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Managing risk and responding to uncertainty: how entrepreneurs and VCs can improve their effectiveness. A comparison of three countries

Author: Loch, Christoph H. ; Sommer, Svenja C. ; Dong, Jing ; Jokela, Paivi ; Pich, Michael T.INSEAD Area: Technology and Operations Management Series: Working Paper ; 2010/34/TOM Publisher: Fontainebleau : INSEAD, 2010.Language: EnglishDescription: 17 p.Type of document: INSEAD Working PaperAbstract: Managing uncertainty is a critical success factor for any startup venture. This article summarizes recent research on management of the high and unforeseeable uncertainty confronting many startups. In such a situation, traditional phased approaches prove to be inadequate; to be effective, any response must include some combination of parallel trials and experimentation. Our study finds that such state-of-the-art methods empirically improve performance in three countries - Israel, Singapore and China (Shanghai) - but are too rarely applied. The two main reasons for this seem to be that startups do not think about uncertainty in a sufficiently explicit way, and that investors do not provide the necessary support; ironically they may even send signals that are counterproductive to effective uncertainty management. We argue that startup companies should upgrade their approach to diagnosing and responding to uncertainty, and that investors, in turn, should be willing to evaluate startup actions considering the state of uncertainty resolution rather than according to artificial measures of linear progress. If both parties could achieve a coordinated improvement, startup success rates and value generation would be significantly improved.
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Managing uncertainty is a critical success factor for any startup venture. This article summarizes recent research on management of the high and unforeseeable uncertainty confronting many startups. In such a situation, traditional phased approaches prove to be inadequate; to be effective, any response must include some combination of parallel trials and experimentation. Our study finds that such state-of-the-art methods empirically improve performance in three countries - Israel, Singapore and China (Shanghai) - but are too rarely applied. The two main reasons for this seem to be that startups do not think about uncertainty in a sufficiently explicit way, and that investors do not provide the necessary support; ironically they may even send signals that are counterproductive to effective uncertainty management. We argue that startup companies should upgrade their approach to diagnosing and responding to uncertainty, and that investors, in turn, should be willing to evaluate startup actions considering the state of uncertainty resolution rather than according to artificial measures of linear progress. If both parties could achieve a coordinated improvement, startup success rates and value generation would be significantly improved.

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