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On Jerry Neumann’s “Productive Uncertainty” (Round 1)
Today: Uncertainty as the cornerstone for business strategy. Wokeness. India is doing badly. Adieu to Tony Hsieh.
The Agenda 👇
Jerry Neumann is back with a smashing essay about uncertainty.
Thumbs up/down: Trump, M&A in publishing, making Europe, wokeness.
Tony Hsieh passed away 😢 An essay about him by Elizabeth Yin.
Jerry Neumann is an infrequent but consequential blogger. His 2015 article Power Laws in Venture is a must-read in the venture capital world. More recently, he’s expressed his interest in the concept of uncertainty as a potential cornerstone for rebuilding the discipline of business strategy. However it was difficult to dig into the details of his thinking since he effectively stopped publishing for several months—basically the entire period during which the world has been struck by COVID-19.
It’s all the more understandable, then, that Jerry’s latest entry, a long, well-researched essay titled Productive Uncertainty, made quite an impression when it was published last Monday.
I immediately knew I would have to dedicate several editions of this newsletter to an exegesis of Jerry’s new essay. And so here’s ‘Round 1’, in which I simply quote a few paragraphs and start iterating on my reactions and own ideas.
I’ll then reformulate things in ‘Round 2’, which I plan to dedicate to illustrations using companies in The Family’s portfolio as examples.
Finally, if everything goes according to plan, I’ll conclude with ‘Round 3’ building a bridge with my own series, The Entrepreneurial Investor, in which uncertainty is also bound to play a key role. You should start by reading Jerry’s essay in its entirety, then come back to my commentary here.
Here’s the first idea I wanted to highlight
Companies can lengthen the time between introduction of an innovation and imitation, and thus increase excess value, by creating barriers to entry, or moats...
If a startup can’t start with a moat, then it must build a moat over time. Uncertainty keeps competition at bay long enough for a moat to be built...
By uncertainty I mean something different than risk. I mean Knightian Uncertainty: the inability to predict, even probabilistically, what will happen…
This difference between risk and uncertainty is worth pondering. Here’s a quote from an article out of MIT titled Explained: Knightian uncertainty:
Risk applies to situations where we do not know the outcome of a given situation, but can accurately measure the odds. Uncertainty, on the other hand, applies to situations where we cannot know all the information we need in order to set accurate odds in the first place.
Uncertainty, generally, is something to be avoided. If you can’t predict the outcomes of your actions you will have a hard time planning and managing…
But uncertainty can also shield against competition, allowing you to create excess value. If it does, it is productive uncertainty…
When something has not been done before, it may be that no one can predict the outcome. [This is what Jerry calls “novelty uncertainty”.]
[And then there’s “complexity uncertainty”:] Complexity is a barrier when predicting the evolution of new markets, whether they use new technology or not.
Here you can recognize two things that may be familiar:
Novelty uncertainty is about exploring those “blue oceans”—and the shift to the Entrepreneurial Age creates many of them, because even with an existing industry the new techno-economic turns the industry’s market into a giant field of uncertainty.
Bill Gurley wrote about Uber not being yet another taxi company, instead discovering a completely different (much bigger) market for itself (and Lyft):
Most taxi services in the majority of U.S. cities have a fixed supply through some type of medallion system. In NYC today there are 13,605 licensed taxis. In 1937, when the modern system was created, there were 11,787. Additionally, prices only go up, they never go down. How could one possibly know if this is the appropriate supply of taxis and an optimal price point? Doesn’t the high-value of medallions (over $1mm in some markets) implicitly prove that the market is undersupplied and that prices are above true market clearing prices? What if someone could run a more convenient, safer service at a much lower price and with much higher availability? You would end up with dramatically more rides – and that is exactly what is happening.
As for “complexity uncertainty”, let me remind you of the concept of a complex system, so well described in Brad Feld and Ian Hathaway’s The Startup Community Way, which I reviewed here:
A complicated system is about a long and difficult sequence of minute steps that are nonetheless predictable and quantifiable—like, say, auditing Wirecard’s accounts and realizing that some fraud has been going on for years 😉
A complex system, on the other hand, is neither predictable nor quantifiable because its state constantly evolves thanks to the interactions of a large number of agents whose individual behavior impacts the system as a whole. Anyone that works in startups knows that this is how the game is played, but being able to abstract it so plainly is a real breakthrough!
Here’s more from Jerry
Uncertainty must be mitigated over time for startups to successfully introduce and sell their products… The uncertainty resulting from novelty can be mitigated by action… [Hence the frequent iterations that are part of product management at a startup.]
The uncertainty resulting from complexity can’t be entirely mitigated by learning because you can’t ‘learn’ what a system will do when it does something different each time… Mitigation has to take the form of waiting for the system to reach an equilibrium on the issue you’re uncertain about or of modifying the system itself, by, say, creating a narrative about what you are doing.
Hence the importance of content marketing in the startup world! The more you publish content, the more you contribute to creating the narrative that will eventually contribute to mitigating uncertainty. And if you’re the one creating the narrative, you can be the first to reap the benefits of the resulting mitigation of complexity uncertainty.
I’m a fierce proponent of taking charge of creating your own narrative, which the Internet now makes easier than ever, as we’re frequently reminded by Balaji S. Srinivasan:
Let me quote Jerry one last time as a conclusion
Questions asked about things that are uncertain can not be answered, but these questions can be asked even if the eventual product and market are not entirely clear because the two types of uncertainties give such different answers. These answers should guide product and market strategy and be updated as these strategies progress. The goal of the strategy-making process is to determine the most protectable manifestation of the company’s innovation, which moats can be put in place, when they need to be in place, what needs to be done to build the moat, and how these activities can be intertwined with the designing, building, and commercializing of the product.
Later this week I’ll send a Round 2 in which I’ll make sure to dig deeper into Jerry’s discussion of cleantech (or climate tech). About that, make sure to have a look at these two past essays:
😀 Trump seems ready to finally concede, in his own way. Technically, he agreed that the federal government could start working with the Biden-Harris transition team. Make sure to read Inside Trump's failed quest to overturn the election in The Washington Post. (Ask me if you hit the paywall.)
🙂 In my 5 Stages of Denial framework, stage 4 is about incumbents buying each other so as to reach critical mass. You could think that with Amazon the paradigm shift is complete in the publishing industry, but in fact we’re still at stage 4: Penguin to buy Simon & Schuster, create publishing giant.
😏 My recent essay about European Tech's Forgotten Stories raised a lot of interest! Some fascinating things might come out of it—I’ll make sure to keep you posted. And a subscriber pointed out this (academic) book series: Making Europe book series: Explore the collection.
😐 Do you know what wokeness is? It can be quite difficult to understand from a European perspective. An American correspondent wrote that France appears to be the only Western European country that doesn’t surrender to wokeness—which I disagree with. Make sure to read Bruno Maçães’s take.
😒 I saw quite a lot of pessimistic articles about India in the past few days 🇮🇳 Here’s Andy Mukherjee in Bloomberg: Why I'm Losing Hope in India. Salil Tripathi in Foreign Policy: Why India Has Become a Different Country. And a thread by Sri Thiruvadanthai: A lot of pessimism about India.
😖 Tony Hsieh, the former CEO of Zappos, has died following a fire at his house in Las Vegas at age 46 😢 Literally hundreds of people have shared tweets and testimonies over the past few days to express how unique he obviously was. I was especially touched by this one by Elizabeth Yin: Thank you, Tony.
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From Munich, Germany 🇩🇪