By far, the session I received the most value from during the morning talks of the Lean Startup conference day 1 agenda was Dan Milstein’s (from HUT 8 Labs) Risk, Information, Time and Money talk.
Dan started out by restating the definition of a startup per Eric Ries: “a human institution designed to create a new product or service under conditions of extreme uncertainty’”. We are talking about established product lines well along the maturity scale.
Though I believe the walk down the logic tree Dan put together in his session is valuable… as I wrote it up it got fairly long. The walk is outlined below, but here is the TL;DR version:
-) In the presence of extreme uncertainty, you make money by extracting information from reality.
-) The most valuable information is that which reduces uncertainty about the largest in a chain of risks.
-) To acquire information quickly, the whole team must constantly adjust its understanding of risks.
You know… what money you are not making by working on certain things instead of alternatives. He gave the following example:
Which would you chose (assume you have the skills to do each):
1) Build customer graphics at a rate of $200 p/h. Assume only 4 hours a day of work for a week (5 days).
2) Build a customer website at a rate of $20 p/h. Assume there is enough work to keep yourself busy 8 hours a day for a week.
When he spoke these, it looked to be a straight math problem to me.
So in this example… it certainly demonstrates that choice #2, though keeping you busy all day, is not the most profitable choice. (Da… it gets better) It actually costs you $640 p/day per person.
Sometimes people/companies get lucky… the ‘right’ work comes their way and the flip of the coin works out for them. Even in those situations, what are we talking about, getting the choice right 50% of the time? That is still, on average, a cost of $320 p/day.
If working hard, and/or luck doesn’t determine success/failure, what does? Identifying when you are working on wrong things is key. Make sure you are working on the most valuable thing!
The choice of what you work on is critical to success. It’s not how hard (or busy) you work, or how lucky you are, but instead it’s ensuring you are working on the right (or conversely NOT the wrong) stuff.
Dan goes on to state the these kinds of bad choices (opportunity cost wise) are happening all the time. He goes as far as to say: “if you aren’t sure you are working on the right thing, STOP working” You should be terrified of working on the wrong thing.
Information and Money
At this point, Dan poses the question most (including me) have on their mind given the above example: Well, what if the customer requesting work doesn’t provide (hides) the rate of pay for an activity? How do you choose then? Dan says in this situation, Spend a week investigating both opportunities. That week of investigation makes us money! It leads to making the decision with proper context.
Taking the time to gather the proper context information before making a choice on where you spend your time makes you money! (Even though it feels like you are losing money because you are not ‘working’.)
Information = Money
Risk and Information
So.. if gathering information = money…. What about the relationship of Risk and Information?
Consider these possible startup choices:
1) Build a teleportation device
2) Build a CRUD app for an insurance company
To lower the risk of the startup, what should you do in the first month for each of the above?
1A) Attempt to ‘pre-sell’ 20 teleportation devices.
1B) Attempt to build a workable teleportation device.
How about the first month of scenario 2?
2A) Attempt to pre-sell 20 copies of the CRUD app to insurance companies
2B) Build the CRUD app
In first month, I think we all would agree to reduce risk, attempting to build a teleportation device is a better choice than preselling a teleportation device. I also think we would agree attempting to pre-sell the CRUD app during the companies first month is more important than attempting to build it (a fairly straight forward task).
The question is why do we intuitively know the above? Answer: Degree of Surprise
Degree of surprise is the measurement of surprise you get in what you find out from an experiment. We only get information when we can be surprised (or when we don’t know the outcome already) Information = Surprise
A startup is an information gathering entity. We only get information when there is uncertainty and risk. Demonstrated via the Degree of Surprise factor. This needs to be thought about when choosing where to spend peoples time.
Information and Time
In a startup, the primary source of money is information. You should be searching out information that demonstrates a Degree of surprise factor. Ok. What about Time… how does that play in the picture?
Examples of ways to measure things related to time:
-) For physically moving items: Velocity = distance/time
-) For business: Revenue = money/time
For a startup, Information = Money… therefore Revenue = Information/Time. The more quickly you gather the best information… the greater the chance of increased Revenue.
Risk, Information and Time
Very often, you get the most/best information by going after your biggest risk items. (They would likely produce the most degree of surprise.) Many times, the things you have to do to get the most information change over time.
Walking the logic tree outlined throughout this post…. If your biggest risks change over time, and risky items yield the most information, and information = money, How fast people respond to changing risks is directly proportional to how well the company can make money.
Fear / Vision
For the leaders out there, Dan states that a startup is really a chain of risks that need to be managed. Many leaders (he referred to them as CEO’s) actually call this their ‘vision’ as they don’t have a real tight grasp on them. Many times these leaders don’t articulate their fears (the chain of risks that need to be managed) and the company will have problems as those risks are the exact ones it should be attempting to test and extract information from… in the end yielding the revenue the company needs to at minimum, sustain itself.
Managing a startup is really managing a chain of risks. Don’t keep those risks to yourself, but instead test them to yield the information your company needs to be successful.