Risk vs Uncertainty – Why Startups are Better Innovators Than Large Enterprise?
Startups are better innovators because they are able to deal with uncertainty and dealing with uncertainty is one of the key skills required to successfully navigate an emerging market. I was listening to a Freakonomics podcast while walking my dog the other day when I was first introduced to the difference between managing risk and dealing with uncertainty. Both managing risk and dealing with uncertainty are great skills to have, but are essential skills for very different stages in the market lifecycle and size of organization.
Large enterprise tends to be very good at building business cases and managing risks, while startups are far better at dealing with change and uncertainty. If you are good at managing risks you are used to dealing with known probabilities and outcomes where the bets made have a high probability of success. However, in the end it is dealing with uncertainty that is the key to developing transformational innovation. The quote below is from this Freakonomics podcast: “How Much Brain Damage Do I Have?”
“LO: For example, if you create an entirely new industry that didn’t exist before, there’s no way to calculate what the odds are. When Bill Gates started up Microsoft, we didn’t have a huge PC and software industry. He created that. He couldn’t sit down and calculate what the odds [were]. Knight came up with this idea that the way you really make money, the way innovation really occurs in the economy, is through taking on uncertainty, not taking on risk.”
“Difference Between Risk and Uncertainty. … In risk you can predict the possibility of a future outcome while in uncertainty you cannot predict the possibility of a future outcome. Risk can be managed while uncertainty is uncontrollable. Risks can be measured and quantified while uncertainty cannot.”
Finally, here is a great example (also inspired by the Freakonomics podcast) that helped to illustrate the point for me and may be helpful for you too. Let’s say you have two containers; one is clear with one hundred coloured balls inside and the other is opaque. In the clear cylinder you know the number, colour and distribution of the balls so you can calculate the odds and manage risk much like how the insurance industry works. However, in the opaque container you have no idea of how many balls there are or the distribution of the colours of the balls. Placing a bet on the outcome of a ball drawn from clear tube with the known distribution of coloured balls represents managing risk. Trying to place a bet on the opaque tube and predict a ball drawn at random is dealing with uncertainty.
In environments with high levels of uncertainty startups are much more nimble/adaptable than their large enterprise behemoth cousins and therefore far better equipped to survive and thrive. When you look at the current environment (Social, Legal, Environmental, Political, Technology) we live in there is no shortage of change and uncertainty. Therefore being able to deal with uncertainty will only become a more valuable skill to have, and as far as job security goes there may actually never be a better time to work for a startup too.
Bring on the change and uncertainty!