Strategy, Risk, and (the Avoidance of) Ruin
Entrepreneurs have “skin in the game.” That’s not always the case for others who champion risk-taking and romanticize “visionary” strategies.
The essence of strategy is the avoidance of ruin.
Venture capitalists, for example, play a different game than do the teams the VCs back. Venture capitalists are exposed to portfolio risk. That is, the failure of venture “A” doesn’t (usually) impact the success of venture “B”. Consequently, a VC will seek out uncertainty. If they lose the loss isn’t overwhelming, and they live to invest another day. If they win the upside can be tremendous.
Entrepreneurial teams, on the other hand, are exposed to serial or sequential risk. The failure of their first venture may mean “game over.”
It’s the difference between playing roulette and Russian roulette. The odds of winning the former aren’t necessarily that great, but the consequences of failure aren’t usually ruinous. The odds of “winning” Russian roulette are 5-of-6, but the consequences of losing are catastrophic.
So, be aware of who has skin the game and who doesn’t. Evaluate the input from the latter appropriately. Use strategy tools to help you map the cliffs in your business landscape. Don’t plot a course that skirts too many of them too closely. After all, as author and gadfly Nassim Taleb notes, “In a strategy that entails risk, benefits never offset the risk of ruin.”
- Risk is a function of uncertainty and “skin in the game.”
- The difference between serial (or sequential) risk and portfolio risk is the difference between Russian roulette and roulette. Know which game you’re playing.
- The essence of strategy is the avoidance of ruin.