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How risk blindness hurts startups


Not enough hindsight in advance

The reason I started writing this post was Buffer’s post that included the salaries of everyone in the company. Although it’s a great PR move, I immediately started thinking what risks they are taking with this approach.

There will be folks who won’t be comfortable with such a level of transparency. Conflicts might occur when someone feels that they are more valuable than the salary assigned by the system. The system might be hard to scale as the company grows, when not everyone is a starry-eyed enthusiast. All kinds of things might happen and they all will distract the management from working on the things that matter. Sometimes this can make a great deal of difference.

This got me thinking about other examples. GitHub and Valve with their flat organization. FogCreek and Atlassian with their unorthodox attitude to sales. Numerous startups that will run their apps on beta (if not alpha) quality technology just because it’s a bit more productive than the previous generation. These decisions might cost them a fortune down the line. Financiers or acquirers might balk at the unfamiliar management or compensation structures, it might be harder to hire, harder to work with partners or otherwise exist in the multi-faceted corporate market.

The Estonian language has an expression that I often use and for which I don’t know an English alternative. It says “If only I was as smart as my wife in hindsight!” This sums up neatly my reservations about these actions. They can have tremendous advantages, but also enormous disadvantages and the way it will play out will only be clear in the hindsight.

Learn from the mistakes of others before you

At ZeroTurnaround, we have made our share of mistakes that either took a lot of effort to correct or that we continue to live with until now. Two completely unrelated examples follow.

The first mistake was made about 3 years ago, when we started building a new product, LiveRebel. When making the choice of technology we decided on the new web application framework Play, which fitted most of our development requirements very very well. Of course 6 months later Play committers made a decision to completely break backwards-compatibility for Play 2. So we were stuck with a technology that had an uncertain future and we had to spend much more resources fixing bugs and adding features than we ever thought possible.

The second mistake had nothing to do with technology. At some point, partially inspired by the FogCreek stories, we decided to drop commission from our sales compensation. Everyone would get a salary that would be adjusted according to performance, same as across the other departments. About a year later we understood that this doesn’t work very well. Mainly, because we compete for the best folks with the open market, and salary adjustments always lag behind commission.

In hindsight, I understand why we made those choices. In a startup, the odds are stacked against you to a monumental proportion. Therefore to survive and prosper you need to develop “risk blindness” and evaluate every choice not by its risks, but by its benefits. The downside just doesn’t matter most of the time.

Enforce risk blindness only in your core competence

Evaluating choices by their benefits, and not their risks is the right attitude a lot of the time–certainly when building products and taking them to market. The issue is that the same attitude will very easily extend to every other activity you do. One of the scariest stories of “risk blindness” I heard was of a startup leader who put the company’s free cash into Apple stock, so as to avoid just keeping money on the bank account where it slowly depreciates in value. The risk of losing the cash in a stock crash just didn’t matter compared to the upside of appreciating value.

But this attitude can be very dangerous when applied to matters outside of the core competence of the startup. We are generally in the game of creating value for customers, shareholders and teammates. We really shouldn’t be in the game of fixing corporate management structures, legal & financing standards or technology issues in the world. We should be focused on creating a flexible company that one day might tackle those issues, but this isn’t something you do on a limited budget with a tiny team.

Once you get to be big enough to weather the inevitable storms you can always take years to set up and run experiments to understand precisely whether to adopt or not the new and exciting technology, methodology or organizational practice. Until then–focus on kicking ass and be wary of risk blindness outside your core business.

Share your thoughts below in the comments section, or hit us up directly via Twitter @ekabanov or @ZeroTurnaround

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