Chapter 3: Let’s Talk About Risk
Assessing Your Relationship with Uncertainty
risk tolerance, uncertainty, risk assessment, entrepreneurial risk, comfort zone
Your Relationship With Risk
Any questions or comments? Okay, let’s talk about risk.
Professor Asgari asked me a few years ago to incorporate a discussion of risk into this presentation. The question specifically was: how do you deal with it, how do you think about it? It kind of caught me off guard, because I don’t think — I mean, I don’t consciously think about it. Sure, I think about it, and sure it’s on my mind. I think the first level of thought for me is: nothing is without risk. There’s risk to everything.
The next level is: how manageable is it? That’s where my head goes right away. The way I tend to deal with it is I look at the riskiest things in a startup. There are immediate risks and then there are the longer-term risks. I look at the risks every day and say, all right, how are we managing these? I’m really good at putting things that are less important — perhaps less risky — off to the side and dealing with the really near and immediate risk.
One way to think about this is there are maybe three, maybe four levels of risk. This is not original — this is actually Donald Rumsfeld, who was the Secretary of Defense in the Bush administration, who famously got up and talked about risk. It was clever, but it’s also really helpful when you want to think about risk and categorize it.
Known knowns are risks you know you are going to encounter. Do I have enough money? Is the product ready for the market? Will people buy it? These are known things, and because they’re known, they’re manageable — they should be manageable. That’s the reason they’re known knowns. You have to manage these.
Known unknowns are gaps in your knowledge. You know that you don’t know enough about something. In any business you start — or run, by the way, this kind of transcends startups — they’re very acute in startups. You know something could happen but you don’t know exactly what’s going to happen. You have to categorize those. This is risk assessment as part of your business plan. You have to think about those.
Unknown unknowns are the things that are going to happen that you don’t know what they are and you don’t know what you’re going to do about them. They exist and they happen. Every business has them. They tend to happen at the most inopportune times — they never happen when you are ready for them. They just pop up and you have to deal with them.
The goal, of course, is to move everything as far to the left as you possibly can. Think about your risks deeply. The known knowns should be relatively simple. Known unknowns — at least you’re thinking about them, you know you don’t have enough information. Maybe you can get more data to help. Unknown unknowns — you just don’t know. This is something that went through my head every single day. Everything we did, I’m thinking about these and thinking about how I’m going to manage them and what I’m going to do when they pop up.
It’s not that they won’t happen — they’re going to happen. What’s important is how you deal with them. Have a 30-second freakout, and then go after it. The really big ones — if you have a team of people with you, however large or small — get together and think it through.
There’s risk, there’s risk and uncertainty, and then there’s just uncertainty. It’s unavoidable. Is this helpful, is this a helpful way to think about this? Yeah, this goes through my head — I’m retired now mostly — I’m still thinking about this on a daily basis, about different things of course.
Assessing Your Risk Tolerance
If you want to look at this slightly differently, this is where it gets more personal: what’s your comfort level with risk? I would put myself in this box — I’m okay with a fair amount of risk, as long as I’ve done my homework and feel I can manage the risks I’ve identified. It’s not a good thing or a bad thing about where you fall, but I think if you’re assessing risk you should start with the comfort level first. What am I comfortable with?
Even coming to university — coming to Tech — is a bit of a risk. How many of you had never been here when you showed up for your freshman year? Okay — there’s a risk-taker. You didn’t know, right? Was it okay? Yeah, it’s okay. But coming to any university, when you think about Michigan Tech — I think about this a lot — I didn’t want to go somewhere way out in the middle of nowhere, not a lot around, and by the way it snows pretty much the whole time. It’s not a big place, it’s not easy to get to or get out of. There’s a fair amount of risk in there. The upside is we know this is a good university with a great reputation, so that brings the risk down a little. But if you’re here at Michigan Tech, you’re probably up in the higher end of the comfort-with-risk spectrum.
The Classic vs. Operator Risk Profile
Student question: Outside of just numbers or data, how would you get somebody — like your CEO or CFO — to agree with a plan if they’re not as much of a risk-taker as you are?
Great question. So beyond the data: how do you assess risk, and who do you talk to about it?
You want to talk to other people. I was fortunate — I had really smart people around me all the time who would trust me to come up with the plan, present the plan, and then I wanted them to criticize it as much as they possibly could. Because they’re going to think about it from a different perspective, and you need those perspectives. Even if you’re a solo entrepreneur, find a mentor or a couple of mentors that you trust and sit down and talk about the plan with them. They’re going to think about it differently than you do.
It’s good to get outside your own head. It really is, because you could talk yourself into anything. I was always the one pushing people a little harder, and I had people say, “Wait a minute, we can’t do that” or “Why would we do that?” It’s a really good thing to do. Data will only take you so far — data is important, and we have access to a lot of it now, much more than I used to. But there’s a non-quantitative side of things that you really have to go after. Great question. Rely on people.
Other questions? Okay. So this is another conversation with yourself. If you’re going to be an entrepreneur, think about this, because it’s unavoidable. It’s a question of how comfortable am I with it, and how am I going to deal with it. There’s no right or wrong answer — there’s just the answer for you. I think that’s the really important thing all the way through entrepreneurship: there’s no right or wrong answer. There’s an answer for you, and that’s what’s really important here.