The entrepreneur lifestyle is mostly about risk management. Just like Inuits have 50 words for snow, we should have a better understanding and language for luck.
The original idea is shared in Marc Andreessen’s blog and Shaan Puri's podcast. This article is a summary of these materials.
1. Blind Luck
Things you get without doing anything: your health, your parents, where you were born or won a lottery, etc.
2. Motion Luck
You take a lot of actions that increase your likelihood of stumbling on something good. You don’t have a clear direction, but the pure increase of touch points between you and your reality helps you. I think of this as brute force. “brute force my own common sense” has been my go-to last resort when I get stuck.
3. Expert Luck
Experts have seen hundreds of cases before the first one profiting from them. Expertise means sensitivity to the baseline metrics. Therefore, when an outlier deal comes by, they can jump on it immediately.
Kevin Rose has a prepared mind for Twitter. He knows it will be big. He recognizes the experience that Twitter is the only social platform that allows you to follow and be part of a conversation with a celebrity without approval, unlike Facebook.
4. Reputation Luck
Naval gave an example of reputation luck. Imagine you are well known as the best deep-sea underwater diver in the world. You sit on the couch and do nothing. Then your phone rings and somebody says “we discovered a treasure off the coast of India buried deep down below. Will you come to help us retrieve it? We’ll share with you 25% of whatever we found”
When Kevin Rose wanted to invest in Twitter initially, the last round was closed. However, he has established a reputation for good products and helped make Twitter well-known, so they let him buy shares from a leaving engineer. Those shares turned $25k into $100 million.
When thinking about risks, we tend to think about things that are obviously risky such as skydiving and crypto. However, for those risks, people usually take precautions to mitigate their risks, such as taking training from well-known skydiving professionals and limiting their crypto investment ratio in their entire portfolio.
The real risks are usually hidden.
Before 2008, people generally thought mortgages and housing markets were safe industries to bet in and used too much leverage. This kind of unsurfaced risk is well illustrated in the book “Black Swan” by Nassim, a former risk analyst.
5. Mediocrity Risk (compared to others)
When most people go into a job or business, they think that “risk means failure;” It’s going to totally “crash and burn.” However, those losses are not that painful of a risk. Yes, you wasted time, but you learn lessons and you can move on. You have a story to tell, you met people along the way and you built some skills. When you were small, there is limited damage you can cause.
The real risk is something that keeps you on the average track. Similar to the tarpit startup ideas, mediocrity keeps you in a rut. It’s not bad enough to fail you, not good enough to be amazing, but it deprives you of the most valuable asset you have — time. Failing is more ideal than being kept on the track to mediocrity.
6. Safety Risk (compared to future self)
How is safety itself can be a risk? I’ve been comparing the entrepreneurial options between starting a crazily new idea, like my SpeakBit, or following business ventures that publicly worked for many people, such as creating content, flipping websites, or investing in real estate. When all measures are already in place to hedge your risk, what’s left is this intrinsically inverse relationship between risk and rewards.
Mediocrity risk is comparing your choice with the majority choice, while safety risk is comparing your comfort zone with your dream. You be higher up compared to most people, so you can’t be defined as mediocre in most aspects. However, is your current trajectory lining up with your dream? There is a conflict between your future self and your current self. If you value your future self and dream more than your current comfort, it’s riskier to play safe now.
7. Eye Wide Shut Risk
This risk is when full trust happens. You fully trust someone; You think the house is totally safe; You think your business is too big to fail. To mitigate this risk, you need to question the things you fundamentally believe in, the things you assume are most safe.
8. Market/Execution/Tech Risks
Market risk is when you build a startup that hasn’t been proven to scale through each stage of a tech adoption lifecycle, but this risk can be inevitable if this is an emerging market like Airbnb. It can be alleviated like Uber to Bolt, but it’s the riskiest among all three. You can have the best team, execution, and product, but if not enough market wants it, the multiplier is zero.
Execution risk is when you take on a proven business like Enduring Ventures or Codie Sanchez, who buys cash flow businesses with proven markets. They don’t have market risk. Their execution risk is whether they can improve the business (increase revenue and efficiency, lower the cost and operation)
Tech risk is when you use technology to improve an existing problem inside a business. For example, a pizza-making robot. The only risk here is whether you can deliver on that promise. Biotech or defense contracts have technical risks only.
