It’s important that we don’t confuse risk with uncertainty. We need to 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!
We’re all familiar with the standard warnings on financial products:
Past performance is no guarantee of future results.
So how should we use the past to inform the future?
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 you something is broken, they’re usually right. But when someone tells you how 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 actually achieve anything. Unless that convinces somebody to act. Potential must be fulfilled. Potential isn’t an end in itself.
This is why, more often than not, the people who invent things and the people who work out what those things are for and how to commercialise them are different people.
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 still need to ask them.
Likewise it’s tempting to think we can manage using incentive schemes based on measurable results. But, whenever we do that we leave ourselves open to people gaming the system or chasing selfish or short-term results at the expense of long-term or collective outcomes. So every measure we rely on needs a counter-measure to ensure that the resulting benefits aren’t weighed down by greater associated costs.
Trying to manage without metrics is like flying blind. But equally managing entirely by metrics is misguided.
Often the biggest and most important decisions we need to make come down to subjective judgement. In those moments we should make sure we have all of 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.
All investment is speculation. The only difference is that some people admit it and some don’t.
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.
Investors in early-stage companies often spend a huge amount of time and effort trying to understand the risk they think they are taking. This is sometimes called “due diligence”.
It’s tempting to think that if we just do enough work and ask about all of the things that could possibly go wrong, then we can eliminate all of these risks in advance of committing to the investment.
But that never happens. There are always questions that we’re not able to answer. There are always things that are just uncertain.
It’s better to be explicit about the leap of faith.
In other words, articulate exactly what we believe is possible, but cannot prove (yet).
If we can describe this uncertainty it allows us to be much more honest about what we know and what we don’t know, and then to choose the specific experiments we will need to complete in order to close that gap as soon as possible.
Everybody involved in an early-stage venture can use this technique. If you’re a founder seeking investment, don’t wait for investors to do this work. That just invites an endless list of questions. Rather, be explicit about the leap you’re asking investors to take. Spell it out. I’ve found it’s a great way to separate those investors who believe that you can do it and those who are likely to waste a lot of your time while they try to prove it in advance. I suspect the reason very few founders ever do this is because they think that investors want them to pretend they are certain.
When we explain our vision for the future, always 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.
Some examples:
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, 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.
Do we believe we know what’s next?
If so, when we describe it, we need to be general and specific!
Sometimes we still feel tentative, even after we’ve identified the leap of faith that is required and described the future we’re hoping for as well as we can. That’s completely normal. Remember: ka mua, ka muri. We’re facing the past (and likely recalling all of the times we were wrong previously) and walking backwards into an uncertain future (which no doubt is waiting with some entirely new ways for us to be wrong).
The question we should ask 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 all of those things are already true, in which case we’re just procrastinating for no good reason.
Othertimes, just framing our uncertainty that way highlights that we’re waiting for things that just aren’t going to be clear until much later. So, 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.
The most successful founders are often those people who aren’t smart enough to doubt themselves in the beginning.
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!
We can mitigate risks by understanding them in advance and thinking about how to avoid them. But to mitigate uncertainty requires understanding what we’ll do if we’re wrong and by asking : What is Plan B?