What do we mean by risks in a startup and do they ripple?
Over the years I have seen many business plans and in the startup world we often speak of calculated risks (see my entrepreneurship simulation).
Risk is divided into impact and likelihood of the occurrence of an event. Essentially every assumption in the business plan is a risk, the management team, the price charged to the customer, etc. Creating a risk score of business plan has some value, but more so is understanding where the risk of the business plan is and working to reduce it, for example, we know that the management team is a risk area of concern, a high quality management team tends to have an overall impact of reducing risk.
A calculated risk means we have minimized impact and likelihood of each risk. Part of this process is to reduce the number of assumptions by validating them, ie, will customers pay money for this product? We can reduce risk associated with the assumption about customers by finding someone(s) willing to commit to purchasing the product prior to its completion i.e. advance sales.
A startup is set of risks of different impact and likelihood and thus different significance. I have seen investors who will not invest in any company where the management team is unproven which suggests that the team is one of the highest impact risks.
We could develop a 2 dimensional impact v.s. likelihood chart and assign values to each resulting area on the chart to derive an overall risk score. While the term impact could be interpreted broadly, its typically interpreted to mean an immediate impact such as an angel investor doesn’t invest or a particular partner doesn’t align with the company.
This narrow interpretation fails to capture a more strategic impact such as the integrated nature and the system wide impact of some risk items.
If the team is of poor quality then the ripple effects can be broad and deep, if a particular customer doesn’t buy then the impact might be short lived.
Generally, the advice around startups is to reduce risk as much as possible and then proceed with launch. But this advice is too coarse.
The advice should be tailored to say something more, along the lines of reducing the risk items that have the largest ripple effect across other risk items. In other words, cause and effect linking of risk items i.e. one risk item could increase the likelihood or impact on another risk item(s). Items that ripple include the management team, barriers against competition and shortage of financing.
So when devising a risk plan:
– understand that assumptions are risks
– that some risks have a ripple effect due to their systematic and integrated nature
– investors tend to dislike ripple risks
– understand ripple risks by considering their impact on other risk items
– reduce ripple risks impact by figuring out a way to decouple them from other risks, for example, adviser teams for a weak management team.
Key Performance Indicators (KPI), metrics, balanced scorecard and other measurement based approaches to management have a common set of objectives: to give management visibility into what is happening in the organization.
Perhaps you have noticed that in some organizations the metric values look good but deep within the organization, it’s actually poorer than perceived quality and manipulated results. I have seen organizations so obsessed with metrics and documentation that a cadre of bureaucratic minds tends to raise to the top and believe that metrics are reality, as long as the documentation and metrics look good, they say its all good.
I recently spoke at a university that is heavy on documentation and metrics, before walking into the classroom, I was told by one of the bureaucrats to say something to the students that they would need for the exam but wasn’t available elsewhere because students weren’t attending class, essentially what was this bureaucratic saying?:
1) The students saw no value in attending class,
2) The university was aware of that, and,
3) Rather than improve quality by changing something, the solution was to punish the students.
A recent investigative review of hotel and restaurant cleanliness by a customer oriented TV show, found shocking problems with a lack of cleanliness, essentially employees using unsanitary approaches to keeping facilities clean and food free from contamination. When confronted, hotel and restaurant leaders babbled the usual corporate speak but appeared to have no idea what was actually happening at the operational level.
We have also seen banks caught cheating customers in a push to drive profit metrics higher, some of the leaders of the organization appeared surprised that their excessive focus on revenue metrics resulted in unethical behaviour.
At United Airlines did a focus on profit, adherence to rules and schedule metrics result in a man being dragged down an aisle?
Metrics aren’t reality.
There are a few reasons for this difference between metrics and reality:
1) Some metrics are subjective and are tabulated using subjective weights, we have subjective weights, descriptions, ratings and thus subjective results used as objective results.
2) Metrics can suffer from validity and reliability problems i.e. are we measuring what we think we are measuring.
3) Organizations can use metrics to reduce operational skill level requirements and thus dumb down jobs.
4) At the operational level, excessive focus on metrics can be de-motivating and result in employees putting what over how and losing sight of why.
5) Leaders use metrics as a primary form of understanding and reduce the person to person communication or learn-by-getting-involved approach.
When we represent a complex multidimensional space with simple two dimensional metrics we have lost information, for example, converting a 256 colour picture into a gray scale image means we have lost information.
Metrics are summary of reality and potentially a lower dimensionality summary of reality.
If you in a leadership position, you need to do every job within your realm, if you don’t have the required skill then act as an apprentice or job shadow. An additional approach is to interact with your organization as a supplier, partner or customer and see what your organization looks like from the outside. Experience what is actually involved with a job. Don’t accept the summary or the metric as a true understanding of the job. You need to understand the nuances, the implementation, the implications of each job and decision.
Don’t be fooled into thinking metrics are reality.
Integrity is regarded by many people as honesty and truthfulness, its values include empathy and respect.
At the organizational and higher educational levels, we want to see individuals consistently acting ethical regardless of the situation, regardless of whether anyone will know.
Can we teach integrity by telling employees or students what is right and wrong?
Or should we have them experience it prior to an ethical dilemma event?
There is tremendous value gained from sharing a learning experience, when we see what others will do, it helps shape or validate our mindset. We wouldn’t play a team sport without team practice and ethical education/training is similar. Teams that rehearse a particular play implement it better during the game.
For example, in the recent United Airlines situation, why did the passengers, flight attendants and the airport security agents not stop the situation? It was probably a new situation for all involved and in a group environment people tend to act according to a herd instinct. Before acting they wonder what everyone else is going to do. If we give a revolution no one wants to be the first out on the street, most people will only consider joining a revolution once it is already started.
What if the herd instinct was to act rather than wait to see what others are going to do? What if through practice or rehearsal people knew what others are going to do and therefore acted without waiting?
I suggest that is where ethics organizational training and education needs to go. Less abstract discussion or videos on telling employees or students what is the right thing to do, more focus on developing a group understanding of how the group and individual will act in any particular ethical dilemma situation. Developing a cultural norm of what to do in a new situation will provide the basis for resistance to unethical decisions and actions.
For corporate training or students in a university/college setting, we tend to rely on videos, and ethics documents, what if we did frequent ethical role-plays in a group setting of actual ethical dilemmas, and employees/students enacted what should be done?
Ethics training/education as a team practice.
We need to instill a group consensus of what to do for types of situations prior to their occurrence, otherwise there is likelihood that during an unethical situation, some people will sit and watch rather than do the right thing.
There are tools to help (see simulations). The first step is to recognize that the herd tends to act when the thought of what to do has been shared/rehearsed as a group prior to the event.
The eternal debate for entrepreneurship courses is, can entrepreneurship be taught?
There are aspects of entrepreneurship that, most would agree can be taught, such as methodologies, and frameworks, best practices, business models, etc.
Aspects such as perseverance and creativity can be learned because there are supporting methodologies and tools that can be learned.
However, starting a company requires an understanding of nuances of implementation that tend to come from experience.
In other words, the question is better framed as, can we teach the experiential part of entrepreneurship?
There are tools for that, such as case studies, simulations (see Entrepreneurship simulation), some form of work co-op, and even running small initiatives such as short lived T shirt companies. All of the aforementioned tools attempt to compress time in a learning environment to provide students the opportunity to experience/explore the key aspects of entrepreneurship. It appears that entrepreneurship can be taught otherwise we would have to be born with a genetic capability for it.
Entrepreneurship is an experiential topic, it’s why entrepreneurs tend to have a board of advisors and serial entrepreneurs are preferred by investors than first time entrepreneurs.
We can provide a resemblance of real life experience through simulations, so the next question is can the experiential side of entrepreneurship be taught in business schools?
A limitation of universities and colleges is that accreditation tends to focus on having predictability, consistency and standardization in courses, which tends to limit what can be done in a course and creates the debate between teaching and grading the mechanics of entrepreneurship such as business plan preparation vs evaluating the business plan as an opportunity.
Some business schools are addressing this by dividing entrepreneurship courses into two levels: the first level course focuses on the mechanics and concepts of entrepreneurship and the second level, by invitation only, the experiential side of entrepreneurship where the evaluation in the course is more on the student’s ability to be an entrepreneur. The latter course requires a different set of tools and professorial skills.
To make entrepreneurship a profession we need to move away from learning just its mechanics and more towards learning how to think and implement like an entrepreneur.
Lately, we have been bombarded with examples of bad corporate behaviour from banks to airlines to fake news to social media company’s attempts to make social media addictive to political figures breaking promises and their questionable behaviour. It all suggests that we are entering into an era of moral and ethical decline.
But there is hope.
Over the last 15 years from my vantage point in European and North American universities, I have witnessed how topics introduced into universities and colleges tend to become mainstream organizational thinking as students enter the workforce, taking those ideas with them. Observe how supply chain management, entrepreneurship and project management are mainstream now after being introduced into higher education courses some 10-15 years ago. Ethics was also introduced as learning thread, into many business courses, around the same time.
I regularly converse with undergraduate and MBA students from almost every industry in North America and Europe and see the following, admittedly not a scientific study but based on interactions with approximately 10,000 students over 15 years on two continents in a dozen universities.
First year undergraduate students tend to be tolerant of cheaters and unethical behaviour, they see it, might not like it, but won’t speak out about it. By the time 4th year rolls around, I tend to see students’ interest in cheating decrease, perhaps it’s because cheaters have generally failed out of the programs as cheating will only carry them so far in the academic system or perhaps it’s because with the ethical threads in business courses students have learned to be more active against unethical behaviour. By the MBA level, students have spent 10-5 years in a career and know what unethical behavior costs. They are more likely to adhere to concepts such as integrity, they are more eager to discuss ethics, have been involved in a strongly ethical or unethical environment and formed strong opinions that led them to take action.
So on one hand we see unethical behaviour enacted by some current leaders in organizations while on the other I see this wave of ethically aware individuals raising up the organizational ladder. My observations are limited to the North American and European universities that I have been associated with, however, it gives cause for hope that there is a prevailing counter movement against unethical behaviour and that the world is getting better.
Although ethics education needs to go the next step, it’s no longer enough to talk about ethics in a course or read ethics case studies. Students, employees and organizational leaders need to practice it, to support each other in their practice and by doing so gain strength for sticking to the correct ethical decision. If we have practice it and see others are of similar mind we gain strength. One way is through role play or simulations such as what we are doing with Ethics simulation another is to ingrain support for whistleblowers (no whistleblower should stand alone), and a third way is to celebrate ethical decisions. So join the counter movement, next time someone does the right thing, say thank you.
There is a common problem that I have seen with graduates of entrepreneurial programs at business schools. Many of their business plans are shallow and they don’t see it.
Business plans generated by engineering, science or technology individuals tend to be solving a real problem with quantifiable benefits to the customer and intellectual property which is deep i.e. its patentable and requires a deep understanding of a problem and solution space to see the opportunity and implement it.
On the other hand, many business graduates have plans which are a variation of something that already exists. The business school graduates are be able to generate reams of secondary research data that they use to extoll why the market will like their idea and why they customer will buy. But their rationale for the customer’s buying the product is shallow. Customers’ buy because the solution saves them money, gains them money or alleviates some form of pain such as loss of competitive difference or regulatory compliance requirements or perhaps is an interesting experience, etc. However, the solution’s benefits have to achievable with a known and high level of certainty. Obviously there are occurrences where customers will buy something on the vague chance of results i.e. as per Roger’s Adoption of Innovation theory, or that the entrepreneur knows the customer better than the customer knows themselves i.e. did we know we want to text on our phones before it was available? In the tech industry, it is readily possible that the customer doesn’t know what they want in terms of the next generation of a technology.
Over the recent while, I have seen business plans from engineering or technology individuals and they are able to definitely point to cost savings or revenue enhancement or alleviating regulatory/legal burdens in a simple to grasp opportunity with the benefits clearly defined, proven and achievable.
While I have seen also seen business plans from business graduates with complex ideas supported by reams of market research that suggest customers will flock to a variant of an existing idea for the unproven likelihood that the new product will offer an incremental benefit. In some cases, the plan suggests that the customer will abandon well established existing solutions for this small unquantifiable benefit.
What is scary is that the business school graduates don’t get it, they can’t see past their superficial arguments and realize how shallow their idea is. Why is this? One reason might be the traditional business school entrepreneurship course focuses on secondary research to support business plans i.e. The cell phone market is growing by x% a year and therefore my cellphone app company will also grow at x% a year, a significant leap in logic.
So what can be done?
Business schools need to focus less on business plans that use secondary research data to support an idea and more on plans that can quantifiably provide a measurable benefit to a customer that solves a particular problem that is causing them to lose money, revenue, etc. This benefit should be provable with a high degree of certainty. Students need a deep understanding of both the problem and solution space from having worked in or experienced those spaces not from reading about it from secondary research data.
Admittedly, there are still a category of products/service possibilities where the entrepreneur knows what the market wants before the customer does, but we aren’t all Steve Jobs.
Check out our entrepreneurship simulation for use in university and college environments Traction entrepreneurship simulation