In the best of times, entrepreneurship is a risky proposition. It’s like jumping off a cliff and assembling an airplane on the way down. And, now, obvious to everyone, we’re living in very difficult and tumultuous times.
Today’s entrepreneurs find themselves falling from the cliff and assembling a plane with tools that are on fire while being attacked by a swarm of murder hornets. Yet despite the increased risks, entrepreneurs are still taking those leaps of faith. To help and encourage entrepreneurs, we are sharing our thoughts on how to mitigate — and even take advantage of! — the present set of risks.
We discussed this in detail on the latest episode of Greymatter. You can listen to the podcast here.
The Upside of Risky Times
The first thought is that if (and this is a big “if”) you’re able to survive all the landmines that the pandemic and other tribulations have strewn across the landscape, you’ll emerge with less competition. Most of the competitors that you might face during good times will either be eliminated by the obstacles, or simply decide never to start. This is why top venture capital firms like Greylock and others are actively investing, especially at the seed and Series A stages. We know that interesting businesses that get started now will have a much clearer runway to generate speed and momentum since the usual copycat competition has been delayed and scared off by the increased risks.
This kind of “high-impact” entrepreneurship, including the highest-impact blitzscaling entrepreneurs, are critical, because we are going to need a lot of job and value creation to compensate for the value destruction of the pandemic and shutdown. We face a decade of recovery, and entrepreneurship will be needed to lead the way out of this recession. Data from the Bureau of Labor Statistics shows that during economic downturns like the Dot Com crash and the financial crisis of 2008, more than 100% of net job growth comes from companies that are less than five years old. While older companies are losing jobs, entrepreneurs are creating them.
Defining Decision Windows
Another way to mitigate the current risky environment is to follow one of the Counterintuitive Rules of Blitzscaling and “raise too much money.” In the months leading up to the financial crisis of 2008, David Sze, who led Greylock’s investment in LinkedIn, came to Reid and warned that he and his partners saw signs that the market was aggressively overheated, and suggested that the company raise a Series D, even though it didn’t need the money at the time. LinkedIn took his advice and closed its Series D about two months before the crisis hit. The series D insured that Linkedin had the capabilities to play both offense and defense in the 2008 crisis.
When the crisis did come, LinkedIn’s CEO at the time, Dan Nye, attended the famous “RIP Good Times” presentation by Sequoia and came back convinced that the company needed to do a layoff. I (Reid) disagreed with the move. Thanks to David Sze’s advice, the company was well-capitalized, and didn’t need to make any drastic changes to cut its expenses. Raising money was an insurance policy that allowed us time and space to capitalize on opportunities and not just manage risks. The problem with unnecessary layoffs is that they break the implicit promise startups make to their employees, which is, “We’re a growth company, and if you do well here, your job will grow as well.” This is how fast-growing and blitzscaling companies attract such good talent–they offer amazing opportunities to excel. A financially unnecessary and cosmetic layoff might signal discipline to a certain type of investor, but it sends a far more detrimental signal to employees.
LinkedIn successfully navigated the crisis. However, instead of a layoff, LinkedIn should have simply paused hiring, budget, and plans. In retrospect, it probably would have been strategically wiser to slow down immediately, and then evaluate if there was a strategic opportunity to play aggressively forward. If the recession proved to be a lasting one, we could then slow down and as necessary adapt later with a modest loss of capital. But, as the recovery came quickly, we might have played a better growth strategy.
LinkedIn’s reaction to the financial crisis is a specific case of a general principle, which is the importance of assessing not just the risks, but also your decision window. The default decision window for startups and entrepreneurs is “right away,” since they depend on speed to outcompete bigger, more well-resourced competitors. But this decision window is only a default; smart entrepreneurs modify their decision window based on the context. A risky, high-impact decision might warrant more consideration. You should be explicit, and define a clear and explicit window, which could range anywhere from “right now” to “in three months.” In uncertainty, or by default, opt for the shorter decision window. It’s a natural human tendency to want more time for decision, whereas making the decision and moving forward is frequently the right call.
The next step is to figure out what you can do during that window to reach a better decision. Questions like, “What analytics should we collect?”, “Whom can we talk with to gather data?”, “Which risks are acceptable and which are unacceptable?”, and “How can we mitigate potential risks?” should be a part of your decision process, rather than only asking them after the decision has been made.
Using the decision window, you can then evaluate these questions on cost-benefit analysis, a return on investment per question. Best judgment: how might the best ideas on these questions affect the decision, by range of changes, by risk analysis, by upside possibilities? What time and resources will it take to get the intelligence for the questions and subquestions? How much will we be able to trust and use the answers to the questions?
One technique for managing an uncertain decision window is to ask up front, “What choice would I make if I had to make my decision right now?” Once you know the “now” answer, you can start asking more questions, knowing that if you’re suddenly forced to make a decision, you can say, “We’ve already made the decision. Let’s go.” Then you can move decisively AND leave yourself the opportunity to find a better move. Furthermore, an answer to the immediate decision question can suggest which questions from above — the decision-changing questions — to focus on.
Of course, you shouldn’t use the decision window technique as an excuse for inaction. One of the mistakes people make in decision-making is to say, “Let’s sleep on it.” That’s just another reflex–you feel uncomfortable, so you waste 24 hours for the sake of emotional comfort, without taking action to make a better decision. If you’re not going to gather any information to help make a better decision, you might as well decide right away. This may feel unnatural, but if you practice making quick decisions despite your emotional discomfort, you’ll get better at making decisions quickly and learn to manage that discomfort. Entrepreneurs learn to make decisions this way from necessity, but it helps in many contexts.
Once you make your decision, stick with it unless there is clear evidence to change your mind. One of the mistakes inexperienced (and even experienced) entrepreneurs sometimes make is to change their decision every few days because they think they’ve found a better alternative. There is a hidden cost to inconsistency. Each time you make a quick change, you train your team to distrust your decisions and delay taking action because they believe you’ll simply change your mind the next day. This damages the organizational coherence – by trying to move more quickly, you destroy its ability to move quickly.
Reducing People Risk
One of the classic risks that entrepreneurs tend to overlook is people risk – the possibility that a lack of necessary talent will prevent the company from succeeding. We’re in the middle of a global pandemic, which makes people risk even greater than usual. First, even young, healthy team members could contract Covid-19 and become unable to work, whether due to fatigue or even (if unlucky) hospitalization. Second, even if your team members remain healthy, their loved ones could fall ill and require their help. At any time, you could find yourself desperately trying to hire someone to fill a key role.
The best way to mitigate this risk is, to paraphrase Glengarry Glen Ross, “Always be hiring.” Entrepreneurs should always be in conversation with great talent, or with people who can refer great talent. Not only will this mitigate the people risks, it will also allow the company to integrate diversity and inclusion into hiring. When you make sure to “always be hiring,” you can proactively reach out beyond your immediate network and build diversity into your team and culture from the beginning.
This is not the same thing as constantly interviewing job candidates for positions you haven’t even opened yet. You don’t have to tell everyone, “I’m hiring for X position.” Instead, reach out to great talent and say, “I’m trying to learn what great looks like in your function. I want to talk with you because you’re great, and I’d like to learn from your greatness.” Whether you’re talking with a software developer, a designer, or a marketing professional, that line of questioning shows that you value their expertise and want to learn, which is exactly the right way to build a good relationship for the future.
Managing the Three “S”es of Responsible Blitzscaling
In our chapter on responsible blitzscaling, we lay out three “S”es for evaluating risks: Severity, Scope, and Systematicity. The more severe the potential negative consequences, the broader their scope, and the more those consequences trigger a cascade of other negative consequences, the greater the risk and the greater the need for caution and mitigation. The organization needs to have the ability have to ask itself, “How do we monitor these risks?, “How can we tell if they’re beginning to manifest?”, “How should we respond if the worst starts to happen?”
When severe, broad, and systematic risks exist, you should hire a team member to focus on leading the effort to navigate those risks.
For example, Aurora is working on autonomous driving. The associated risks are severe (human life is at risk in the event of failure), broad in scope (the entire road and transportation system), and systematic (our entire economy depends on transportation and logistics; even if Covid-19 has reduced the importance of driving for many consumers, it has increased the importance of the delivery services that now serve as our lifelines).
That’s why Aurora’s founder, Chris Urmson, invests his own time to understanding and navigating these risks. Chris, by his work at Waymo and at Aurora, is one of the world’s leading experts in navigating the risks of AV technology.
While few prefer living in risky times, even when you aren’t given a choice, you can still choose to employ risk management to achieve advantage. Reducing risks to zero is both impossible and counterproductive. Taking unnecessary risks is a very bad idea – but playing risk intelligently rather than simply limiting downside, and leveraging an insight that you have and others do not – can become a key competitive edge that helps you succeed.