Maximizing entrepreneurial progress by systematically de-risking
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Hi - I’m Mike Wilner, the writer of this post which is part of my weekly newsletter, Getting Shots Up. The newsletter includes frameworks, analyses, and profiles about building entrepreneurial careers. This isn’t just startup advice – it’s a zoomed out view of how entrepreneurial people can think about constructing a career that results in a lot of high quality shots on goal.
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TL;DR
Progress is measured by the the growth in expected value of an investment (new job, startup, side project, project at a bigger company).
One of the ways to increase the expected value of any investment is to reduce the risk that it realizes its potential.
Entrepreneurs often mistake "traction" for progress. Thinking that if they drive traditional KPIs like revenue or users, then they're making progress.
Traction can incidentally lead to de-risking an investment, but it's not a direct way of de-risking an investment (AKA increasing the amount of certainty that it can realize its potential).
The godfather of all KPIs is the rate of de-risking – the speed at which an investment is de-risked.
When you see startups that are able to raise funding quickly despite far less traction than similar startups, it's because their rate of de-risking is high.
Maximizing rate of de-risking doesn't just apply to building startups. It applies to any investment – from side projects, to startups, to job choices.
The framework for maximizing the rate of de-risking for any investment involves (1) identifying the risks, (2) stack ranking risks by priority, (3) de-risk highest priority risks as cheaply and quickly as possible, and (4) rinse and repeat.
For a deeper dive on these concepts, including real examples, read on!
Maximizing entrepreneurial progress by systematically de-risking
A theme of the past few weeks has been that anyone building an entrepreneurial career – from investors, to founders, to startup employees – are investors. We invest our time and money into a combination of day jobs and side hustles to maximize both financial returns (capital) and entrepreneurial asset returns (growing skills, network/audience, and/or domain expertise).
As investors, one of the most important skills is the ability to manage and reduce risk.
We defined progress as being measured by the expected value of an investment, and looked at how one of the ways to increase that expected value is to reduce the risk:
With any venture, progress can be measured its expected value. If we think of the example of building venture-backed startups, this expected value is essentially the valuation. Over the lifecycle of a venture-backed startup, a valuation grows as a startup makes progress, and if the startup regresses, then the valuation can go down.
The expected value of any venture breaks down into the following simple formula:
Expected Value = Potential Value * Chances of Success
Chances of Success = 1 / risk
Which means:
Expected Value = Potential Value / Risk
Therefore, there are two ways to make progress on any venture – whether it be a venture-backable startup, a side project, or an internal project for a bigger company: (1) build evidence that the potential value is higher, or (2) reduce the risk that it will work.
This week, we’ll dive deeper into the pitfalls of measuring progress of entrepreneurial investments using traditional KPIs, why the godfather of all KPIs is the rate of de-risking, and walk through a practical framework for maximizing speed of progress by maximizing the rate of de-risking over time.
I often see entrepreneurs make the mistake of conflating “traction” with “progress.” This was a mistake I made with my first startup (freelance marketplace where you could hire web designers), which was a big part of the reason we failed. I thought that if we kept growing each month, then we would be making progress. I was obsessed with month-over-month incremental growth and didn’t de-risk some of the most important parts of a marketplace business. As a result, we never solved the initial chicken-and-egg problem – the biggest early risk that marketplaces have that marketplace businesses encounter.
Traction is the growth in a clearly defined KPI, like users, revenue, or number of customers. Traction can sometimes serve as evidence that parts of a business have been de-risked, but that’s not always to case.
For example, here are two scenarios of two companies that are directly competitive. They’re building software for 20-100 employee companies that makes it easy for employees to schedule and run more efficient internal meetings:
Company A has more traction – they’ve been at it for 2 years, have 10x as much monthly recurring revenue, and are growing 20% month-over-month – indicating that they’re starting to figure out how to grow. But Company B, which has 1/10 as many customers and revenue, is not yet growing, and has only been at it for 6 months – has made more progress. One of the biggest risks with selling a B2B productivity tool is end user adoption. The fact that 90% of their customers’ end users are weekly active users shows that Company B has figured out (AKA de-risked) that part of the business, while Company A has not. If I was an investor, I would bet that if you fast forwarded 12 months, Company B would end up with just as much traction as Company A, and would have a faster growth rate. While it’s seductive to focus on traction early on because it’s the easiest to measure, at the end of the day, whether you have $1K in MRR, $5K in MRR, or $20K MRR, if the startup fails, it all rounds down to zero anyway.
It’s tempting to jump to measurable KPIs immediately trying to measure progress. They’re tangible and make us feel good as we see those numbers grow.
When focusing on traditional KPIs and not directly addressing risks, progress only occurs when we happen to de-risk parts of investments as a by-product of focusing on those KPIs. This is the path Company A is on.
Linear growth in monthly recurring revenue by Company A (which is rare)
As Company A grows, they will incidentally de-risk parts of the business over time, but not directly. For example, as they go from having 30 customers to 35 customers, they get 5 net new customers and $1K more MRR. But if those 5 new customers do not help Company A de-risk any part of the business (e.g. figuring out a new vertical, figuring out how to improve onboarding, etc.), then that increase in traction will not actually de-risk the business and therefore is not real progress. While the MRR might be growing consistently, if Company A starts on day 1 with a 1 and 200 chance of becoming a $1B company, then their de-risking over time be lumpy, as their day-to-day work is indirectly addressing risk.
Company B on the other hand, is focusing on de-risking the business rather than focusing on traditional KPIs. For example, they realize that figuring out end user adoption is a much bigger risk than figuring out how to build a B2B sales funnel, so they de-risk that first. With their first few customers, they’re getting 90% of end users to be weekly active users, compared to Company A, which has only 40% of end users as weekly active users.
Company B is essentially focusing on a KPI that’s hard to measure – the rate of de-risking – the speed at which an investment is de-risked. If Company A and Company B started with the same chances of success on day 1 (1 in 200 chance of becoming a $1B company), and Company B is able to de-risk the company by 10% each month, then their risk would be decreasing a lot faster than Company A.
This is why some companies are able to get investors (in the broader sense – VCs, Angels, early team members, advisors) despite having far less traction than competitors.
We can look at this through the investor lens, where Pre-seed investors, Seed investors, and Series A investors all have different expectations in terms of risk profile of their investments and expected value.
Suppose we have three investors:
Pre-seed investor who writes $100K checks and expects 2% of the company
Seed investor who writes $250K checks and expects 4% of the company
Series A investor who writes $1M checks and expects 5% of the company
If we assume that our B2B SaaS company has a potential value of $1B, in order for the math to work for each of these investors, they will all have different thresholds of risk that they’re comfortable with, and they will expect the company to be de-risked to a certain degree before they invest.
The Pre-seed investor will be willing to invest when there’s a 1 in 200 chance of success, the Seed investor will be willing to invest when there’s a 1 in 100 chance of success, and the Series A investor will be willing to invest when there’s a 1 in 50 chance of success. Therefore, we can see how Company B - despite having far less traction, has made progress way faster than Company A and can meets the risk threshold for investors earlier in the company’s lifetime.
Based on each company’s rate of de-risking, while Company A has $10K MRR and is ready to raise a pre-seed round ~24 months after idea inception, Company B created the golden path of early stage funding by focusing on reducing risk by 10% month-over-month:
Raise pre-seed round 6 months after idea inception
Raise seed round ~6 months after pre-seed round at 2x the valuation
Raise Series A ~12 months after a seed round at 2x the valuation
Reducing risk by 10% month-over-month sounds great. But given how hard “risk” is to quantify, what does this actually look like in practice, and how can this be applied outside of venture-backed startups?
A framework for maximizing rate of de-risking
While the example of Company A and Company B illustrates the value of maximizing rate of de-risking for venture-backed startups, this framework applies to anything from startups, to side projects, to career moves, and any other investment entrepreneurs make with their time and/or money.
There’s a pretty simple four-step process way to maximize the rate of de-risking over time:
Step 1: Identify the risks (AKA the unpleasant questions)
Step 2: Stack rank risks by priority
Step 3: De-risk (AKA answer) them as cheaply and quickly as possible
Step 4: Repeat Steps 1 through 3
We’ll go through 4 different examples:
Running this weekly newsletter (a side project)
Building B2B SaaS company (Company B) from above
Building a D2C women’s apparel company (like the example from last week)
Getting a job as a VC (a career choice of how you invest a majority of your time)
Step 1: Identify the risks (AKA the unpleasant questions)
The first step is to identify the risks involved in an investment. The risks of any investment are a collection of yes/no questions which represent the biggest risks for any investment realizing its potential. These risks change over time.
For example, when I was thinking about starting this newsletter, I was tempted to jump to traditional KPIs like “newsletter subscribers” to give myself an objective sense of progress. But growing subscribers isn’t a big risk – the biggest risks were those which if the answer was “no,” then (1) it would be hard or impossible to get subscribers, or (2) even if I got subscribers, the newsletter would eventually fail. Here were some of the risks which I framed as unpleasant questions:
With the rest of our examples, here are some big, existential risks that can be framed as unpleasant questions:
Not all of these risks are created equal. Some pose a more existential threat to progress than others. That’s where prioritization comes into play.
Step 2: Stack rank risks by priority
The next step is to rank the risks by priority and determine what risks – if the answer is “no” – would make the rest of the risks meaningless because you would need to go back to the drawing board.
For example, with this weekly newsletter, I knew that two of the risks were:
Do I have a repeatable way to grow a newsletter audience?
Can I get started with writing again?
While finding a repeatable way to grow a newsletter audience is important, if I can’t get started with writing again, then well, there’s no newsletter. Therefore, the highest priority thing for me to de-risk was to start writing again. Here’s how the stack ranks look for our examples:
With a clear sense of the biggest risks, maximizing the rate of de-risking comes down to answering the unpleasant questions as cheaply and quickly as possible.
Step 3: De-risk (answer) them as cheaply and quickly as possible
When it comes to answering highest priority unpleasant questions, I’ve seen entrepreneurs (including myself) make three mistakes:
Having confirmation bias and not being open to the answer being “no”: Intellectual honesty is essential to de-risking any investment. One of my biggest pet peeves is when I hear entrepreneurs talk about how they’re working on “validating” something. If you’re working on “validating” something, then that implies that you’re not open to disproving your assumptions. I was guilty of this many times with my first startup. Operating with confirmation bias and not disproving your own beliefs results in continued “progress” in the wrong direction, which isn’t progress at all. When answering an unpleasant question, it’s important to know what a “no” answer looks like. For example, when trying to answer the question of “can I get started writing again?” I decided that I would need to publish 3 consecutive posts in 3 weeks that I was proud to share publicly. If I couldn’t do that, then the answer was “no” and I would have had to revisit this whole newsletter thing at a higher level.
Trying to de-risk in expensive ways: The path to a “yes” or “no” with an unpleasant question is usually shorter than people think. For example, if a big risk for our B2B SaaS startup is “Can our customers successfully onboard end users (their employees) onto the product?” then there are two ways of figuring out that answer: (1) do in-depth interviews with four prospective customers to walk through the process of onboarding their employees onto your proposed product (which hasn’t been built yet), or (2) build the product with customer feedback and then measure the rate of end user adoption from pilot customers. The first method results in de-risking that big question in a few days, whereas the second method would take months and tens of thousands of dollars to get an answer. There are often going to be very inexpensive and fast ways to get answers to the biggest risks without needing to wait months. Later in the maturity of any investment, the learning cycles end up taking longer, but even then, de-risking as frugally as possible maximizes progress.
Not de-risking in parallel when possible: Some risks have limitations on how quickly you can get your answer, and some risks can be de-risked with the same experiment. De-risking in parallel, when possible, can further accelerate progress. For example, when considering getting a job as a VC, three of the risks are: (1) “Would I be able to get a job at a reputable VC firm?” (2) “Would becoming a VC accelerate my career in the right direction faster than being an operator?” and (3) “Are there positions available at VC firms that I would be a good fit for based on my experience?” The cheapest way to test each of those would be to have conversations with career VCs, diving deeper into each of those questions. Rather than addressing these risks sequentially, it makes sense to set up 3 conversations with career VCs who can provide unique insight to each of these questions. This idea of de-risking in parallel was part of why I joined the On Deck Writers fellowship: it was a creative solution to inexpensively de-risk (1) “Can I get started with writing again?” and (2) “Can I find a unique voice/angle regarding building entrepreneurial careers?” Answering those questions was my goal of going through the fellowship, and it worked.
Here are examples of inexpensive tests to answer the unpleasant questions:
If the answer to any of the questions is “no,” then it forces us to revisit things at a higher level and either change direction or decide to stop investing our time and/or money. If the answer is “yes”, then the process doesn’t end there.
Step 4: Repeat Steps 1 through 3
Whenever answering unpleasant questions and de-risking an investment, there are usually new risks that crop up which are more nuanced. Continuing this process of surfacing the biggest risks, prioritizing them, and de-risking them as inexpensively as possible is a never-ending cycle.
For example, here are some of the answers and learnings I’ve had from running this weekly newsletter.
And now from those learnings, I have a new crop of risks:
Focusing on de-risking means this cycle never ends. KPIs then become useful as evidence that something has been de-risked. But it’s important to be clear about what needs to be de-risked before jumping to the metrics.
