Risk Breakdown
People are not good at calculating risk. Risk can be broken down into (1) the actual estimation of likelihood of failure / downside calculation, and (2) the outcome in the result of failure / what does failure really represent.
People are also not good at calculating upside, which can be broken down in a similar way of (2) chance of outcome and (2) the reward.
The reason for this is there is a human aspect to risk. Humans aren’t computers. Also, what is the risk of never doing anything meaningful with your life?
Risk in Entrepreneurship Doesn’t Check Out (In Theory)
If you were to create a “risk model of entrepreneurship,” the clear and obvious output would be to not engage. Most startups fail. Most ideas are worthless. Most people shouldn’t be entrepreneurs. There’s a power law that works against you. The list goes on.
In contrast, actuaries and hedge funds can take broad portfolios of stocks and, using statistics and math, create reliable and relatively precise models around upside/downside cases to predict risk.
We Should Trust Our Brains and Instincts More
We seem to forget that while we have calculators in our pockets, we are still the most intelligent animal on the planet, more intelligent than any risk model. You should ask yourself when the last time you truly identified and solved an important problem was? I can’t really even remember. Society isn’t structured in that way. You are always carrying out processes for others. As a young person, you are supposed to question the system. It has always been that way. And the older systems will never reward irreverence.
The Reality is Wandering, Learning, and Creating
We should trust and let our brain, heart, and instincts guide us.
Startups/Entrepreneurs shouldn’t view risk the same way investors should. The reason is it is impossible to predict 1 and 2 for both upside and downside. During the early stages of an invention, for instance, it is just an idea thread that tugs at your curiosity. Only after pulling on it for extended periods of time, talking to others about it, and learning intensely, do you start to see what that invention could or could not be.
I’ve always viewed these things as white sheets of paper. For every new thing I’ve worked on, it’s always started with just a thought written on a piece of paper. A grain of sand in the universe. After extended periods of time of letting your curiosity guide you, you start mapping out the problem and its surface area expands. The paper becomes 10 pages, 50 pages, pruned down to 25 pages again, then 70 pages… You are literally creating enthalpy of the universe’s entropy. You are connecting ambiguous dots and organizing them in a way which has actual value. The paper lengthening doesn’t have value in itself. It only matters in the sense that it is a projection of your brain thinking through the concepts, mapping out the area, solving the problem, and learning.
The vast majority of the time, you are just wasting your breath. Most ideas have no real value, even when mapped out. They may not be profitable, no one really cares, there may be regulatory reasons they can’t be sold, it’s just too hard to make, the timing isn’t right, etc.
The human side of this as well is that according to Vannevar Bush, “an invention has the characteristics of a poem. An inventor invents because he cannot help it.” I can relate with this in some ways, as I am compelled to write this.
When it Works
Sometimes it works. Maybe 1 out of 100 ideas, you feel incredible conviction in one and it is received by people in the market well. The universe is on your side. A lollapalooza event in the eyes of Munger. While it is just a hint at what’s possible, and there will be an incredible amount of work from there, you have to imagine all of the possibilities and continue forward.
You have to be optimistic close to the point of delusion, because the calculus still doesn’t make sense. And most people don’t have this mindset, so you also have to receive their feedback but insulate your delusional optimism to keep pushing forward. There is an S-curve of technological adoption and most will not believe or see what you see until it literally punches them in the face.
Startup Risk/Reward Calculus
You should still be logical about ways in which the plan will not work, but you have to leave a lot of room for “figuring things out.” Most people won’t be comfortable with that, but that is simply the nature of these things.
You need to manufacture serendipity. You have to just keep moving and trying a ton of different things. You should speak to hundreds of people. You never know what these conversations lead to and often they hold keys to doors, step functions, and opportunities there is simply no way to know exist at the beginning. As a plus, those relationships will mean you have someone to ask questions in their field of view at later times.
You need to obsess over a singular problem and learn everything you can that surrounds it. Once you map out the surrounding territory of the idea and chew on the problem relentlessly, your brain intuitively forms more idea strands to pull on. Some of which will hold answers.
In this sense, a lot of the requisites for figuring it out is simply to stay alive, just so you can continue moving, learning, and figuring it out.
Staying Alive
Just stay alive. This is actually somewhat how I feel about life too. Most people get on these treadmills and humans will always want more. You should be pretty protective of what you chase.
Most of life is just staying alive. Every day above ground is a good day.
Low Expectations
This is going to sound stupid and irrational, because it is, but I feel I have already accomplished all that I want in life. As completely stupid as that is, I have felt that way every single year for the last 10 years, since my first semester of high school. Some recent examples:
After starting Quant, I felt incredible pride that I helped so many students learn about a new career path / connected people to dream jobs and that it may have really helped people in this world.
After getting an IB internship, I felt that I had done so much more than I ever thought possible. At best, I figured I could become a mediocre accountant.
After working on Nephra, I felt that it was really the most impactful thing I could have done at that time, and that we were solving an important problem no one else cared to glance at.
After joining Shaper Capital, I was working on the exact thing that I wanted to with the exact people I wanted to.
But that doesn’t give me a feeling of comfort, stagnation, and riding off into the sunset. It gives me the freedom to continue going all-in. I’m still playing on house money.
It probably also has something to do with the way I was raised. I was never pushed to do anything. I chose to do well in school and push myself. I chose everything I pursued and never had looming expectations of what I “should'' do over my shoulder. I saw in college that many people sputtered out. They were now free from their parents’ authority. Good grades was what their parents wanted, not them. Either that or their parents’ authority was burnt into their brains. They were simply getting good grades because that was all they ever knew to do. Never questioning what it led to.
If you’re going to last the distance, you probably need to be doing what you believe in. This mindset of freedom has enabled me to pursue ambitions that are completely irrational, but why not try?
Downside Risk
People also overestimate downside risk.
Especially in my case. There is value in being young and nameless. Worst scenario is you lose a few pennies and learn a ton.
I guess another reason that maybe enables risk is viewing money as a means not an end.
Try and Fail. Don’t Fail to Try.
That is not to say that someone should take risks and half-heartedly jump in because there is a life preserver nearby. If you do this, you are setting yourself up for failure. You should Try and Fail. But not Fail to Try. Failure is a good thing and teaches.
When you make the decision to try, you should immediately close your ears to everything around you. You need to burn the boats. Any hesitation in the face of action is counterproductive.
An additional reason startups shouldn’t view risk the same way investors should is they have the advantage of raw, animalistic ambition. Humans, throughout history, have done miraculous feats with impending doom. Startups are default dead. In a sense, you can back yourself into a corner and trust you can find a solution.
In fact, I don’t really think startups work any other way. As soon as you remove the pain, you are removing that raw horsepower in the early days.
A Plan
Even with ambiguity, the most important point in all of this is that you need a plan and clear guiding vision.
Without a plan, you are a captain lost at sea and wandering aimlessly. If you don’t set your sights on a clear target, you will obviously not hit it.
If the vision was clear, someone would have already done it, however, so you need to leave room for wandering.
The plan should be simple and you can alter it as you learn more information. A bad plan is still better than no plan.
Your Own Path
If you are on a clear path, it is probably true that it’s not your path.
That is the most uncomfortable thing about all of it. If you are trying to be the next Microsoft, you are partly not learning from Microsoft. You can borrow inspiration from all existing forces in the world, but ultimately you will never do anything remarkable on the trodden path.
Conclusion
Humans aren’t great at gauging risk. You can only calculate risk reliably if you are doing something clear, likely, and determinate. However, anything leading to excellence will not come with an instruction manual.
Sometimes, you should trust your raw human instinct and that your beliefs and convictions hold value in a world of people doing likely things.
Men with a clear vision can move mountains. Ignore false risk. Burn the boats. Make it happen.