On Entrepreneurship, Risk and Uncertainty
Entrepreneurs live with risk and uncertainty. They don’t have a choice. The future is up to them. They are responsible for their successes and failures, and success is never permanent. Therefore, Entrepreneurs have to learn to handle the risk and uncertainty of having to be responsible for their company and employees.
I have been fortunate. I have spent the majority of my life as an entrepreneur. In fact, I have never had a “real job”. I started my first real company when I was in elementary school, and sold it when I was 20. I have spent most of my life focused on building successful and sustainable companies. My early start allowed me to adjust gradually to the risks and uncertainty of being an entrepreneur.
When I started I had nothing to lose. I started a business because the people I knew needed a service and I had time. Gradually, the risks and uncertainty increased. In order to increase profits I started to take on more and riskier projects. They required hiring more employees, purchasing more equipment, investing more money, and taking more risks. Over the years, I have been forced to learn to handle the risk and uncertainty of being an entrepreneur, both in the good and bad times. I have made and lost money, employees, and capital.
In good times, I learned to stay paranoid. In High School, after getting overly confident I learned the importance of Andy Grove’s quote, “Success breeds complacency, complacency failure, only the paranoid survive.”
In bad times, after letting uncertainty distract me, I learned the value of returning to the fundamentals and keep steadily moving forward.
I learned the value of experimenting in good times, so I knew what worked when the bad times came.
The following is what I have learned so far as an entrepreneur.
Do something valuable and hard
If you are unsure that your business model will work, stop. Do something other people value, something that they can’t live without. If you do this, no matter what happens you will always have customers. Now other things might kill you, but you will at least have a fighting chance. If you solve a true need you will find customers. Customers provide cash, and cash solves most problems. If you want even more certainty do something that people find valuable, and other people find hard. If something is difficult to do, you will have less competitors and a better profit margin.
That is why I started CAN. CAN does something that is extremely valuable; we help companies sell more, but what we do is also extremely hard. A lot of people know that data science and predictive analytics are valuable; 91% of the Fortune 500 currently have some type of data science program. However, very few people are willing to do what it takes to become a Data Scientist.
Know When to Experiment and When to Focus
Once entrepreneurs find a formula that works, they tend to focus all their resources on it. They stop exploring and start conquering. They scale. They pursue hockey stick growth. Unfortunately, overtime every successful formula degrades and stops working. These entrepreneurs are left in a lurch with a large organization that has only know one speed, full-steam ahead. Once this happens, it is hard to change.
The solution is to experiment and explore new formulas for success. People often wait to try new things until their formula for success stops working. They waste time experimenting in bad times. This can be fatal. When the weather turns dangerous, you need to have a plan. That is not the time to start searching for a plan. Experiment in good times, so in the bad times you have learned what works and have a new plan ready. This takes a lot of discipline, but it will save your company. In good times, people will mock you as paranoid and wasteful, but in bad times they will be thankful.
Manage Your Risk and Energy
I have learned to focus and prioritize my risks and energy. For people who know me, I fall into two categories, adventurous and hard working, or timid and lazy. In the past, I have burned myself out several times. Eventually, I realized that my capacity for risk and work is limited. I can’t afford to fill-up on unnecessary risk or work. I have to be brave to take necessary risks and equally brave to turn down unnecessary risks. This requires that I spend time each week, month and quarter thinking about what is truly important. If something isn’t truly important, I don’t take the risk or waste my energy. However, if something is truly important I do what is necessary and give it my all.
Be Aware of Asymmetric Risk
It is important to understand that some risks are symmetric and some are asymmetric. If you take a symmetric risk, you stand to gain as much as you can lose. The potential gains and loses are equal. With asymmetric risk, you stand to gain more or less than you can lose. The potential gains and loses are not equal.
Typically with asymmetric risk the gains are less than the potential losses. You want to avoid these “negative asymmetric risks” if at all possible. They tend to be fatal. A good example of a fatal negative asymmetric risk, is the sub-prime mortgage crisis. Many banks took on sub-prime loans to make more money, however the potential increased revenue was a very small fraction of total revenues. If the risk paid off, the banks would have generated incrementally more revenues. Unfortunately, the banks were wrong, and many were forced to sell, file for bankruptcy, or close their doors permanently. In hindsight, sub-prime mortgages were not a risk worth taking.
Bound Risk to Avoid the Death-line
With every decision that you make you should ask yourself, “What if I am wrong?” This question will help you bound your risk. Most decisions won’t kill you. With most decisions, you will only lose your initial investment and sometimes even less. However, there are decisions where being wrong will kill you. Your business will cease to exist, or will be severely crippled. Jim Collin’s calls this the death-line risk. If possible, you want to avoid making decisions that could cause you to approach or worse cross the death-line. If you do the company will lose its independence or even existence.
A common example what happens to a lot of small companies. A company has 10 employees and minimal cash reserves. They are facing a recession or the loss of a major customer. The CEO knows that revenues are going to fall. His forecasts show that revenues will fall by 10%. He has to maintain profitability since, he doesn’t have enough cash not to be profitable for more than three months in a row. If revenues fall by 10%, the company will be profitable, but with only 9 employees. He has to layoff 1 person. However, if he is wrong and revenues fall by 25%, the company will cease to exist. He will have to file for bankruptcy or sell the company. He decides that instead of planning for a 10% decrease in revenues, he will plan for the worst, a 50% decrease in revenues. He will have to lay off 6 of his employees to remain profitable if revenues fall that far. However, if he is wrong, the worst that would happen is he would have to hire back his former employees or hire new people. But he can be confident that the recession will not kill his business.
Remember You are Anti-fragile
You can take comfort in knowing that you are anti-fragile. When you apply pressure to something fragile it breaks. When you apply pressure to something that is rugged, nothing happens. When you apply pressure to something that is anti-fragile it gets stronger. Organic things tend to be anti-fragile. Mechanical things tend to be fragile. Elemental things, e.g. iron, rock, rubber, tend to be rugged.
Business, organizations, and societies are organic. They are composed of people and their relationships. This makes well designed companies with good people, anti-fragile. When things get tough, you can take comfort in knowing that humans, organizations and societies are anti-fragile. You should fear complacency instead of struggle, because in the long run complacency is more likely to kill you. You need to celebrate the bad times as a catalyst for becoming stronger.
Don’t Sprint, Run
When pursuing a goal you can either sprint or run. If you know exactly how to get there, sprint for it. But sprinting is risky. How often can you be 100% certain you know the exact path to success? Sprinting exhausts all of your resources and leaves you with only one shot.
Instead, run steadily everyday. Try to run the same amount on good days and on bad days. For example, at CAN I work 12 hours a day 6 days a week. I know that when I wake up, what I am going to do. This rhythm keeps me going even when I am tired or the going is tough. Also, since I don’t exhaust all of my resources in one shot, I can adjust as I learn new things.
Calculation vs. Judgement
It is important to understand the differences between judgements and calculations. People like calculations. If a decisions is a calculation, you will be able to list all the reasons why you made that decisions. This certainty is comforting. However, calculations can be done by machines and algorithms. Read: “Simple vs. Complex Science”
Only humans can make judgements and it is what makes our work valuable. A decision is a judgement if you can’t list all of the reasons for the decision, before or even after you make the decision. Judgments are always uncertain. Their is no way to know you made the right or wrong decision. There is no way to remedy the uncertainty of judgement. They are just part of human work. There is no way to escape it, so you might as well face the fact that outcome of some of your decisions will be uncertain.
Cash is Not Enough
Cash alone will not protect you from bankruptcy. It is necessary, but not enough. No matter how much cash you have in the bank, enough bad events in a row will cause your company to go into bankruptcy. Think of Lehman Brothers, Palm Pilot, and Zenith Electronics. They all had a lot of cash. Cash only buys you time.
The best protection from bankruptcy is the ability to create customers. Customers provide revenue that efficient and effective operations can turn into profit. Don’t invest in hoarding cash until you have a credible brand, good distribution, persuasive marketing, and a competitive/valuable product. Services companies reach this point sooner than products companies. Over time companies have to switch from accumulating cash to investing in their ability to create customers.
You can have all the money in the world, but if you can’t get new customers you are hosed. Once you have these things you should save as much cash as possible, but not until you have protected your ability to create new customers. “Businesses exist to create customers” – Peter Drucker
Invest in Knowledge
As an entrepreneur, you are forced to operate in unknown territory. Creativity is required to survive in the unknown. Investing in knowledge, allows you to be more creative.
Knowledge is what you can put into words and symbols. You can find knowledge in books, but also in your employees, customers, partners, vendors and mentors. Successful entrepreneurs avoid letting their egos get in the way of new knowledge. Great entrepreneurs, such as Sam Walton, have an insatiable hunger for knowledge. They rarely miss an opportunity to learn from other people.
Creativity = Knowledge * Decision Making. Decision making is the non-verbal, non-symbolic mental processes. You need to invest in improving your decision making abilities, the complexity of your mental processing. This can take years to mature. However, you can multiply the decision making ability you currently have, by investing time regularly in studying.
It is important to point out that knowledge is different than a skill. A skill is something that you can do without thinking. Knowledge is what can be put into words and symbols.
Remember the good and the bad
It is important to remember the good and the bad times. Remembering will help you stay grounded and keep going. Stories will remind people that success is not permanent, and that failure is not forever. You need to tell stories to your new employees, but remember that they won’t be as powerful. You lived through the tough times. They didn’t.
Risk Over Communicating
It is important to setup a rhythm for sharing information. The faster things change at your company the more frequently you take time to meet with your team. It is easy to want to stay focused and to see meetings as a waste of your time. I understand. Poorly organized and run meetings are a waste of time. Thankfully, properly organized and run meetings are the most effective way to transfer the information required for work. Check-out Manager Tools podcast, “Effective Meetings Starter Model”. Work happens between people, and therefore information must be shared. Until Vulcan Mind Meld is possible, meeting are the best effective way to share information.
The reason you want to risk over communicating, is that you don’t want to wait until the last minute to change direction. This doesn’t mean that you communication shouldn’t be well thought out and purposeful. You want to release the right information at the right time to the right people. You want to make small adjustments as quickly as possible. You need to signal changes to your as far in advance as possible. No matter how agile your team is, you don’t want to delay. You want to risk over communicating.
At CAN we have team meetings everyday at 4:45. Monday through Thursday we use these team meetings to align the entire company, hold people accountable, and get people to think about what they need to accomplish tomorrow. Each person shares what they accomplished during the day, and if anything, “roadblocks”, keeping them from completing their projects. Others provide advice or recommend resources to help each person overcome their roadblocks. On Friday, we use this meeting to review what was accomplished during the week, and determine who needs to accomplish what during the next week. This helps to keep everyone aligned, and prevents people from accomplishing unnecessary tasks. It allows us to make small adjustments, and avoid crashing at high speeds.
Still More to Learn
I know that I will learn a lot more in my career as an entrepreneur. However, I wanted to stop and share what I have learned so far. I hope you found what I shared valuable. So far, CAN has been able to achieve more success than 96% of the roughly 23,000,000 companies in the United States. Only 4% of companies in the United States have more than 10 employees or more than $1M in revenue. I can’t rest. The road ahead is even more perilous. Only .04%, or 1 out of 10 of the 4%, ever make it to $10M in revenue, only 17,000 companies surpass $50M, only 2,500 firms in the US are larger than $500M, and only 500 firms are larger than $11B in revenue. Our goal is to make it into the top 500. If you enjoyed this post, please subscribe to our monthly newsletter.