside teams and companies as they cross a certain threshold in size,” he writes. Bahcall believes that this is essentially a math problem. By understanding the control parameters that affect this critical threshold, teams can manipulate them to ensure the Magic Number rises or falls proportionally to your organization's size. In this way, teams can continue to innovate even after reaching the franchise stage. The book explains Bahcall’s “Magic Equation” that organizations can use to determine when a particular group will experience a phase transition. In short, the Magic Number is influenced by the fraction of equity each individual receives, the number of managers at each level of the org, and “organizational fitness”—which includes review systems and employee skill development—divided by salary growth rate as people move up the ladder.

[Read also: Innovation requires everyone in the band]

The importance of culture and organizational structure

Loonshots is set up as a companion text to the many books written in recent decades about company culture. Bahcall argues that while culture is relevant to organizational success, he believes an analysis of structure is necessary to properly understand how culture develops and evolves.

By understanding the control parameters that affect this critical threshold, teams can manipulate them to ensure the Magic Number rises or falls proportionally to your organization's size.

While the book will be most relevant to people with vested interest in organizational structure or those making decisions about a company’s incentive packages, I found the overarching ideas of Bahcall’s theories applicable to everyday life as well as non-professional organizations.

A couple simple lessons to take away from Loonshots include creating separation between franchise projects and your “loonshot nursery”– the part of the organization dedicated to trying out crazy ideas. Bahcall exemplifies this with stories of federal research groups, like the Royal Society of London or the United States’ Office of Scientific Research and Development. These groups were set up specifically to allow for experimentation to take place without interfering with day-to-day military operations and have been the catalyst for world-changing inventions like early-warning radar systems and nuclear fission.

Another important lesson is to love your franchises and loonshots equally. Bahcall shares the story of Steve Jobs’ first stint at Apple and describes how he would publically put-down employees working on older products like the Apple II, while showing great pride in his innovation team developing the Macintosh. This blatant imbalance in the CEO’s appreciation for different sectors of the company created animosity between teams and a toxic work environment that prompted many talented designers and engineers to leave Apple. Jobs himself would eventually be ousted from the company he founded.

[Read also: Company culture is more than ping-pong and free snacks]

Chock full of insights, Loonshots presents interesting ways of looking at traditional business models to see how one can allow fringe projects the room to grow. While the stories are fascinating, some can feel a little long-winded or even repetitive at times. Yet the message is simple and easy to understand: If you have a crazy idea that you think could change the world—or your world—don’t be afraid to speak up. And don’t give up after the first failure. Mevastatin, for example—the active ingredient in cholesterol medications like Lipitor—took three attempts over a 20-year span to receive FDA approval. Had the developers given up after their first try, millions might still be at greater risk of heart attacks and strokes.

If you have a crazy idea that you think could change the world—or your world—don't be afraid to speak up.

But perhaps the most important thing to keep in mind is that if your project succeeds and your business thrives, don’t forget the spirit of risk-taking that propelled your success.