Category Archives: Thinking about Risk

On Failure

More Andreessen from the WSJ:

I’m really schizophrenic on this. I can argue both sides of it. The Midwestern Protestant in me is very strongly on the side of failure is terrible and horrible and awful and the goal of every entrepreneur should be to not fail. This whole thing where failure is somehow good in Silicon Valley, or failure is OK, or failure is wonderful, or failure is part of the process, is just a bunch of nonsense, and is actually a destructive sort of meme because it gives people an easy excuse to give up. If you look at a lot of the great successes in corporate history and in technology, they required real determination and real staying power.

The other side of it that I can argue equally enthusiastically, is that an enormous cultural positive for the Valley and more broadly the U.S. is that failure does not end your career. Failure is not a mark of shame that means you are done in your field—which is true in a lot of the rest of the world. In the Valley, it means you have valuable experience. One of the things I always tell our entrepreneurs is, don’t just hire people out of successful companies, because the people out of successful companies didn’t learn anything. Maybe they were just along for the ride. Whereas, the people who have been through tough times tend to be much more resilient and they tend to be much more determined and they’re not daunted by things being hard.

The way I try to resolve it is, I think there’s a grain of truth on both sides. I think both are kind of true and then it’s just a question of nuance and judgment. You really can’t just give up the minute things get hard. But at the same time, not everything works. And when something doesn’t work, it shouldn’t end your career, it should just inform the next thing you do. And that’s kind of how the Valley works.

History and Opinions

The difference between genius (and riches) and stupidity (and failure) is a result determined by outcome and history.  Even the “domain-smartest” people can only offer opinions and advice, but not formulas or guarantees either way.  This is Paul Graham in an Inc interview.

How do you know when a small idea has big potential?

Mostly, we look at the people. If they seem determined, flexible, and energetic, and their ideas are not just flamingly terrible, then we’ll fund them. We thought Airbnb was a bad idea. We funded it because we really liked the founders. They seemed so determined and so imaginative. Focusing on them saved us from our own stupidity.

The very best ideas usually seem like bad ideas at first. Google seemed like a bad idea. There were already several other search engines, some of which were operated by public companies. Who needed another? And Facebook? When I first heard about Facebook, it was for college students, who don’t have any money. And what do they do there? Waste time looking at one another’s profiles. That seemed like the stupidest company ever. I’m glad no one gave me an opportunity to turn it down.

Do Ideas Matter?

Chris Dixon writes today of a metaphor that helps us get beyond the untruth that ideas do not matter in startup innovation.

Ideas are more than the Eureka moment — they are working out that initial Eureka moment through the idea maze:

In other words: a good idea means a bird’s eye view of the idea maze, understanding all the
permutations of the idea and the branching of the decision tree, gaming things out to the end
of each scenario. Anyone can point out the entrance to the maze, but few can think through
all the branches. If you can verbally and then graphically diagram a complex decision tree
with many alternatives, explaining why your particular plan to navigate the maze is superior
to the ten past companies that fell into pits and twenty current competitors lost in the maze,
you’ll have gone a long way towards proving that you actually have a good idea that others
did not and do not have. This is where the historical perspective and market research is key;
a strong new plan for navigating the idea maze usually requires an obsession with the market,
a unique insight from deep thought that others did not see, a hidden door.

That is from the work of Balaji Srinivasan.  Ideas are process rather than point in time.  Chris’s post talks about using analogy, history, academic thought, and direct experience to work one through the idea maze.  Complement this process by wrestling with Elon Musk’s notion that identifying too closely with history, analogy, and current thinking kills creative thought.

The Curious Life of A Turkey

Another of what is becoming periodic posts with wisdom from Taleb’s Antifragile:

This one involves seeing opportunity: being a turkey in reverse:

“A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So with the butcher surprising it, the turkey will have a revision of belief — right when its confidence in the statement that the butcher loves turkeys is maximal and “it is very quiet” and soothingly predictable in the life of the turkey. This example builds on an adaptation of a metaphor by Bertrand Russell. The key here is that such a surprise will be a Black Swan event; but just for the turkey, not for the butcher.

“We can also see from the turkey story the mother of all harmful mistakes: mistaking absence of evidence (of harm) for evidence of absence, a mistake that we will see tends to prevail in intellectual circles and one that is grounded in the social sciences.

“So our mission in life becomes simply “how not to be a turkey,” or, if possible, how to be a turkey in reverse — antifragile, that is. “Not being a turkey” starts with figuring out the difference between true and manufactured stability.”

Being a turkey in reverse is about seeing beyond stability in life and markets, stability that is usually manufactured, but that has terror and disorder lurking right under the surface.  That’s where the opportunity might be.

The Tinkerers, the Hobbyists, and the Risk-Takers

This is from an interview with Nassim Talib on his anti-fragility thesis:

How would you make something antifragile?

If antifragility is the property of all these natural complex systems that have survived, then depriving them of volatility,randomness and stressors will harm them. Just as spending a month in bed leads to muscle atrophy, complex systems are weakened or even killed when  deprived of stressors.

If you want to move away from fragility, you must avoid centralisation and debt and foster aggressive risk-takers who are willing to fail seven times in a lifetime. The economy of the west was initiated through trial and error. We still have a pocket of that in California, where there are small costs of failure and big gains once in a while. The top-down approach blocks antifragility and growth, whereas everything bottom-up thrives under the right amount of stress and disorder.

Are you saying that capitalism is good, but that 21st-century capitalism has gone too far?

What we do today has nothing to do with capitalism or socialism. It is a crony type of system that transfers money to the coffers of bureaucrats. The largest “fragiliser” of society is a lack of skin in the game. If you are mayor of a small town, you are penalised for your mistakes because you are made accountable when you go to church. But we are witnessing the rise of a new class of inverse heroes – bureaucrats, bankers, and academics with too much power.

They game the system while citizens pay the price. I want the entrepreneur to be respected, not the CEO of a company who has all the upsides and none of the downsides.

There are plenty of open-minded individuals who weren’t upset by what I said. This coming book will upset bureaucrats and academics - academics because I suggest trial and error is superior to knowledge. The process of discovery, innovation, or technological progress depends on antifragile tinkering and aggressive risk-bearing, rather than education. A country’s assets reside in the tinkerers, the hobbyists and the risk-takers.

It is important to think of the consequences of a society where the rewards go those without skin in the game in some way.

Conjuring Bridges (To Leap Off)

Storytelling is the tool to bridge the chasm of risk between vision, on one side, and reality, on the other side, as Professor Eisenmann suggests below:

“Storytelling” by entrepreneurs—conjuring a vision of a better world that could be brought about by their venture—can encourage resource owners to downplay risks and in the process commit more resources than they would if they had not been inspired. Steve Jobs, for example, was famous for his mesmerizing “reality distortion field,” through which he impelled employees, partners, and investors to go to extraordinary lengths to help fulfill his dreams.

Reality-distortion is, perhaps, making people see that the bridge exists.

The Stoic Entrepreneur School

This view on pursuing and achieving a vision comes from an essay by Oliver Burkeman in the WSJ recently:

He rediscovered a key insight of the Stoic philosophers of ancient Greece and Rome: that sometimes the best way to address an uncertain future is to focus not on the best-case scenario but on the worst.

Seneca the Stoic was a radical on this matter. If you feared losing your wealth, he once advised, “set aside a certain number of days, during which you shall be content with the scantiest and cheapest fare, with coarse and rough dress, saying to yourself the while: ‘Is this the condition that I feared?’ ”

Research by Saras Sarasvathy, an associate professor of business administration at the University of Virginia, suggests that learning to accommodate feelings of uncertainty is not just the key to a more balanced life but often leads to prosperity as well. For one project, she interviewed 45 successful entrepreneurs, all of whom had taken at least one business public. Almost none embraced the idea of writing comprehensive business plans or conducting extensive market research.

They practiced instead what Prof. Sarasvathy calls “effectuation.” Rather than choosing a goal and then making a plan to achieve it, they took stock of the means and materials at their disposal, then imagined the possible ends. Effectuation also includes what she calls the “affordable loss principle.” Instead of focusing on the possibility of spectacular rewards from a venture, ask how great the loss would be if it failed. If the potential loss seems tolerable, take the next step.

Bill Gurley II: The Advantage of Being the Small Fish In A Big Pond

Here is the second Bill Gurley post.  This corresponds to the second video on the GigoOM link:

Too often, we think about outside money as being a validator, but Bill illustrates that the opportunities to have a meaningful exit become far more constrained by taking money.  The most obvious point is through the dilution, but the important related point is that the entrepreneur needs to build value beyond the sweet spot of many acquirers.  The dpreview example that Bill gives is particularly compelling.  Here is a rough transcript, but listen to the entire video:

The number one type of acquisition that the big companies like to do is $20 to $70 million.  The minute you take venture…and all of a sudden everyone’s expectation is its got to be $150 [million] or more or we are not saying yes…and that frustrates the buyers…and so if you have a killer product that might elicit a $30 million exit and you can bootstrap and hustle your way and own 80% of it…80% of $30 million is $24 million and that’s a lot of money for an entrepreneur…and I think a lot of people get caught up in the game of venture…

I love this story of dpreview which is a website for digital camera reviews. 1 guy. 1 founder. and Amazon reportedly…I have heard anywhere from $40 to $70 million for a single guy…it wasn’t a venture-backed deal…it worked out very well for that entrepreneur.

Bill Gurley and the Dilemma of Rules

Bill Gurley — the very sage Benchmark partner and incidentally perhaps the tallest VC in the game (6’9”) — was interviewed by Om Malik recently.  I encourage you to watch them, but two clips in particular, about thinking about risk that I want to particularly highlight in adjacent posts:

First, he notes that a venture capitalist’s reputation might be created by just one investment.  That creates a tension, since you need experience – a period of developing pattern recognition and “rules” – but then the one investment that defines your career might be one that defies those and other rules.  Listen to the first clip on the link above and then here is an excerpt of my rough transcript:

Waiting around to hit the one out of 10,000 pitches and getting it right; that’s a tough game to play and it’s really easy to miss…and a lot of the ones that become the breakout players break any rule set that you have created…

So, you have a rule set through experience, discussion, learning, but then you also need the wisdom, instinct, and courage to break those rules in order to truly hit the grand slam.  This strikes me as the tension in truly doing anything great — knowing the rules, but also knowing that you need to break certain of them sometimes because ultimately it’s not a formula.

Avoiding Lean As Ideology

We’re all familiar with the Shakespearean phrase “Too much of a good thing…”  Like great things, great ideas have their limits. Last week, Marc Andreessen noted some of the limits on the Lean Startup method.  Two of Andreessen’s points really stuck out:

First, some ideas cannot be done in a small-scale or they just need to work in their entirety.  Andreessen says:

“I would serve this as a challenge for the Lean Startup community. Especially the ones with the really audacious goals. Sometimes they start audacious because otherwise the product will never get to market. The Macintosh, that product had to exist in its entirety for people to wrap their heads around it,” he said, pointing to modern entrepreneurs like Elon Musk’s ventures as ones that can’t be done on a small-scale at first. “You got to get the rocket into space.

Second, if you have a vision, it can take some persistence to figure out how to implement it.  Andreessen says:

“The pivot. It used to be called, ‘the fuck-up.’ Taking the stigma out of failure is very exciting,” he said. “But we see founders who give up too quickly. It’s permission to give up very fast. Are they really going to do the heavy lifting over time?…

We joke around the office that the worst is the fetish for failure,” he said. “You want to preserve the good of the idea when it comes to pivoting, but you don’t want people to be intentionally encouraged to fail. Maybe it’s time to add a bit more stigma. The entrepreneurs I admire, I admire the ones who pivot but I really admire the ones who have persisted.”