1.1.12. Opportunities and Uncertainty


Entrepreneurship is always a bit scary because taking advantage of opportunities involves embracing uncertainty. So the most common question I get asked is whether or not a startup will succeed. If I’m going to have to take a leap of faith, how do I know that I’m going to be successful or not? And how do I make sure that I’m doing the right kind of thing by engaging in entrepreneurship? And unfortunately there’s not an easy answer to this because entrepreneurship drives from uncertainty. It gets its power from the fact that you are taking advantage of an opportunity that other people have not seen or haven’t taken advantage of, right? You’re starting with an innovation, an idea or a market need that other people haven’t spotted, or that’s currently unsatisfied. And your goal is to fill that need. But because that need’s unsatisfied, you can’t know the answer in advance. And if the opportunity was obvious or risk free, somebody else would have done it already. So that means that taking advantage of entrepreneurial opportunity is inherently about taking advantage of uncertainty and embracing uncertainty yourself. That doesn’t mean however that there’s nothing you can do, that this is a coin flip, because there are a number of things you can do to reduce uncertainty in your entrepreneurial venture. The first and most important thing you can do is plan. So, strategy is all about dealing with uncertainty. About embracing uncertainty and figuring out how to reduce it by planning in advance, and lowering your risks. If you think about uncertainty, there’s actually three kinds of categories of uncertainty. Okay, we start off with, things that we actually know. Facts, information that is already certain to us. And this category of information is the lowest risk, right? If we know that our products going to be accepted, we know that we’re going to get that bank loan, we know that customers are going to buy our thing, that’s the highest quality level of knowledge that we could have. Slightly worse is uncertainty. Uncertainties are categories that we know it’s something we’re going to encounter and we don’t know how it’ll pay out. All right, will we raise funding? We know we need to get funding from somebody, we don’t know from whom. Will everyone who’s joined our company stay at their job in the long term? So those are uncertainties. And then we finally have the most uncertain category which is unknown risks. These are things that could happen out of nowhere. The market changes. A new technology is invented and invalidates all previous technologies. Political turmoil changes the government of a country you’re working with. A sickness forces one of your co-founders to resign. These are these risks that happen in every case. So when you think about planning, it’s about trying to reduce uncertainty by moving things that were uncertainty into known facts, and moving risks into uncertainty so we at least know that these are possibilities we can plan for.
2:46
The problem with entrepreneurship is you have a lot more uncertainty than in conventional planning. So that comic conventional planning tells you when you’re launching a new product or service in an existing business or organization you have a lot of known knowns, a lot of facts. You you know about your past performance when you launched ventures before. You know what competitors do, you can read analyst reports telling you about business or how market segments operate. There’s still some uncertainty, you don’t know exactly how customers respond. You don’t know exactly how competitors are going to react to your market entry but you have some idea that these are things you have to be concerned about. And as far as unknown risks, hopefully outside of the giant systemic risks everyone has to deal with there aren’t that many unknown risks. In entrepreneurial strategy, however, you know very little. You haven’t built your product. So how do you know whether people will react? You have no past performance to draw from. So there’s a huge range of uncertainties. You know you need to find customers. You don’t know what they’re going to look like. You know you’re going to have to give a pitch, but you don’t know how that’s going to be received. You know that you’re going to have to raise funding, but you don’t know from whom. You know that there’s going to be competition, but you don’t necessarily know how people are going to react. So there’s a lot of uncertainties. And there’s even more risks because you don’t know a lot about the future. You don’t know what the market’s going to look like. You don’t know what kind of customer problems you’re going to encounter, what legal problems. There’s whole categories of unknown risks that you’re facing. So we can’t eliminate all of these risks and uncertainties but we can by planning identify risks and move them to uncertainties that we can manage. We can get information about uncertainties like whether customers will accept your product and turn them into facts. So we can increase our certain level of certainty and decrease our level of uncertainty through planning. And that’s not necessarily a bad thing, because startups need to learn as they go. You need to structure your startup to learn. And this is based on some research that I’ve done, surveying working [INAUDIBLE] companies. And what you see in this chart is the survival curve for working start ups. So the bottom is years and the left axis is the percent of companies remaining after a certain number of years. And there’s two lines. There’s a red line and a blue line. That red line are companies that changed direction radically from their initial idea. The blue line are companies that did not change direction radically. What you can see I think is very interesting which is that the companies that changed direction a lot which is usually a sign of problems in a larger more established company. Actually had the same or better survival rate than companies that knew what they were doing initially and executed on their initial idea. So what you need to do in your startup is think how you learn as you go, how you adapt your strategy as you deal with these uncertainties about your future. And if you do that successfully, as you can see the chart, you actually will succeed very well. So, the idea that you have to change direction, that you have to pivot and adapt your approach is actually a part of what makes startups interesting and more successful than more established organizations much of the time.
5:38
Now, how you do this is sort of an open question academia, there’s a lot of techniques out there for planning start ups. And all of them try and embrace the idea of uncertainty and try and by having you test your ideas earlier and often and update your assumptions frequently let you take into account the fact that you’re learning as you go. And you can use any of these techniques using the data and tools that we’re giving you in this class. Right, so we’re not going to privilege one approach over another and say you have to use one method or another method. These tools are applicable to many ways of doing planning. So one method you may have heard of is the lean startup method. So lean startups, there’s a book about it, there’s quality circles, it’s become a big issue in the press. We don’t actually have any academic evidence that lean is better than other approaches to launching a startup company. But it’s one method that takes into account uncertainties and has you thinking in advance about your assumptions, which is something we’ll talk about later in the class, and plan around it. Another approach is the business model canvas. Again, there’s not a lot of academic evidence validating this as better than any other way of planning your startup, but it takes into account the idea that you’re trying to think about all of the assumptions and all of the parts of your business and how they fit together. In this class we’ll actually cover discovery driven planning, which is one of the set of approaches that you can use that are applicable to other angles like lean for how you can plan in the face of uncertainty, so we’ll give you some tools to do that. But the point is to realize that there isn’t one set of ideas or one set of approaches that is academically proven to be the best set of ways of planning with uncertainty. So whether you use lean startups, discovery driven planning, your own technique, you have to take uncertainties and learning into account. And we’ll show you how to do that as this class progresses.

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