Risk and Uncertainty in the Expansion Stage
Expansion-stage companies and startups are swimming in uncertainty.
They have a product, and if they’re lucky they have customers. But most have little or no knowledge of who their customers are, why they’re buying their product, how satisfied they are, or what the company’s best opportunities for expansion are. They operate on intuition, coaching, and whatever meager information they can gather.
Contrast that with the fact-based decision making at a big, established company like Amazon. The uncertainties are still there, but they’ve been roughly quantified. If Amazon releases a new product, it will sell about X dollars in the first week, give or take Y margin of error. If they enter a new market, they expect to take Z market share. The result is something totally different from the uncertainty that startups face. Rather, it’s something the late economist Frank Knight called “risk,” a quantifiable form of uncertainty akin to the odds in a casino.
Risk vs. Uncertainty
Because risk can be measured, it’s largely benign. If you walk up to a roulette table, you know exactly how much you stand to lose, and can calculate the odds precisely. You can plan for the worst, and abstain if the odds aren’t in your favor.
Uncertainty, on the other hand, has no defined parameters. It’s walking up to a roulette table with no idea how large your bet is or what the odds are of success. It can make or break you, and either way, you’ll never know if you made the right or wrong decision.
It’s uncertainty, not quantifiable risk, that makes being an entrepreneur so difficult. For example, you’d love to know what your success rate will be in a certain segment. But to quantify that risk (we’ll win 5% of these accounts), you’ll need a ton of planning, months of data collection, and a concerted effort to make sure the information is being recorded consistently and correctly. You can’t just wake up one morning and decide to do the analysis.
As your expansion-stage company scales, it’s important to think about this early on. It may be too early to make a decision on customer segmentation, but until you map out what information you wouldneed to make that decision, and put in place a process for collecting it, you won’t be in any better of a position this time next year, either.
So stop everything you’re doing and ask yourself the following questions:
- What are the major questions I have about my company that I’m currently unable to answer?
- In a perfect world, what analysis would I need to do or see in order to answer those questions?
- Is anyone currently collecting that data?
- Is it being recorded in a format that can be manipulated or analyzed?
It’s likely that there’s some data you could be painlessly collecting today that will be extremely useful tomorrow as you try to convert an uncertainty into a risk. Do yourself a favor and get a head-start.