Risk vs Uncertainty — The Untold Truth about Startups and Venture Returns by@mattwardio

Risk vs Uncertainty — The Untold Truth about Startups and Venture Returns

March 2nd 2018 2,300 reads
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No risk, no reward. It is old adage and cliche loved by entrepreneur and investors alike. Interestingly it isn’t exactly correct — at least not in the traditional sense. Let me explain.


As a kid, RISK was hands down my favorite game. Who didn’t want to conquer the world? It was risky though (pun intended). Alliances, backstabbing, battle… you never knew who would win.

But like poker, understanding the odds gave you a competitive advantage. When rolling dice, there are only so many options — and you could analyze everything.

That is the nature of risk — it is knowable, it is quantifiable. And incredible wealth has been built upon taking risks.

If you have short time horizons, a 51% chance of winning and make small bets, you can’t lose. Eventually you are incredibly wealthy.

But transformational businesses are not built that way.

Venture investing

There are three ways to make money:

  1. capture an existing piece of the market
  2. expand the market
  3. create an entirely new market

As an investor, only 2 and 3 are interesting. Zero sum games are zero sum games…

In venture we look for 10, 20, 100, 1000x returns… It is a power law game. As such, only truly transformational businesses can return the portfolio and make the math work.

Typically this means creating new markets. The best businesses build value where previously none existed — no competition, no comparable costs.

Uber, Airbnb, SpaceX, Tesla, ESPN — all these companies defined an industry, creating something from nothing. That is where money is made.

This isn’t risk however. Yes it is risky, but not risk. Initial investors didn’t Uber or Airbnb’s odds of success — there was no formula. All estimates were assumptions, with every investor and entrepreneur interpreting the risk differently.

Uncertainty creates alpha.

Risk-reward investing is easy. With probabilities plus a level head, you can go far. But any investor that tells you they “knew” XYZ startup would be a success is lying (or delusional).


The best things in life aren’t risky, they are unknowable.

Talking to that girl in a coffee shop would change my life — I couldn’t have known. The same is true in business and most all meaningful thing. We aren’t taking calculated risks, we go with our gut and imagine the upside — despite the uncertainty.

I can tell you 20 reasons your startup will fail, but what about the one or two unknowns that could make it succeed and change the world.

Risk is proportional to reward — the uncapped upside of venture is a result of this uncertainty. That proportionality is the uncertainty.

That uncertainty is the difference between a 10x and a 10,000x investment…


There is a difference between mission and money. Founders (and investors) that focus first and foremost on the money rarely change the world. Money like risk is quantifiable. When one approaches business from a quantitative as opposed to a qualitative view, they suffer from risk and normalcy bias — leading them to incremental as opposed to disruptive innovation.

The most lucrative businesses break the system or build something bigger. Rarely does incremental improvement drive massive ROI… the better mousetrap fallacy.

Conversely founders obsessed with an idea or worldview think not in terms of risk or reality, but inevitability. By failing to evaluate risks they both increase their likelihood of massive success and massive failure.

“To believe a thing impossible is to make it so.” — French Proverb

Greatness happens when investors are uncertain and founders are 100% certain.

Closing thoughts

I am curious to hear your thoughts on the article.

While this is shorter than most of the pieces I write, I thought it was interesting, relevant and thought provoking.

Convention can carry you only so far. I believe this verbalizes something many in the ecosystem inherently understood but could never quite grasp.

Are you an investor? Are you a founder?

How do you think about risk and handle unknowns? Venture says you should turn into them.

It is hard, but if it was easy or obvious, everyone would do it.

“You can’t make money with a consensus accurate prediction” — Bill Gurley

It all comes down to conviction.

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