Part 3: Creating Antifragile Startups
Contents
In this section, I will give you six qualities of an antifragile startup. These qualities will be your main takeaways; your job will be to see how you can inject these qualities into your own business.
At the beginning of this text, I asked: Why are startups really fragile? That wasn’t a fully rhetorical question. The following paragraph tells the story of why startups are fragile. Read it carefully and take particular note of anything that might apply to you. Anything that, in your most brutal self-evaluation, might be something to which your company is vulnerable.
So, why are startups really fragile?
They fall in love with one idea, and trust only the feedback of others who love this idea, invest everything in that single idea without asking questions, value their own vision above making users happy, neglect to build a brain trust and group of core fans, never budge from their top-down central planning, place huge gambles on a few promotion strategies that drain their time and money, have no back-up plan for when their first ideas fail, outsource key decisions to those without a significant stake in their success, blindly follow “expert” predictions, advice, and interventions, become overly dependent on single people and single points of failure, and are otherwise unprepared for the required determination, grit, and the willingness to get their hands dirty.
I’ve boiled down this sentence into six main qualities what we’ll now discuss one by one.
Antifragile Quality #1: Cultivating market intelligence versus being a lone visionary
The iPhone Story Isn’t What You Think
One of the things that I don’t like about the entrepreneurship domain is we tend to hero-worship, and take the wrong lessons from their stories.
We tend to remember the McNuggets and forget everything else.
When you read a book like The Lean Startup, what do you remember from it?
You remember “fail fast.” You remember “iterate.” You remember “MVP.” But these concepts can very easily become parodies of themselves because people remember only the most basic concepts and forget the important distinctions.
One of the tropes that’s been flying around forever is the idea that Steve jobs did not need any market feedback to create the iPhone. His creation was of such genius that he simply told the market what it should want, and then he created the desire simply by weaving it out of the air.
This stupid story is completely untrue, but everybody believes it.
The story grew from a kernel of truth: Jobs disdained focus group research because focus groups can’t tell you how to innovate. Nobody in a focus group is going to start drawing an iPhone prototype out of a piece of paper and say, “It would be really nice if you created this kind of pocket-sized metal-and-glass device with a new app-based touch interface…”
However, there was tons of research at the time which indicated strong demand for device consolidation. You may be old enough to remember that in the mid-2000’s we were carrying around four or five devices with us: phones, PDAs, digital music players, digital cameras, eReaders, and so forth.
There was a treasure trove of unmet demand available if these devices could be consolidated.
On top of that, Jobs had about 30 years of experience not only as a device maker, but more generally as an electronics maker and a computer maker before that. He was so familiar with his core audience that he knew which of his own instincts to trust and not trust. That kind of instinctual ability is a skill built over years.
It is not true to say that Jobs distained feedback from the marketplace. To the contrary, he spent his life becoming acutely sensitive to advice from the marketplace.
If entrepreneurs are to emulate any quality of Steve Jobs, it should be his sensitivity to the needs of his core audience, and not what he may have thought about a particular research technique.
Don’t Lecture the Market, Listen To It
Please remember this: Your value as an entrepreneur does not lie in your idea. It’s not even your execution. The value that you bring is your ability, refined over time, to 1) take information from the marketplace, 2) turn it into actionable intelligence, and then 3) use that intelligence to determine the next hypotheses to test.
The cliché in venture capital is whether one favors investing in the “jockey” (the entrepreneur) or the “horse” (the innovation). In my formulation, the horse is nearly immaterial. The jockey is always the value.
This is why people who fail at one entrepreneurial endeavor can be successful as another. Though the experience was unsuccessful, they further developed their ability to take indications from the marketplace, interpret them, and turn them into testable hypotheses.
Lone visionaries are especially susceptible to confirmation bias. They tend to fall in love with their original idea and become obstinate when their first ideas fail. Instead, you want to move your vision towards market need.
On average, successful entrepreneurs are the ones who cultivate as much market input as possible. The best become obsessive about it.
They are the ones who treat their beta groups and their early buyers as gold, consistently interviewing them for information, and then leveraging this information in the most intelligent way possible.
This process is not easy, and most founders avoid it. If potential customers or beta testers are not readily at hand, a founder might be tempted to justify substituting her own judgement for the market’s. This saves her from having to do the hard, scary work getting out from behind her computer and talking to people about what she could be doing better.
Information coming back from these small groups of customers and stakeholders will not be scientific, or for that matter even easy to interpret. It will be anecdotal, often contradictory, and can favor the preferences of early adopters over mainstream buyers. This is why the entrepreneur’s core skill lies not just in cultivating information, but also making sensible inferential leaps and then rigorously testing those leaps.
Antifragile Quality #2: Institutionalized trial and error versus central planning
The Market Should Alter Your Vision
Often, a founder will be so overconfident in their original vision that they exhaust all their time and money developing a relatively rigid product and then have no idea what to do when it gets no initial traction.
Most Minimum Viable Products I see are not externally validated before the engineering begins. They’re often too complex and take too long to develop. And most crucially, when they’re deployed, they’re not made in a flexible way that lend themselves to necessary experimentation. Their product’s experimental flexibility consists of changing button colors from red to blue.
The Tinkering Is the Point
Founders tend to envision product-market fit to be like picking a lock. They’re trying to arrive at a certain configuration that allows everything to “fall into place,” whereupon they breathe a sigh of relief and bathe in the confidence that they’ve figured out their business.
Please remember that as a founder, your goal is not to create a steady state in which your company has figured everything out and simply rings the cash register.
The goal is to create a regime of constant, directed experimentation and tinkering.
Recall from the last section, an entrepreneur’s value lies in the skills of cultivating market feedback, turning that feedback into actionable intelligence, and using that intelligence to derive the next set of hypotheses to test. Rinse, repeat.
User happiness never stands still. It’s a target that’s constantly moving.
The process of trial-and-error should never relax. The process itself is the goal.
A Tale of a Pivot
Early in my career I was the first employee of a startup. This was back in the days of internet link portals, like Yahoo, and the founder I worked for created a portal with resources for small businesses: how to incorporate, how to file trademarks and copyrights, that kind of thing.
After doing a revenue source analysis, he discovered that 80% of his revenues came from one particular link. That link was an internet access finder.
In those days, there were a lot of service providers from which you could buy business-level internet access, but the brands were not well known. It was difficult to figure out who could serve your area and at what price.
On the strength of this analysis, he made the rather gutsy decision to discard his original vision. He rebranded the company as an internet access project management company. That company is still thriving today, and now operates out of a wholly owned office building in downtown Chicago.
This is an example of what startup founders typically call a “pivot,” yet another Lean Startup term that has become its own parody.
I would take the concept a step further: if you have to make a pivot, which is a sudden, dramatic business model shift, it probably means you weren’t experimenting rigorously enough and got caught flat-footed. Dedication to experimentation and tinkering should allow you to evolve more smoothly towards the model to which you would have eventually needed to pivot.
Antifragile Quality #3: Small mistakes and capped downside versus huge, resource draining gambles
Fear the Right Things
Entrepreneurs are scared of the wrong risks.
They’re all petrified of things that they’ve seen in movies. They’ve all seen The Social Network. They’re all scared that there’s going to be some nefarious boardroom maneuver that dilutes them out of their ownership.
They’re also petrified about having NDAs signed, scared that somebody is going to steal their idea. And between you and me, overconcern about NDAs usually correlates with the lameness of the underlying idea.
If you want to have NDAs signed, fine. That’s fine, we’ll sign them. But don’t lose sleep over this. Competitive espionage is not going to be what gets you.
The First Rule of an Antifragile Startup: Survive
The stuff that’s going to kill you is related to your survival.
When we see poker tournaments on TV, they’ve been produced in such a way as to emphasize those most consequential moments. One could be forgiven for thinking that great poker players make bold, dramatic bets and bluffs on every single hand.
What tends to get lost is the mundane reality of folding hand after hand until a player feels that they’re in a position to bet.
A lot of what goes into winning a poker tournament outright is not getting knocked out in the early rounds. A player has to survive until they control enough resources to make the kinds of bold plays that the game is known for.
Keep Hold of Your Non-Renewable Resources
As an entrepreneur, the risks that you have to focus on are those that stand the most chance of knocking you out of the game: usually either running out of time or running out of money.
As a marketing mentor, the most common questions I get asked are about 1) how to run ads for paid traffic, or 2) how to write blogs that bring organic search traffic. The former, in most cases, drain your money. The latter, in most cases, drain your time.
Part of the lure into entrepreneurship is the possibility of fast growth and the potential wealth that brings. Sometimes VC investment can exacerbate this dynamic by applying unneeded pressure for faster returns. This is the poker equivalent of pushing all-in on more hands, even inferior hands, because you’re under a time crunch to build up your chip stack.
The VC investor is antifragile, remember. She does not need you to be successful, she just needs someone in her portfolio to be successful. She benefits from over-bold growth strategies that lead to more unicorns, even if it also increases the number of bankruptcies in the portfolio.
Don’t worry about huge growth while you’re still fragile. Worry about surviving until you get enough chips that you can start making bolder investments.
Worry about getting good at the intelligence-experimentation cycle. If you keep your mistakes small and manageable, you can make lots of mistakes and fold lots of hands. Remember the relationship of the boulder to the million little pebbles: you want to get pelted by many small mistakes rather than dashed by one or two huge ones. Small, manageable tests that don’t work out still give you priceless information without crushing you.
[Read my article on Antifragile Marketing (Opens in a new tab)]
Watch Your Downside
If you are keeping your mistakes small and manageable, you are executing on a broader theme of capping your downside. Capping your downside refers to the harm curve we showed earlier. You want to do what it takes to straighten out that downside harm curve so that volatility and unexpected outcomes don’t pose a survival threat.
How can entrepreneurs cap their downside risk?
Let me ask the question in a different way: What percentage of startup founders do you imagine fail to conduct adequate due diligence before investing in a venture? How many of them start ventures in areas or industries with which they have no previous experience, like quitting one’s white-collar job to open a restaurant or a yoga studio? How many forget about researching existing demand and product-market fit, like we talked about earlier?
Tom Eisenmann’s wonderful new book, Why Startups Fail, identifies six categories of mistakes that tend to cause a startup to not survive (e.g. huge “boulder” mistakes):
- A poor fit with core contributors and/or resource providers
- Jumping the gun before conducting pre-MVP research
- Good initial indicators of demand not sustaining over the long term
- Squeeze between high scaling costs and less-enthusiastic new customers
- Absence of key skills and resources as one scales
- Reliance on “cascading miracles” – everything proceeding exactly as expected
These are the types of mistakes that require an entrepreneur’s fullest attention.
Cascading Errors
In addition to making one’s errors small and manageable, one also wants to make sure one’s errors don’t create more errors; that they are disconnected from one another.
Some systems, particularly those that are interconnected and complex, allow errors to spread like contagions. This is referred to as error correlation.
We’ve just lived through such a phenomenon. Pandemics are particularly hard to deal with because of their ability to scale. The data points are not independent; one positive case affects all the surrounding data points, and so on in a multiplicative growth curve.
A fragile situation allows impacts to cascade into more impacts. Errors lead to more errors. An antifragile situation represents the complete opposite; the system learns from errors, making future errors less likely rather than more likely.
What is a small business example of a decision with correlated error or with this kind of contagious error?
Think about bringing on a co-founder, investor, or partner with a toxic personality. This kind of error is very common because such people can seem charismatic at the first meeting.
In short order, the rot that infects everything that they touch—work that goes undone, drama in the workplace, a bad example for the younger workers—cascades outwards into an ever-increasing detriment.
The “Barbell” Strategy
To ensure that you don’t get knocked out of the game early, you want your mistakes small and you want them isolated from one another. There is also a particular investment technique that can help founders cap their downside risk. This technique constitutes a special mix of boldness and paranoia called the “barbell” strategy.
Most amateur investors make the very human mistake of thinking that middling risk investment is a prudent strategy—not too hot and not too cold.
However, putting all your chips into moderate risk can actually be the worst strategy: payoffs are guaranteed to be mediocre at best, in addition to which there is still a substantial chance of all the funds being wiped out. The position merges the worst qualities of the extremes.
The barbell strategy, by contrast, invests in the extreme ends and ignores the middle. One places the majority of their time and cash reserves into safe, proven strategies that have tested out well and are currently generating revenue (maximizing paranoia), and a minority of time and cash investment into potential high-payoff experiments that have a lower chance of return (maximizing boldness).
The strategy works because you keep the majority of your resources safe and accept the loss of all your bolder investments as a cost of doing business. The loss of those funds doesn’t pose a threat to the rest of your company. Think of it like research and development investment— there’s no guarantee that the research will result in a viable product, but when it does, the returns could be outsized.
I’ll give you an example of how this works.
I used to run Facebook ads for a digital agency. Typically, you do some initial experimentation with targeting and creative, and you usually find a configuration that starts generating results for you. At that point, you feel a temptation to simply keep those well-performing ads running in a perpetual steady state.
However, advertising resists steady states. Audiences get tired of seeing the same ad, and so those ads start losing their effectiveness.
If you’ve committed 100% of your resources to safety, you aren’t using any resources to test new audiences and new creative. This is very tempting because clients want you to maximize returns, and if you use some percentage of ad spend on experimentation, that is spend that might not generate the same return as if it was used in safer campaigns.
I found I had to incorporate the barbell strategy, and that meant being very straight and transparent with clients about how the investment would work. I said, “Look, once we find a good steady state, I want to maximize your return. So with the majority of your ad spend, I am going to pump it through that and get the best ROI that I can. Some of your resources have to be exploratory, and we might lose that money. But that’s the cost of keeping the campaigns strong over the long term.”
Antifragile Quality #4: Building a core cadre with skin-in-the-game versus blindly following expert predictions, advice and interventions
Beware the Big and Sudden
In this chapter, I’m going to criticize the blind following of outside advice, and I fully realize that includes my own advice. I get the irony that I might be digging a hole for myself. Please bear with me.
Whenever you make sudden changes from the top down to your company, it invites risks to crawl into the system and hide.
This is why I mentioned earlier that I don’t like pivots so much. Pivots are sudden veers, and they rely on the new direction being correct. By the time the ships lookout tells you there’s an iceberg directly ahead, it’s too late to do much. Systems that constantly test, tinker and discard have a better chance of feeling-out the correct direction before one feels the need to grab the ship’s wheel and yank.
Sudden veers introduce new risks because there’s been no testing in that new direction. Are we overcorrecting? Are there any hazards in our new path? Can the ship take the physical strains of such a course correction without experiencing damage?
The pivot is an example of a top-down intervention in a company’s strategic or operational plan. The more major this intervention, the greater the chance that it introduces the potential for harm.
Even Healing Can Cause Harm
Think of going into surgery. Surgery is something that we usually reserve for rare, necessary instances because it carries that slight probability that something will not go as expected. Surgery is fragile to unexpected outcomes.
These small risks add up. If one has to have multiple surgeries (interventions), each carrying its own risk of something unexpected happening, then one multiplies the risk of something going wrong. Multiplying pebbles into a boulder.
There’s a word in medicine called iatrogenics, which refers to inadvertent harm caused by the healer. Whenever you have a major intervention or a major course shift, you introduce fragility because you have to rely on everything going right. The more dramatically you try to steer yourself off to a different course, the more fragile you are.
The principle at issue here is the judgment you exercise when taking in market / stakeholder information and deciding what, if anything, to do with it. You don’t want the firehose spray of information coming at you to result in a lot of major shifts, corrections and do-overs. Your value as an entrepreneur is your ability to weight the sources of your information, infer meaning, and test hypotheses judiciously.
Turning Information Into Intelligence
When your company is in its early stages, market information comes in sporadically and can vary in quality. You might get an anecdote here, a small survey there. A partner or spouse might offer some feedback.
How do you know which of these signals are pointing you in the right direction? You can’t take it all at face value. We have to assign weights. You must sort out the wheat from the chaff and decide which information trust the most.
A good way to know how to weight the material is what Taleb calls “skin-in-the-game.”
Of those who are providing you with feedback, who has a vested interest in you? This is why we would lend more weight to the advice of VC partners, for example, because they have a considerable amount of money invested in us, and presumably they want us to do well.
Same goes for customers. Customers have invested something in you, in that they’ve bought your product. To a certain extent, they want you to provide an effective product or service and have shelled out money to back that up.
Sometimes people can come in and call themselves experts (as I mentioned earlier, I know I’m digging myself a hole here). Advisors of all stripes can offer well-meaning suggestions, but without being bought into your operation in a significant way, if anything goes wrong, they simply move on to the next advisee.
Skin-in-the-game should determine the weight that you give every piece of feedback you receive, so that you can turn that information into actual intelligence. Interestingly, this is why spouses and partners (even those without specific domain experience) are capable of giving outstanding advice.
Partners have incredible emotional skin-in-the-game of your success. The extent to which spouses and partners want you to succeed tends to align incentives in such a way that they can provide judgment that punches above their weight class.
Antifragile Startups Don’t Have Distanced Investors
By contrast, some people whom we expect to be bought into our success may be less invested than we imagine.
Some VCs make a practice of splitting up their investments into sections called tranches, to be released to the startup when progressive milestones are reached. This makes sense from the point of view of the investor, but such withholding practices create a dynamic where the startup constantly has to prove itself to its own board. This tends to preserve an “us-them” relationship between the startup and the VC.
You want investors to consider themselves part of the company, not above the company. Any barriers to this kind of emotional investment tinge the advice that they give. You can feel that they’re advising from the point of view of their portfolio, which may be in conflict with your company’s well-being.
Part of the reason that you’re giving equity to somebody else is that you want them to feel skin-in-the game, and you want their advice to come from a place of emotional investment in you.
In summary, when turning market feedback into actionable intelligence, the information can be scattered and anecdotal, so you must weigh the value of sources differently. One good way to weigh competing ideas is to value them by how much skin-in-the-game the source demonstrates.
The most valuable information will come from your core cadre of co-founders, initial investors, and people who have a financial stake in your company. Also deserving consideration are certain capable family members and others who, while not having domain experience, are still bought into your success and so can provide a voice of context and prudence.
You want to be most wary of advice and conclusions that necessitate huge changes, particularly if that advice is coming from a source who will survive quite fine even if you don’t.
Antifragile Quality #5: Redundancy and decentralization versus relying on single people and single points of failure
It’s Not Always About You
Every serious startup founder realizes very quickly that there are not an infinite number of hours in the day.
Even when we can finally afford the luxury of a staff, some founders to want every decision to go through them. They might not admit it or even know it, but some come to like the attention of having a cult of personality revolving around them. Most simply feel the need to make every decision for the sake of security (or, to put it less generously, control).
At the beginning this may be efficient, because as the founder, you know the answer to most operational questions. An assistant would just have to turn around and ask you what to do.
This arrangement, however, does not scale. In the long term, you will wind up being more of a bottleneck and a risk than the business genius you want to feel like.
What Are Your Single Points of Failure?
Anything that has a single point of failure is fragilizing.
Some things are more important than being absolutely “Lean.” Overoptimized businesses can become especially fragile to events involving personnel. Just as the human body has two kidneys, nascent startups also need strategic redundancies and inefficiencies in order to survive. Founders need to put some real thought into business continuity.
As you grow your business, you get to the point where anybody who works at your company, including and especially you, could conceivably get sick for two weeks to a month and the business keeps right on going.
This may seem unlikely, but the stressor might not have to be an illness. What if someone leaves and you have a hard time backfilling the position? How about if there’s an opportunity to grow your business that requires the founder’s undivided attention? What if you want to offer liberal or short-notice vacation policies as a perk?
An agile and resilient business will take these stressors without even skipping a beat.
You have to be willing, however, to accept the trade-off of investing time to lay the foundation. Agility and antifragility always demand some time invested in preparation and positioning (the small, recurring downside) so that you can grow through overcompensation when the unexpected happens (the occasional but dramatic upside).
Antifragile Startups Cross-Train and Delegate
If you have employees, start with cross-training and delegation. Make sure that employee A can do a little bit of what employee B does, and employee C can do a little bit of what employee A does.
In past marketing departments that I’ve run, we refer to the cross-training protocol (maybe a little too darkly) as the hit-by-the-bus list. Every major functional area has a primary owner, and a backup who can step in.
If anything is left uncovered from that list, you as the leader are personally accountable for making sure the work gets done. If it’s work that you can’t do (e.g., development work for a non-technical founder), you are fragile to that eventuality and you need to think long and hard about your plan B.
Delegation, like cross-training, is not efficient but it is crucial.
The very definition of a business is an entity that captures value, and the amount of value captured increases as the company learns how to improve its processes. Therefore, a company is growing whenever it is increasing its institutional knowledge and savvy.
Given that is the case, staff members must be trained over time to make good decisions in your absence. Investing time in supervised delegation, defining boundaries within which decisions can be made, and heuristics for making good decisions, are all necessary to capturing more market value, because they are learning to leverage their institutional knowledge to improve everything they touch.
Antifragile Quality #6: Grinding, pitching, selling, schlepping and demonstrating grit versus founders with clean fingernails
Antiseptic Marketing Is Fantasy
I’ve had many mentoring conversations with founders who really believed that, when it came time to promoting their business, they would be able to do it from behind their computer.
They would say, in so many words, “Give me some Facebook ads, give me some blogging to capture organic search, and I’ll be set.”
Life does not work that way. Life is not clean fingernails.
In my experience, the small businesses that did the best in their nascent stages were sales organizations before they were marketing organizations.
The Shoeleather Advantage
They were organizations where founder was always out of the office getting in front of somebody. Sometimes it was to make a pitch, sometimes it was to create a partnership, sometimes it was to network or to gain feedback, but there was always a shoe-leather quality to it. They would make calls—lots and lots of calls—to people they knew, people they didn’t know, contacts of contacts…everybody.
You always got the sense that they were trying physically to get more business, that they were investing all of their energy, heart, grit and determination to getting in front of as many people as possible…into getting to know as individuals all those users and stakeholders that their business was trying to make happy.
Routinely, the startups and small businesses I’ve seen do the best were the ones that were most aggressive in reaching out to individuals in order to further the business. Advertising and search optimization came later to expand traction, rather than to try and cause it.
The Antifragile Startup Energy Source
The words “grit” and “determination” have become somewhat clichéd in the startup domain, but they really are the energy source for everything else. If antifragility seeks, to a certain extent, to mimic nature, then from somewhere there must come the drive to keep testing, tinkering and discarding. This may be the part of being a founder that’s truly irreplicable: the inexhaustible wellspring of energy that ceaselessly, neurotically, single-mindedly wants to make everything better.
You’ll recall in an earlier section when we talked about the “uncle point” of a fragile system, the point where the teacup smashes or the business goes bankrupt. Grit and determination are the well-worn but hopefully not worn-out words that we have for the quality that pushes the uncle point as far out as possible. When things really don’t go as expected, often it’s the psychological strength of the founder that underwrites the operation.