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How to Manage the Ambiguity of Entrepreneurship

The Question

I once interviewed for a consulting opportunity at a VC-backed portfolio company. Of all the questions asked by its Director of Human Capital I can recall only one, “How do you deal with the ambiguity of entrepreneurship?” I’m sure I fumbled my way through the question. But I’ve since thought a lot about it and have come to realize how profound it really was.

How exactly do we navigate the ambiguity of entrepreneurship? What’s the secret?

The Answer

The answer? Risk tolerance. Our ability to take risks and make executive decisions based on extremely limited information is the best way to manage the uncertainty of entrepreneurship. After all, entrepreneurship is inherently risky. We may have a revolutionary product. We may even have the early adopters (innovators) waiting in line to buy it. But sometimes, that’s about all we have. Yet despite our lack of experience and limited resources we still have to select the most appropriate distribution channel, the most effective marketing strategy, and the best pricing schedule. Like I said, risk.

The Algebraic Analogy

Making these decisions blind is like having to conclude the answer to an algebraic equation with more than one missing variable. For example, if I told you 2X + 3Y = Z could you tell me what Z equals? Probably not exactly unless you know X = 2 and find that Y = 3; then you can solve for Z = 13. But what if you didn’t know X or Y? Say you didn’t know how your customers will respond to a premium price (X) and how your competitors will react (Y). What if you had to guess? That’s entrepreneurship. And when you combine the decision with the fact that investors’ money is on the line, it makes for a very risky (and tense) situation.  But it must be done. The decision must be made. And there are a things we can do to hedge our bets, such as thorough market research.

Even market research can yield wacky results or no results at all. Perhaps the sample used isn’t representative of the target market. Or maybe our sample is biased. While the results may be flawed, it’s still better to find that X = 1.9 and Y = 3.1 than to simply guess X = 0.0003 and Y = 32. Yikes!

Let’s put this  into a business context. Say we’ve launched a gourmet soda pop shop and want to adjust the corporate strategy to reflect the national health trend. We need to know who our new customer is, how to access them, what their taste preferences are and their sensitivity to premium pricing. Yet our market research yields only that, for a minority of the local population, soda is a substitute for beer. That’s it. The rest is speculation. So how do we navigate the ambiguity of the situation? It’s an incredibly risky proposition, albeit unrealistic that an entrepreneur would launch a new strategy under ambiguous circumstances. I digress.

Entrepreneurs with spizrintum will still take the plunge and make some educated assumptions based on the limited information available. Hypothetically speaking, they’ll price the sodas at a 40% margin. They’ll invest in non-traditional advertising that targets men ages 18 – 35. And they’ll position the brand as a healthier, premium alternative to alcohol. This is risky because the decisions are based solely on assumptions gathered from limited market research. But that’s entrepreneurship!

Were I to go back a few years and interview again with the same Director of Human Capital, I would have answered the question saying, “It’s my tolerance to risk that enables me to deal with the ambiguity of entrepreneurship.”

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