Are you a founder? Here are some startup tips for identifying risk, gathering information, and making money.
We all know that hard work and good luck are key to startups’ success. But what if that’s not true? What if all startups have people who work hard and a bit of serendipity is fairly common? Let’s make it concrete: Have you worked at—or run— anything where people were deeply committed and worked long hours, yet the project or company failed?
In his talk at the 2013 Lean Startup Conference, Dan Milstein explored what does make a difference for startups: Information. It’s worth real money and the way to make more money is to more quickly gather information that helps you figure out the right things to work on. This mindset is so critical, in fact, that you should be afraid of working on the wrong things.
If hard work and luck are important, but they don’t seem to really distinguish the startups that succeed from the ones that fail, then the choices of what we’re working on must be critical. What you choose to work on is actually your biggest lever, with a huge differential effect. You should be very, very scared of working on the wrong things. In fact, you should be terrified. I would say you should be so terrified that you actually don’t work. If you’re not sure that what you’re working on is the most valuable thing to your startup, you should stop working. I tell people this and they think I’m exaggerating, but I’m not. You should only work if what you’re working on is the most valuable thing. – Dan
The kind of information you want to gather at a startup is the kind that answers the riskiest or most uncertain questions. He explained: “You actually don’t get much information when you already know something; you get a lot when you’re uncertain. And then, what information is valuable depends on what decision you’re making.”
Identifying your biggest risk can be hard because risk shifts constantly. He tells this story about a software product, for hospitals, that used a public data set. Before selling or building it, the company’s biggest risk was that nobody would buy it. So the startup created a demo, and one hospital signed a $10-million contract for the product before it truly existed:
That’s great, you did the right thing. So now your sales team is out there trying to repeat that and sell the second one, and you’ve got a bunch of engineers now building that thing. And I want you to imagine something. I want you to imagine a junior developer, someone on the team, bright guy but young–guy or girl. And some morning—it’s a Thursday morning—and they were given a job of taking the demo app and turning it into a real production system. And they’re working with this public data set, and they discover, to their surprise, that it’s not as comprehensive as everyone thought it was. It worked well for the demo, but for the actual hospital, it’s actually not going to work. The whole product that the company has sold is actually not going to succeed the way they’ve done it. They have to do it some other way. In the moment after this person makes this discovery, the biggest risk for the startup has changed. The biggest risk is no longer: Can we repeat this sale? The biggest risk is: Can we actually build the thing that we promised in the first sale that we thought we could build, but we just discovered we were wrong?
If the biggest risk has changed, the thing you should be doing to gather the most information has changed. Because the way you gather the most information is by going after the biggest risk. Therefore, the thing that’s going to get you the most information—and therefore, the most money—has changed. So, as long as the company is still doing what it was doing before that discovery was made, they’re doing the wrong thing.
In order for your company to move fast (the entire organization), the thing that will limit them in how fast they can move and how fast they can make money is how fast they can respond to the changing nature of risk. Because it’s only by going after the biggest risk do you make the most money, and because risks are changing all the time, the entire organization has to be able to change direction.