Most people are trained in how to make a non-risky decision. Most people are also not trained in how to make a risky decision.
Do you use your gut? Do you calculate payoff to make the uncertain more certain? Do you get advice from others who know more? Do you gather more information and if so, what?
don’t pay but sub if you wanna hear me rant in a quasi-educated way
In lieu of such a framework most people, usually unknowingly, fall back to what they know: their tools for assessing non-risky decisions.
This is a problem. It is a fundamental miscalculation of risk.
I see this constantly among most of my colleagues, close friends, and even most seed investors. And it is particularly obvious in the questions one asks (especially in front of founders)1.
Now startups are risky by definition, but I find lots of cases in my life where the generalizable framework applies. Including in a lot of major life decisions (like who you date and marry).
Arguably the most important decisions you will (or will not!) make are risky. How do you assess them?
Let me offer one way.
What is a non-risky decision?
It is a decision where you have near complete information. It’s where you have a case full of information in front of you.
How do you evaluate it?
You poke holes in each of the reasons you should or should not do something. You resistance test each point. Once you assess each point, you move each into a “for” or “against” column.
And then you add everything in both columns. Maybe you implicitly weight each point. And then you make your decision.
Something like the above2.
What is a risky decision?
It is a decision where you have little information but a potentially outsized outcome3.
How do you evaluate it?
Instead of poking holes, you should try and create a path to success. You should start at a core assumption or base truth, and from there build up every step until you get to your outsized outcome.
At each step, you should think critically about what might be a threat or what might be hard. And then you need to come up with several ways on how to overcome that. This is where marginal thinking comes in handy.
Instead of poking holes, you are doing something fundamentally positive - you are figuring out what core assumptions you are making at each step – about human behavior, market changes and eventually strategic reactions – and how you will test and then solve for them. You are building up, rather than tearing down.
It is a fundamentally optimistic, creative, and imaginative exercise almost akin to daydreaming – you have to dream of a potentially outsized outcome, and you have to have the creativity to think about what you can do to get there.
And statistically speaking if you try enough times at your risky endeavors, including trying enough times at each step, you will succeed.
So what does thinking through it look like?
As an example, I’ll use a venture pitch – something I often see go wrong. Those in venture usually ask “tear down” questions instead of trying to “build up” the company with the founders when doing due diligence.
Let’s start with a bad session. Most don’t even recognize it.
A bad session would look like this series of questions: “Why won't Google kill you?”, “Is it easy for someone else to copy your product?”, “Why are you not monetizing earlier?”. It's an often random set of questions that all fall into the category of how might you fail, instead of why might you succeed.
These are usually not useful questions to ask because failure is the default with risk. It is a wrong framing of the endeavor. Instead, one should ask “how might you succeed” questions.
A good session would look like this series of questions: “What are you building?”, “What problem are you solving?”, “How will you get your first customer?”. “How will you get that customer to love you?”, “Are there any existing solutions they use?”, “What do you know that those competitive solutions don’t about what your user wants?”.
They triangulate the problem and the solution. And you as a founder should be working with them to answer it, honestly. “Have you thought about this alternative solution?”, “Why wouldn’t it work?”, “Is that that problem the most intense one that they have?”, “Is there an easier way to test this?”.
Once you finish the problem and initial solution – the base case4 – you will then think through how to grow it. Questions like “How will you get your next 10 customers?”, “Who will you hire?”, “How will you go-to-market beyond those 10?”, “How big is your initial market?”, “How big can it get?”, “When competitors take notice, how will you use their advantages against them?”.
You can use this same “building up” to evaluate other risky decisions – whether it be job, partner, location etc. Start with the base case where problem and solution fit matter most, and then think critically about each next step of the journey on the path to your outsized outcome.
Cool. So like investors do this, right? I mean who does this well?
Ironically, most investors actually don’t. And most people don’t because the filter we use to promote people to decision-making positions is their ability to analyze non-risky decisions.
If you were given decision-making power, you likely were trained in an elite educational institution (for investors, Harvard Business School or Stanford GSB where you’re given cases with more information than you’ll need). Through that and your previous training, you will excel at information analysis (pun intended).
You will get a job as an individual contributor, given non-risky decisions with lots of information and relatively inconsequential outcomes. And your promotion will be decided on your execution capability, where you will then be given progressively larger outcome decisions.
But they will all be linked to high information.
And that is enough when you are a manager running an operational company at scale. And to be fair, that is also very hard.
But for many decisions, including the ones you might not think to consider, you will have little relevant information and the outcome is potentially outsized – this is not what managers are trained to deal with. So most default to their training and de-risk by getting more information, or stick with low-risk decisions.
Some even resort to connecting irrelevant information in an attempt to bring order to the chaos (think a spreadsheet with “cash flow estimates” that is always incorrect for new ventures).
Investors often share this background. Choose them wisely so they don’t make the above mistakes.
You mentioned derived from Y Combinator. Great clickbait. How are they relevant?
This framework is how Y Combinator evaluates startups.
If you reach the interview stage, you’ll get peppered with about a hundred questions in ten minutes that don’t feel like an attack but rather a build up of the idea with you and a questioning of your assumptions. It’s intense – some people describe it as scary, but I think it’s really fun.
Later when pivoting during the batch, I watched this video from YC partner Kevin Hale5. Watch it – in 90s he describes this way of thinking that he adopted from Paul Graham and how it’s part of YC’s operating DNA. In my experience, it is clearly reflected in the selection process.
In my personal notes, I scribbled: “YC has the best record for early-stage startup investing by a hundred miles. Investing in each early stage startup is a risky decision. Their selection process leads to these results. This must mean their process can be made generalizable for all risky decisions, even beyond investing.”
And so I wrote something similar to this piece in my personal notes.
Conclusion
Lesson: Learn to evaluate risky decisions in a different manner. Start with the base case and then think critically about each next step of the journey. “Build up” rather than “tear down” when making any risky decision in your life.
If you make enough risky decisions and have enough ways to overcome the challenges at each step – it’s not a matter of if, but when. You will succeed.
Non-obvious lesson: I genuinely believe daydreaming helps build up the capacity to imagine outsized outcomes. It is a skill you build when you have end-state thinking, which is a pre-requisite for identifying non-risky decisions.
Most people have a plethora of non-risky, outsized outcome decisions available that they completely miss because they couldn’t or didn’t let their imagination wander.
For example, a lot of people say “I would totally start a company, but I don’t have an idea.” My response is always, you should daydream a lot more about what you want your world to look like.
Thanks for reading :) Would love to hear how you think through risky decisions.
Also working on the tone, this is no 2 and want to inject more humor into this. Bear with me.
As stated later, bad questions usually fall in the category of “how might you fail” instead of “how might you succeed”. Those are not useful questions to ask, as there are always an abundance of reasons for failure – that is the default with risk.
I usually weight the second argument higher than the third. Hence why I am single 🙃
Technically a risky decision is just one where you have little information. It isn’t dependent on the outcome (think skydiving from a sketch, unlicensed company. Still very risky).
Having a potentially outsized outcome is a condition I’m putting that makes it (potentially) worth taking. Otherwise you can pretty much automatically rule it out.
Another interesting question is when it is hard to determine if the outcome is potentially outsized (like, going to Harvard Business School). For that, you have to daydream. Seriously. For most outsized outcomes, you need to create the outcome which means it is not easily recognizable.
Induction would be the most generalizable form of this theory if you were able to magically hold the environment constant – allowing n+1 to scale infinitely. Unfortunately, the market changes quite often so growth looks different at each step.
That being said, if you can find an opportunity where n+1 scales irrespective of the market (the closest is Brex with startup banking), you will win big.
Better yet, if the market is shifting so those where n+1 is applicable is rapidly growing and will eventually tip so everyone adopts the behavior (like Stripe with digital payments in the earlier internet era), you will win even bigger.
In case you didn’t click on the link and have not wandered to this footnote, watch it. 90s. Probably worth more than whatever you’re doing right now:
Text form if you refuse to hear it:
“I learned this way of thinking from Paul Graham. He says the average investor, when you talk to them, it feels like they’re trying to poke holes in your idea. They’re trying to figure out what’s wrong with it….
And he explained that his job and the way he sees our work at YC is that it’s not to figure out what’s wrong with the company. It’s to figure out how it could possibly win.
Because our bets, the ones that win, are the ones that are non-obvious. And so for us to figure out the non-obvious stuff, it’s not going to sound obvious when they first tell you.
And so we have to like work on our imagination, we have to work on our optimism, to figure out, oh, what is the way that whatever story that they’re telling me could become a billion dollar company?”
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