Necessary risk

March 5th, 2024

Building a business is really hard. Many things need to come together for it to succeed. Your product needs to solve a big enough problem. Customers need to be willing to pay for it. Your sales approach needs to work. You need to convince very talented people that working on your startup is mutually beneficial. And when they join, you need to keep them happy and engaged. The list goes on. If enough of those things don’t materialize, your startup will fail.

One way to increase your odds of success is to be very intentional about when to take risks and when to avoid them. Some people think of this as managing your “innovation tokens” or making boring choices.

But it’s not always obvious that you’re even taking on risk.

Let's take an example: You want to hire one additional engineer for your early stage startup, and your recruiter asks your opinion on where they should source candidates from. Your only options are:

  1. Source candidates from both startups and big tech
  2. Source candidates from big tech only
  3. Source candidates from startups only

Absent any other information about the role, your current team or company, and absent any additional levers for filtering candidates, what would you choose?

I would choose option 3: only source people who worked at startups.

It’s not that I think people who worked at Google can’t hack it at startups — obviously they can, and they often do. But I also believe that previous success at a startup is a better predictor of future success at a startup than previous success at big tech, just because it’s a direct proof point of success in a similar context. Plus, there are probably enough engineers who were previously successful at startups to fill the role within a reasonable amount of time. I’m sure a huge number of big tech employees could succeed in the role, and we could add more steps in the resume screening process to find that out, but given the beliefs above, I don’t gain anything by taking on the additional risk. I can achieve my goal without it.

This is a toy example, but illustrates how you could be taking on risk without even realizing it. Now of course, if you were hiring for real, you’d know way more about the role, your current team composition and needs, and you’d be able to filter candidates on more than just “worked at startups” vs. “worked at big tech”. But in business you are often faced with decisions when you have very little information. You constantly have to choose between spending time collecting more information or acting on what you already know. In those situations, you may be able to move faster by eliminating unnecessary risk and doing what you already know will work.

The other half of this is knowing when you should take on risk. If you only do what you know, you won't innovate. This can also kill a startup by causing it to offer the market nothing new. An incumbent can afford not to innovate (for a while), but startups by definition cannot.

The trick is recognizing the level of risk you’re taking on, and which risks are worth it.