“Risk management is too negative. We’re focused on growing our business.” – a startup CEO
A certain Captain Smith once entertained the same certainty about large pieces of ice at sea and ignored the potential effect. He was focused on getting to New York, but that focus didn’t help him much when he ran into trouble.
Preparation is king
Old sergeants will tell you that while recruits hate digging foxholes in training, they do a remarkably effective job of it once the shooting starts. Digging a hole is a simple task easily mastered under stress, however, and managing the loss of a major client or a cash flow crisis is not.
The comparison becomes even worse when you consider that the only thing the young soldiers are missing is motivation. The two other risks require analysis, planning, coordination, and skillful execution. None of these lend themselves particularly to be learned under duress. The odds are that you will drop the ball.
Ignoring a risk won’t make it go away
We love to lie to ourselves.
“A couple of drinks make me a better driver.”
“Seatbelts give people a false sense of security that makes them take greater risks behind the wheel.”
There are a million excuses for not managing your risks. Startups have plenty to do, but the many risks they face demand risk management, not excuses. Investors can pick and choose where they put their money, and telling them that you don’t intend to manage your risks will not impress.
Do what needs to be done
No teacher of mine would claim that I was eager or prompt in the homework department. I did the bare minimum necessary. I understood that ignoring homework did not make it go away, that it was a requirement to pass, and that I wanted to pass. Far too many firms have not made this connection.
Do your risk management homework. And eat your vegetables.
Time will show how many people make it off Nokia’s platform – and how many of them get picked up.
Offshore oil rigs are dangerous places, not least because they combine being at sea together with highly combustible materials and heavy machinery. It’s the sort of work the people who write the warning labels on cold medicine want you to avoid.
On a good day, getting hurt on an oil rig is easy. Just getting there is risky. Oil companies wouldn’t plunge their offshore staff into swimming pools while strapped into helicopter mockups to practice crashes at sea unless experience had taught them it was necessary.
Bad days are scary
The odds of getting hurt when things go wrong on an oil rig are ugly. In two of the most famous accidents, the Alexander L. Kielland capsized off Norway in 1980, killing 123 people, and the Ocean Ranger sank off Newfoundland in 1982 killing 84.
Like BP’s Deepwater Horizon, oil rigs also burn. Fires are frequent enough that putting them out is a lucrative niche business (Red Adair). If you’re on the platform, and you and your colleagues cannot put out a fire right away, you don’t have many options.
Nowhere to run
Modern rigs have specialized lifeboats whose seats have five point harnesses and head straps. The drop is long and the landings dramatic. If you don’t make it to a boat, you either stay and burn or do the drop alone in what you’re wearing. Nokia’s CEO chose that choice to indicate the severity of the firm’s position and stir his staff into action.
The truth is that not everyone is going to make it
The workers lucky enough to survive the initial blast on the Deepwater Horizon had the option of jumping into the Gulf of Mexico. The drop was long, but they were jumping into calm, warm water in daylight. The survivors of the initial blast all survived the accident.
The workers on the Alexander L. Keilland were jumping into the North Sea. The waves were 12 meters tall, it was dark, it was night, and there were only 89 survivors. The Ocean Ranger went down in 100-knot winds and 20 meter waves. There were no survivors.
Time will show how many people make it off Nokia’s platform – and how many of them get picked up.
When do you pull the plug? Part 2
Knowing when to walk away is important, and often I walk away long after it is wise to go. It took the abrupt realization that my startup had run out of money to realize that the time had come. We needed to put more money in to keep it going – and I decided that throwing good money after bad was silly. Running out of cash convinced me, but other triggers are just as valid.
John and Yoko
An idea can start with one person, but turning that idea into something worth something takes a team. Most teams do not survive in their original form for long. John Lennon wasn’t the first musician who ever left a band – or the last. You have to agree on the important stuff and want the same things. If it’s you against the team, all the time or most of the time, it may be time to leave.
Mickey is running
Life is short. Time is precious. The hands on the Mickey Mouse watch don’t stop, just because you’re not having fun. Do you enjoy what you do? If not, why are you still doing it? Do you really need the money?
Looking back at my failed startup, I marvel at how I ended up where I did. It takes an effort to understand that the “me” that was stuck there actually believed that there were no other options. It is as absurd now as it was then, but back then I believed it. I believed that I had to keep at it and work until it succeeded.
Step away from the coalface
Perspective is hard to maintain, so get help. Find a couple of people you trust, who you can talk to occasionally in order to balance reality with perception. The buzz, the urgency, and the pressure all combine to make it almost impossible to compare apples with apples, as opposed to pears.
If nothing else, write some goals and limits down on paper and review them occasionally. Step back from time to time and ask yourself whether you’ve crossed lines you swore you would not cross – and whether forward is the smart direction to go.
Knowing when to say when takes a little preparation
Someone asked me an excellent question the other day, “When do you know to give up?” It was a superb question and she touched on a key dilemma. We’re always taught to do our best, she said, and work until we achieve our goals, but sometimes success isn’t possible – or worth the price. How do you know?
Personal experience… Ugh!
Once upon a time, I had a startup. We made classic startup mistakes and it didn’t work out well. Years later, a friend quoted Will Rogers on how good judgment was the result of experience and experience was the result of bad judgment. I must be quite the sage.
Amongst many bad decisions, one of my biggest was to keep going when I knew that it wasn’t going to work – and that I hated my job. I knew it at least a year before I quit, and make no bones about it, I quit. I gave up, threw in the towel, said “uncle”. And thank goodness.
Why do we wait?
We stay when we know we should go for many reasons, including pride, loyalty, desperation, and determination. The process that makes us stay is just as important. It is simple, because it is short on process and long on denial. Like the famous frog in the pot, we get boiled by degrees.
If the frog doesn’t wait, why should you?
The truth is that frogs may not be bright, but they’re not that dumb either. They get out of the water when it gets too hot. That’s worth remembering.
Set limits before you start. Write the limits down on paper. Write them into emails that you send to yourself and a friend before you start. Review the limits occasionally – and honestly – and know when your time is up.
My startup crashed – and so what?
It was not the end of the world. My pride was bruised, but all of my limbs were intact, and I immediately saw that I should have left sooner. Lesson learned: Draw a line in the sand before you go – so you can say this far and no further.
The unrehearsed contingency is not a contingency
Predicting the unexpected tends to be hard. It may seem obvious, but an absurd number of people think otherwise. Murphy has a thing or two to say on the subject and contingency planners often make a number of dangerous assumptions.
Don’t assume anyone has read the plan
Time is short and most people have more than enough to do. Unless you have walked people through the plan, assuming they know anything about it is unwise.
Walking means walking
Walk people through the plan. If you can, make them physically do what they will have to do. If you can’t, then use a drawing on a whiteboard and have them show what they will do. Have them show it not just to you, but to the people with whom they will have to do what they have to do. Have leaders talk through the processes they will perform, and what they will do in specific eventualities.
Note: Running through a deck of Powerpoint slides does not count. If I can work on my iPhone, while being subjected to a slideshow, anyone can.
Do not assume you have been understood
Repetition is the key to understanding. People forget. People change jobs. Go over your plans on a regular basis and walk through the plans from different angles. Vary who is in what role. The odds are good that at least one key person will be away or unavailable when the day comes.
Keep it simple
Martial artists have much to teach us about self-defense, but they require time and dedication, investments few of us are willing to make. Running away has two distinct advantages as an alternative. First, if you’re hard to reach, you’re hard to hurt. Two, it doesn’t taking any remembering how to do.
Focus matters. So does practice.
Startups are risky business. Most of them go bust, either with a bang or a whimper. They tend to require huge amounts of work, a skilled team – and money.
Finding the money is often the hardest part. Founders are usually excited about their idea, but finding the money necessary to fund the effort seldom generates the same enthusiasm.
The reluctance is natural
The idea gets founders out of bed in the morning because it’s exciting. Building the business keeps them glued to their desks because it’s exciting and sometimes terrifying. They usually see asking for money, however, as a necessary evil – and it is hard.
It’s hard, because “Hi, my name is ____, and here’s why you should give me a million dollars”, is a hard line to pull off well. Founders usually feel in control of their product or company, because progress is the result of their work. They often feel powerless, however, when dealing with investors.
A lack of control does not equal a lack of influence
It is a mistake to believe that the investors hold all the cards, because both sides need each other. The investors need somewhere to put their money. Startups have the potential to turn that money into much more money.
The founders take big risks – personally, professionally, and financially – and most investors respect that. The investors worry, though, because once they commit their money, it’s out of their control.
Confidence matters – and so does practice
Founders are the rock stars of the equation. They are the talent, the people that are going to turn the investment into a success. Everyone else knows it, but sometimes the founders do not. Asking for money is not easy and founders need to be confident when asking for the money. Gaining that confidence takes practice.
Painful as they can be, the hours spent in front of the mirror rehearsing the pitch can be more important than the weeks spent creating the product. Practice can create the confidence – and the ability – to say the right words at the right time.
The enthusiasm needs practice too. After all, if you’re not excited about your product, why should an investor be excited? You can do worse than practice jumping up and down shouting “show me the money!” to get your groove going. If nothing else, it will help you get over feeling bashful.
Asking for money is hard. Practice makes it easier. Get to work.
Avon Barksdale on Managing Risk, Part Two
Avon Barksdale, the drug kingpin from HBO’s “The Wire“, was a man of many precautions, because his life and his freedom depended on them. Managing his risks effectively kept him free and alive – and enabled him to build an empire that made him fabulously wealthy.
Do not ignore failure
Most of us can limit our potential risk effects to money lost or careers damaged and we make our risk management choices accordingly. Facing death or prison, it should not surprise that Mr Barksdale and his associates chose a very proactive approach to their risks.
Mistakes in Avon’s business were analyzed more than is usual most other places. There was the familiar search for the “guilty man”, and the punishments for poor performance were severe, but their next step was much more interesting.
Going beyond just putting a head on a stake
The Barksdale organization not only punished the guilty parties, they attempted to correct their own processes – and they tested the assumptions that formed the basis of their conclusions.
An armed robbery that resulted in a serious financial loss, for example, was analyzed to determine the security lapse that made it possible. It was also examined to find disloyal employees who may have helped make it possible. Finally, the conclusions of the analysis were double-checked to attempt to ensure the answer was correct.
Constant vigilance and a questioning of assumptions
The name of the show is a reference to the wiretaps that formed the backbone of the police efforts to stop Mr. Barksdale. The drug lord and his men were aware of the risk of being heard. While they had no specific proof that it was happening, they knew the potential effects were great.
They therefore managed the risk like any other. They attempted to reduce the risk of it occuring and mitigate the effects should it happen, all while accepting that a certain amount of phone use was unavoidable for them to run their business.
They correctly assumed that the police were trying to listen to them and acted accordingly. The gang frequently changed their procedures to protect themselves. Barksdale constantly challenged the assumption that their methods were sufficient and adapted them to reduce their exposure.
Not all textbooks are square – or thick
Avon Barksdale did an exemplary job of managing his risks, whatever his motivations or his ethics. The lessons his story holds are worth learning. If all textbooks were as engaging, we might actually learn a bit more in school.
Avon Barksdale on Managing Risk, Part One
Jon Gnarr, the mayor of Rekjavik, Iceland, uses the HBO series The Wire as a political filter. If you haven’t seen all five seasons, he doesn’t want to work with you. Crazy as it sounds, he’s on to something.
The series has plenty to say about how cities are governed. Many a new mayor – or manager – would do well to establish such a comprehensive common point of reference for potential coalition partners. The Wire has plenty to teach us.
Wisdom from unlikely sources
Avon Barksdale, one of the series’ criminal masterminds, knows a thing or two about managing risk. When the series starts, he has managed not only to survive and to thrive in a high risk business, but also to elude the notice of the police so successfully that they don’t even know what he looks like.
The business is hugely profitable and it is run like a business. Subordinates are delegated tasks and rewarded or punished according to their performance. Indeed, it is so business-like that Barksdale’s number two is actually studying business at a local college.
Internal audit by another name
The business is run tightly and they are very aware of the temptations that accompany their product and the large amounts of cash it generates. Every level of management keeps a close eye on the money as it is collected and when it is exposed to risks such as being transported.
A string of “loss events” trigger a review, for example, to check for information security leaks within the organization. The steps Barksdale and his lieutenants take to find and control the source of the loss are criminal, but well thought out.
Simple, but effective
Ask yourself how many classes you’ve sat through and how many you would care to repeat. I’m watching The Wire for the second time and may actually be enjoying it more this time. The drugs trade, or “Game”, has plenty it can teach those of us on the straight and narrow. There’s much to be said for the value of a good teacher.
Sometimes our faith in an idea is wierd
My grandmother was a cultivated woman of many opinions, most of them strongly held, and some of them distinctly unusual. For many years she insisted on watching TV in the dark while wearing sunglasses. She kept her TV in the dining room for almost as many years and so she would sit at the dining table wearing her Jackie O shades whenever she watched the tube. It looked quite odd.
Grandmother wasn’t the only one
Similarly odd notions also strike great captains of industry. The former CEO of Countrywide, Angelo Mozilo
, who you may remember as one of the nice people that brought us the subprime crisis, decided to base his firm’s business on the idea that it would be wise to match any mortgage made by anyone anywhere in the United States.
Likewise, they decided to offer any type of loan that consumers and securities market were willing to trade in. Say what you want about their business model, but complicated it was not. Their answer was always yes.
“Any friend of Tonto’s is a friend of mine”
The rule may have worked for the Lone Ranger, but Tonto’s friends were a more selective sample of the US population that the sum total of people offered mortgages by US mortgage brokers. Offering to buy and sell anything that would fly on Wall Street also required unusual faith in the wisdom of Malcolm Gladwell’s masses.
The term ”business model” is specific and means no more or less than exactly that. It does not mean “sure thing”. It absolutely positively does not mean “guaranteed good idea”. A model is in essence just a concept, and like my dear grandmother’s notion of “safe television viewing”, some contain more wisdom than others.
All ideas are not equal
My mother and I were pretty insistent about the madness of my grandmother’s practice, but she was impervious to reason. The advice of the nice man who had repaired her previous television weighed stronger than ours, despite my mother’s protestations that she had spent her entire career in the television business and never heard of such lunacy.
Somebody must have pointed out the folly of Countrywide’s practices to them, but to quote the article above, they insisted on following their model right off the cliff. It seems odd, but then so was my grandmother’s practice of wearing her sunglasses to watch TV in the dark.
We all have our idiosyncracies
Before we laugh too hard at Mr. Mozilo or my dear grandmother, we ought to ask ourselves what strange notions we cling to and what risks they entail. Unlike Mr. Mozilo, my grandmother eventually changed her mind. Her risks were also insignificant.
Are your strange notions on the order of Grandmother’s or Mr. Mozilo’s? Are you even aware of them?
Answers to questions you haven’t asked can speak volumes
I live in the middle of Copenhagen, where the best way to get from A to B is on a bike. A few years ago, I bought a new bicycle. A month later I was outside the shop asking the owner why the rear brake had gouged the frame.
“I don’t know”, he said, folding his arms across his chest, “but you’re not getting a new bike”.
His wife had handled the transaction, so I asked to speak to her. When he stormed off to get her, my girlfriend whispered, “A new bike is exactly what you’re going to get”.
She came outside and looked at the gouge. ”This is unacceptable”, she said, promptly, “you’re getting a new bike.”
Neither my girlfriend or I thought the gouge warranted a new bike - until the dealer mentioned it. It was a useful lesson.
The unasked question
An old boss announced that to save money, we were moving to share offices with another department, adding, “no jobs will be affected”. No prizes for guessing that jobs were cut the next quarter.
The unprompted denial is as sure a signal as “I don’t mean to toot my own horn, but…” and ranks alongside “unsinkable ship”. The words ”there is nothing to worry about” should cause exactly that, worry.
“Nobody will be leaving the Euro”
Does this mean that the question is who will be leaving the Euro? This morning a radio host asked a panel of experts what a breakup of the Euro would look like. In 1991 he’d asked a colleague what a break up of the Soviet Union would look like and said both of them had been at a loss. His experts’ opinions were revealing.
Instead of discussing scenarios, they explained why it wouldn’t happen. It’s ironic that after a housing crisis built on a talk of why the market could only go up, we still can’t talk about what it might look like if things go down. Saying “Greece would be crushed, if it left the Euro” won’t help us plan for if it does or recognize a breakup as it approaches.
The new bike
For the record, I got new frame and the other parts were transferred from the original frame. The bike lasted almost seven years. Maybe the same will happen to the Euro.