Hello, I'm Shlomo Maital, welcome back to Cracking the Creativity Code Part Two, Delivering Ideas. We're going to our toolbox, and we're going to open it, and out pops tool number eight. Tool number eight is an important tool, it has to do with mapping risk. Can you do a visual presentation of the risk that your startup is facing? Do we wanna do that? We know that startup's are risky business, but do we really wanna visualize that risk and scare our investors and scare ourselves, and the answer is absolutely, yes we do. Let me see if I can provide you with a useful tool that will help you map risk, and in mapping it, manage it, and perhaps in some ways even reduce it. There's an expression in English, a proverb, forewarned is forearmed. If you can somehow try to anticipate the bad things that can happen, you may be mentally and otherwise, prepared to deal with those bad things. So, sometimes we think that when we make a presentation to an investor, or the people that we want to hire. We're like somebody trying to find a mate, a spouse. We want to present the beautiful side of our personality and not some of the dark sides, and that's a wrong assumption. We need to present reality. For investors who are savvy usually and very experienced, they wanna hear that we're aware of all the risks that can go on, that can happen, all the bad things that can happen. We want to see people who are ready to deal with these things even though always, always, there are things that happen that simply cannot be anticipated. So in some ways a startup is like the Rocky Horror Show. A lot of scary and bad things happen, many of them we can't anticipate, some of them that we can, and we simply have to be agile, and resilient, and ready to deal with them. So, I have in front of me a business plan, and I'd like to tell you the story of this business plan. It was written in February 2004 by a student at Babson College, Babson College is a private college in the suburb of Boston. It's regarded as the number one college in undergraduate entrepreneurship education, has an MBA program. James Poss who wrote the business plan with colleagues, won a competition, [COUGH] $20,000 and a business plan competition, started a business, and the business became successful. He's made available the business plan, but in a very useful manner, he has annotated it, and then gone back later and said which things were good, which were less good, what lessons he learned from experience that he can share with us in reading this fine prize winning business plan. Fast forward, I was in Boston last year, and was excited when I saw in Brookline, a Boston suburb, the product that James Poss' company called Sea Horse Power. I saw the product itself. It's a solar trash compactor. So, on the streets of Brookline you see these inconspicuous kind of black trash containers, so they're actually quite attractive. On the top is a shiny black photo voltaic cell. So the photo voltaic cell charges the battery, the battery powers an electric motor, the electric motor compacts the trash into a quarter of its size, and so you need one quarter the number of collection trips with diesel garbage trucks, thus saving the environment a great deal. And I was so pleased to see this product because, it indicated that James Poss' business indeed is successful. Now the point I want to make here is that this prize winning business plan includes a detailed section on risk, and the authors have been very careful to indicate that they're aware of all the different things that can go wrong. So there are operational risks, delayed production, the suppliers don't deliver on time, we don't raise enough capital as we planned, technology risk, the machines don't work, heavy bags, leaking liquids, bad weather, IP, intellectual property. Companies infringe on your patent, and you don't have the money to sue them. Labor unions, labor unions are not thrilled when you have to make one quarter the number of trips with garbage trucks driven by labor union members. Members of the Teamsters, for example, waste hauling companies, that cuts their revenues. They're not gonna be thrilled. So, there's a detailed list here of all the operational and other risks that can go wrong in the business plan, and the point here is that this should be a part of your own personal road map. It should be a part of your business plan. You need to map the risks and think about all the different things that can go wrong. So, what is your startup's risk map? Taking your idea, and then figuring out how you're going to make it operational, deliver the value to the customer, and you've used the tools so far. We've developed seven tools, and this is the eighth, the risk map, lists the different kinds of risks, operations, what you do in order to produce the value, technology, legal, patents, intellectual property, competitors, regulatory, the market place. So, try to estimate the bad things that can happen, maybe using some scenario analysis, tell little stories about what could go wrong. Tell the stories to your teammates, and talk about what you would do to deal with them if they actually happened, and the way I'd like you to think about doing this is to create a risk map. So a risk map, and I'll show you an example in a moment, a risk map is a map, it's an X,Y diagram. On the X axis you have the likely hood of something happening, and on the Y axis you have the impact, or the total effect of the risk if it does happen. Y axis impact, X axis likelihood. So you're gonna have something that's very likely, but not much impact, or something really huge impact, but very improbable, but the things you want to think about are high likelihood risks with high probability and big impact. Those are the ones we really want to be able to deal with. Before we look at an actual risk map, I'd like to make this point. Its very hard to manage uncertainty. Uncertainty is the state of being unsure about something. We know bad things happen, we don't know what they are, we don't know what their likelihood is, so basically all we can do is kinda worry. You need to transform uncertainty being unsure of something into risk, and risk is a probability of something that causes harm or damage. It's pretty hard to manage uncertainty. All you can do is worry and fret, but you can manage risk, but in order to do that, we need to have some numbers. So how do you transform uncertainty, being unsure into risk, and we do that by listing the bad things that can happen, and then providing two numbers for each. There’ll be guesses I’m sure, but we need to have those numbers. The size of the impact, that's the magnitude of the damage, and then the likelihood, or the probability that this bad thing is actually going to happen, and then once you have that, you can create this map, this risk map. So I'd like to show you on your screen a global risk map. Now this global risk map is one that's developed every year by the World Economic Forum based in Davos, Switzerland, started by Klaus Schwab and Michael Porter and others. And each year they talk to experts all over the world, and they try to do a risk map for the world. All the different bad things that could go wrong in terms of economics, environment, technology, society, and other things, and each is color coded, and each is a dot in X,Y space based on likelihood and impact. So, the things we need to worry about that have high likelihood and high impact, this is for 2014. Our water crises, wars between countries, interstate conflict, unemployment, climate change and our failure to adapt to it, unemployment, fiscal crises, big budget deficits, cyber attacks, spread of infectious diseases, Ebola, bird flu and so on, integrate many other things. So, this global risk map changes from year to year, and my point is that it's good for your startup to see if you can do a similar kind of risk map. Maybe you want to color code it for operations risk, technology risk, financing risk, intellectual property risk, and so on. Likelihood versus impact, and then try to focus on the high likelihood and high impact events. So, looking at the screen there are four boxes, risks with low impact and low likelihood are less worrisome. The ones we worry about are higher probability and higher impact, and the beige square on this screen, that's one that we really would like to think about carefully in advance, and maybe develop a contingency plan about how we can deal with it. Now, there's a different angle on this subject give us a different point of view, and this was presented really effectively in a book published in 2007 by Nassim Taleb, called the black swan, the impact of the highly improbable. Notice that this book was published just before the global financial crash, which to many was unpredictable, although a handful of people did predict it, even though it signaled its coming in many ways as we can see with the benefit of hindsight. This is a wonderful metaphor, the black swan, and Taleb the author, talks about the fact that we once believed that there was no such thing as a black swan. We know that swans are all white, and then once in Australia, black swans were observed, surprisingly, and after we observed them, then of course we were all new, that black swans are entirely possible. So he uses this metaphor to explain that when unexpected, and unpredictable events occur, we analyze them with hindsight, and suddenly they become perfectly understandable. And his point and advice is that we overestimate our abilities, what we're capable of doing, and we underestimate what can go wrong. In a Harvard Business Review article, Taleb and coauthors talk about the six mistakes executives make in risk management, this is worth thinking about. The first mistake is we think we can manage risk by predicting extreme events. So always, bad things are going to happen to your startup that you didn't expect in advance, and for this we need resilience, agility, and flexibility, because things always gonna happen that were unpredictable. Risk number two, we're convinced that studying the past will help us manage risk. We had a global financial crisis in 2008, we're just recovering from it now. There may be a new financial crisis on the way. I know experts who believe that's the case. It will be utterly different from the subprime mortgage crisis of 2008. It will take entirely different forms, studying the subprime mortgage crisis isn't going to help us a lot in dealing with the next financial crisis, which may be developing as we speak. And finally, another risk that Nassim Taleb talks about, we don't appreciate that what's mathematically equivalent isn't psychologically so. The point here is that risk is perceived psychologically, and you can manipulate people's perception of risk by the way you frame the problem. So be careful not to be manipulated by the way people pose risk. Sometimes risk is posed as opportunity. So when you examine a risky situation, treat it like a coin. Look at it from different angles, re-frame it in order to avoid the psychological bias and avoid being manipulated by people who are trying to manipulate our perception, either increasing our risk perception, or in many cases diminishing it. Test your understanding, so please go to the assignment section and answer these multiple choice questions, and finally action learning. So, take your idea, you've come up with an idea. You have a creative idea that can change people's lives and create value. We're now trying to use tools to implement it, this is the eighth tool, risk maps. For your idea, as you think about how to implement it, do a list of all the things that can go wrong. All the bad things that can happen, and try not to skip things that are somewhat likely, or probable, or very impactful. Then do a risk map, so for each of the key risks, and an X,Y diagram, probability or likelihood on the X axis, impact on the Y axis. I know it's hard to estimate these probabilities. You can use low, medium, and high, if you wish. That's probably good enough, or even just low and high. Map each of the risks, and then put this on a wall, and then think about scenarios. How could this develop? How would it happen? How would I spot it happening? How would I organize my team in order to deal with it. Alibaba was formed in 1999, late 1999, and the .com bubble burst in March 2000. So a .com company was born less than a year before the .com bubble burst, and financial markets went from throwing money at every .com company to doubting the viability of any .com company, even a viable one like Alibaba, how would you deal with that? It's interesting how Alibaba dealt with it, with great courage and great resilience and flexibility. Prepare a plan, it can be mental, it can be a written plan, a contingency plan, think about how you would deal with each risk especially the high impact and high likelihood ones. This completes tool eight, risk map. Tool nine is related to risk, it has to do with risks becoming an opportunity although that's a cliche, there really is a tool that can help us do that and this tool is called real options. Please join us for tool number nine.
