Don’t confuse risk with uncertainty - be clear about what we know is true and what we hope might be true.
We usually assume that we are in the present, looking forward to the future, with the past behind us. But this whakataukī suggests the opposite, and seems to be more supported by evidence:
Ka mua, ka muri
We’re actually facing the other way - looking to the past for guidance, but walking backwards into the future.
This is why it’s so hard to imagine what’s coming next - it’s behind us!
This is why we shouldn’t be surprised when we occasionally stumble on unexpected obstacles - we’re not looking where we are going!
Of course we’re scared. We remember the past and recall all the times we were wrong previously, and we anticipate an uncertain future no doubt waiting with some entirely new ways for us to be wrong too.
But we don’t need to worry about being wrong as long as we’re choosing good things to be wrong about. We can remind ourselves that we just can’t know until we try. Then we can make a plan to prove to ourselves that we can do those things, or learn that we can’t. Either of those outcomes is better than not knowing. We just need to be honest about our results.
We need to remember how everything grows: first we do it once, then we do it again, then we do it multiple times. The progress we can make just by taking one step at a time is phenomenal, provided we start soon enough and keep going at a pace we can sustain without having to rush. It’s the only good way to walk backwards!
It’s important that we don’t confuse risk with uncertainty.
If we already know how to do something, but don’t know if we can or will, that’s a risk.
If we don’t yet know if that thing is even possible, that’s uncertainty.
We need to be clear about what we already know is true and what we hope might be true but haven’t demonstrated yet.
This is the important distinction:
We use evidence to identify problems.
We use experiments to solve problems.
These two things require surprisingly different mindsets.
This is why when someone tells us something is broken, they’re usually right. But when someone tells us how they propose to fix it, when there is no proven solution, they’re usually wrong.
This is why just describing an opportunity or, worse, raising awareness about a problem, doesn’t achieve anything, unless it convinces somebody to act. Potential must be fulfilled before it counts. Potential isn’t an end in itself.1
It’s easy to say we are led by data, and that we do what data tells us to do. But it’s never as simple as that. Data can sometimes answer our questions, but we need to ask them first.
Managing without metrics is like flying blind. But equally trying to manage entirely by metrics is misguided. The most important decisions we need to make often involve subjective judgement. In those moments we should use all the data we can get our hands on to inform our decision. But let’s not pretend that the numbers themselves will ever make difficult decisions for us.
We mitigate risks by understanding them in advance and planning how to avoid them. But mitigating uncertainty requires understanding what we’ll do if we’re wrong and by asking: what is Plan B?
Investors in startups often spend a huge amount of time and effort trying to understand the risks involved. This work is commonly called “due diligence”. It’s tempting to believe that by being thorough we can eliminate risks in advance of making an investment.
But that never happens. There are always questions that we’re not able to answer. There are always things that are just uncertain.
We should be explicit about the leap of faith.
In other words, we should articulate exactly what we believe is possible, but cannot prove yet.
Describing this uncertainty clearly forces us to be honest about what we know and what we don’t know; to choose the specific experiments we will need to complete in order to close that gap as soon as possible; and to think in advance about what we’ll do when we’re wrong.
Everybody involved in a startup can use this technique.
Founders shouldn’t wait for investors to do this work. That just invites an endless list of questions. Rather, we can describe the leap we’re asking investors to make. This is a great way to separate those investors who believe that we can do it from those who don’t and so are likely to waste a lot of our time while they try to prove it in advance. Very few founders ever do this because they assume that investors want them to pretend they are certain.
It’s reasonable for investors to ask about known risks and mitigations. But it’s more important to focus on the specific experiments the investment will fund, and decide if we believe those will be successful. Embrace the uncertainty rather than pretend that we can avoid it. Great founders are delighted to work with investors who think this way.
When we explain our vision for the future, we should consider if what we are describing is thematic or specific:
A thematic vision is a top-down way of thinking and describes general trends.
A specific vision is a bottom-up way of thinking and describes individual ventures or projects.
A theme without a specific venture is academic. A venture or project without a supporting theme is likely to face headwinds.
The best ideas are a combination of the two: a specific venture that is created to capitalise on a general trend.
For Trade Me the general trend was the web as a consumer platform, the specific idea was to replace the newspaper classifieds by taking advantage of the benefits of the web (e.g. longer descriptions and photos) and to create a network effect that kept marketing costs very low.
For Xero the general trend was the shift to Software-as-a-Service (SaaS), the specific idea was accounting software for small businesses, using accountants and advisers as the sales channel.
When we describe the future we imagine we need to be both general and specific.
All investment is speculation. The only difference is that some people admit it and some don’t.
Sometimes we still feel tentative, even after we’ve identified the leap of faith that is required and described our vision for the future. That’s completely normal.
The question we should ask then is:
What are we waiting for?
Or put another way: what do we need to know is true before we would be ready to fully commit (or decline)?
Sometimes, when we make that list we discover that those things are already true, in which case we’re just procrastinating for no good reason.
Other times, just framing our uncertainty that way highlights that we’re waiting for things that just aren’t going to be clear until much later. Rather than wasting energy on those, we can instead get moving with the smaller experiments that we can start immediately to begin to resolve that uncertainty.
Making sure that everybody involved in a venture understands the leap of faith in advance continues to pay dividends even after the investment is confirmed, because it gives everybody a clear thing to constantly test and track: do we still believe?
If the answer is “yes”, then what’s the next thing we need to do to get closer to knowing?
If the answer is “no”, then it’s time to stop and make different plans!