Shaan delivers a solo framework episode breaking down luck and risk into four levels each. On luck, he draws from Marc Andreessen’s blog to describe blind luck, motion-based luck, the prepared mind, and reputational luck. On risk, he argues that the obvious risks aren’t the dangerous ones — mediocrity, playing it safe, Eyes Wide Shut assumptions, and misidentifying your risk type (market vs. execution vs. technical) are what actually trip people up.
Speakers: Shaan Puri (host)
Introduction: Luck and Risk Are Misunderstood [00:00:00]
Shaan: Luck and risk are two of the most important words for anybody who wants to be great. But I think for most people they feel like something that’s outside of your control. Luck is this magical thing that either happens to you or it doesn’t. Risk is this thing that you either get screwed by or you don’t.
I don’t think that’s true. I think there’s a lot more to risk and luck than most people recognize.
It’s the same way that Eskimos have like 40 or 50 words for snow. When we see something just falling from the sky, white and fluffy, we just think “that’s snow.” Whereas they have 40 or 50 different words to describe the different types of snow — as you would if you lived in an extremely snowy environment. You’d develop that vocabulary.
So similarly, for an entrepreneur who is going into an environment of trying to make great success happen, maybe we need some nuance, some differentiation between the different types of luck, the different flavors of risk. And so that’s what I’m going to tell you today.
These are the four flavors of luck, and the four flavors of risk.
The Four Levels of Luck [00:01:20]
Shaan: Let’s start with luck. I got this from Marc Andreessen, back in the day. He had a blog that he used to keep up — it’s down now, but there’s an archive of it online called PM Archive. I still remember reading this post like ten years ago, and it was about the four different types of luck. I think he originally read it in some book.
The levels of luck are as follows.
Level 1: Blind Luck [00:02:05]
Shaan: Level one is called blind luck. You just sit around, you get struck by lightning. You didn’t do anything. You just happened to be you. And it’s not something you can count on — it’s either going to happen or it’s not.
For me, I was just born with the use of my limbs. I was born healthy. I was born in the right country. And I remember one time my cousin gave me a bunch of raffle tickets that he had bought — he gave them to all of our cousins — and I ended up winning this Dolly Parton painting out of the raffle. I literally didn’t do anything. I just sat there. He handed me a ticket. My ticket happened to win.
That’s an example of blind luck. That’s level one. Can’t do much with that, because it’s either going to happen or it’s not.
Level 2: Motion Creates Luck [00:03:05]
Shaan: The next one — you can increase the odds of luck in your favor by going to level two. Level two is what the phrase “fortune favors the bold” is about. It’s sort of a lucky chance, but you increase the odds of it happening by adding motion or action to the mix.
You’re doing a bunch of stuff, you’re running around. If the first one is you’re standing in place and lightning strikes you, this one you’re running around all over the place, kicking up dust, stirring up the pot, and something happens as a result of your motion. Your motion increased the surface area you were covering where you might happen to get lucky.
So this is a chance encounter. Maybe you’re just out and about, and in doing so you bump into somebody who’s really interesting and opens up some opportunity for you.
There’s a quote I like: “I’ve never heard of someone stumbling onto something good while sitting down.” This just emphasizes the importance of simply taking a bunch of action, being out there, having some motion. That’s level two — motion, fortune favors the bold.
Level 3: The Prepared Mind [00:04:20]
Shaan: Level three — this is where it starts to get interesting. This is “chance favors the prepared mind.”
This is where you notice that something lucky has happened where other people may not have noticed, because of your years of preparation. Any investor knows this. You look at a hundred deals — not because all 100 are going to be good, but so that when that 101st deal comes with killer metrics, you’re able to recognize that that deal is unique, that that price is fantastic, that those metrics are off the charts, because you have a benchmark of what normal looks like.
This also happens in science. There’s an amazing story about the discovery of penicillin — a drug that has saved millions of lives. The way it was discovered: the scientist who was studying it just noticed that some mold had fallen on his petri dish. That was an accident — not the result of his action. But he had a prepared mind. He noted that around the mold in the petri dish, no bacteria was growing. He started to wonder: maybe there’s something about this mold that kills bacteria. He wrote that down, he tried to convince others of it — and nobody cared. None of his peers cared.
Then ten years go by before somebody else picks up that paper and says, “Huh, that’s weird — the staph bacteria wasn’t growing around this mold. The mold seemed to kill staph bacteria. I wonder if we could revisit that.” They had the prepared mind to read that paper and notice something interesting.
That is luck favoring the prepared mind.
Level 4: Reputational Luck [00:06:10]
Shaan: The last one — level four — is luck finds you. This is reputational luck.
You’ve heard me say on this podcast before that my goal with this podcast is not to become well known. I’m not trying to be famous. I’m trying to be known well — meaning I just try to put my brain, and the things I’m most into, out on blast, so that people who are like-minded will come find me. People who are building startups in that space will come find me and I can invest in them. People who are using a product that they know I love will share it with me. That’s the value I get back out of this. Because I’m well known in the right way, my reputation brings me some luck.
The example Naval gives of this: imagine you were known as the best deep-sea scuba diver in the world. You are amazing at deep sea dives. You’re just sitting on your couch one day, not doing anything, and the phone rings. Somebody calls you and says, “We’ve discovered a treasure off the coast of India, buried deep below. Will you come help us retrieve it? You get to share 25% of whatever we find.” Now your reputation has caused you to find a treasure. Luck has found you. Your reputation of being a great person at doing X will cause people to come find you.
We just did a podcast with Kevin Rose, and he talked about this with Twitter. He had the prepared mind to notice that Twitter was going to be a big deal. He’s very humble about other investments — “I don’t know, I just wrote the check, I liked the person, it turned out well.” But for Twitter he said, “I thought it was the next big thing, because I was using it and I noticed — man, this thing has really given me this feeling. Imagine I’m just a little tech celebrity. Imagine if real celebrities got a hold of this. This is going to be crazy.”
He noticed that Facebook and all the social networks before it were based on the idea of a friend request — I had to request to follow you, and you had to accept, in order for me to see your content. And Twitter had one new feature that everybody else was making fun of: it was one-directional. I could just follow you and you didn’t have to give me approval. He goes, “Wow, that’s going to be amazing for celebrities.”
So that was the prepared mind. He then took action, he reached out to Ev, said, “I’d love to invest.” The round was closed. He was turned away.
But this is where his reputation allowed him to get lucky. A couple of weeks later, Ev calls back and says, “Hey, you asked about investing, right? We have this engineer who’s leaving — he wants to sell some of his shares. You could buy his if you want. I’ll let you in because it’s you. I like you. I think you have a good eye for product. You’re really active on Twitter, and I know you really believe in this — you’ve made that well known. So here’s your opportunity.”
That $25,000 turns into a $100 million-plus payday. That’s luck finding you.
The Four Flavors of Risk [00:10:00]
Shaan: So those are the four levels of luck. Now let’s talk about the four flavors of risk.
These are not levels — these are more flavors of risk.
The first thing to recognize: people think the big risk is doing something crazy. I’m going to jump out of a plane. I’m going to invest all my money in crypto. Those are obvious risks. But because they’re obvious, people don’t always take them, or they take a lot of precautions. Most people don’t go skydiving — “that sounds risky, I’m not going to do it.” And even the people who do go with an instructor who’s done thousands of jumps, make sure the place has good reviews, a good track record.
Same thing with crypto. You’re only investing one, five, maybe ten percent of your net worth into this risky thing, because it was obviously risky.
The things that are obviously risky don’t actually trip you up. It’s the things that are not obviously risky.
An example: everybody before 2008 generally thought that mortgages and the housing market were a pretty safe bet. That’s why, if you ever watch The Big Short, all these mortgages were highly rated debt. In actuality they were much riskier than people realized. That’s what caused the global financial crisis — there was a risk that people did not identify as risky. They thought it was safe. And they therefore relied too much on it, took out too much leverage, and then you get disasters.
So the first thing to recognize about risk: risk is not just the things you think about.
Flavor 1: Mediocrity [00:12:00]
Shaan: Here are some of the hidden types of risk — the different flavors you should think about.
The first one is mediocrity. When most people go into a job or a business they want to start, they think their risk is failure — that they’ll try this and it’s going to totally crash and burn. In actuality, at least for most people in America, that’s not that painful of a risk. You waste a little bit of time, but it failed, crashed and burned, you can move on. You learned a lesson, you have a story to tell, you might have met some people along the way, you’ve built some skills. So you actually don’t take that much risk doing it.
But the other version — the one I think is much sneakier and plagues many more people — is mediocrity. Which is the risk of having something that’s just okay. Not bad enough to obviously fail, not good enough to be amazing. The risk is that you’re wasting your most valuable asset — your time — on something that is not great.
If you listen to this podcast, you’re the type of person who wants greatness out of your life. Then the biggest risk to you is mediocrity. Because failing is fine — you’ll just try another thing. But something that’s just alright, not great but not bad enough to fail, is going to deprive you of your most valuable asset: your time.
So mediocrity is the first flavor of risk to identify. In what way are you just settling? A bad relationship, or a just-okay relationship, a just-okay job, a just-okay level of traction at your startup?
Flavor 2: Playing It Too Safe [00:14:00]
Shaan: The next one — safety. Safety is a risk.
How is safety a risk? There’s a risk in not taking enough risk. You’ve got to ask yourself: I have a dream, I have an ambition, a goal I’m trying to reach. If I keep doing things the way I’m currently doing them — in my comfort zone, where I am safe, not taking any risk — is it going to lead to my dream? Am I on track? Is my trajectory taking me to where I’m trying to go?
Because if not, then the safety you have now is actually putting your dream at risk.
People usually think: “Am I putting myself currently at risk?” But what you want to think about is: “Am I putting my dream at risk? Am I putting my future success at risk by playing it safe now?”
That’s the second one.
Flavor 3: Eyes Wide Shut Risk [00:15:10]
Shaan: The third risk is the Eyes Wide Shut risk. That’s the one I talked about with the mortgages.
It’s one thing when you go in eyes wide open — you say, “I’m doing this thing, but it’s risky, so I’m not going to bet it all, and I’m going to take some precautions.” That’s eyes wide open.
But what about Eyes Wide Shut? What happens if you think something is safe but it’s not? You trust the wrong person and bet it all. You think that housing is safe and so you’re super levered up. You think something is too big to fail, but in fact it is not.
Eyes Wide Shut risk: you want to ask yourself, “What am I assuming is safe that may not actually be safe?”
Flavor 4: Market Risk vs. Execution Risk vs. Technical Risk [00:16:10]
Shaan: The last one is market risk, execution risk, and technical risk. These are like the Eskimos having 50 words for snow — there are many different types of risk in business. You’ve got to know what type of risk you’re taking.
Market risk is trying to figure out: does anybody even want this?
At my previous startup, the studio I worked at — Monkey Inferno — we had every resource available. All the money we wanted, a team of brilliant engineers, freedom to work on whatever we wanted. But the constraint was we had to work on something in consumer, and it shifted towards social. When you try to build the next social app, you’re taking on massive amounts of market risk: does anybody want your thing? Is this going to be the next Twitter, the next Snapchat? It didn’t matter that we had a killer team and could build a killer product — because market risk means if people don’t actually want your well-made app, it multiplies by zero.
Then you take firms like Enduring Ventures or Codie Sanchez, people who buy cash-flowing businesses. They’re not taking market risk. The market has already proven it wants that business, wants that product — it’s already cash flowing. So they take execution risk. They pay three, four, five times earnings, and they’re betting: can I improve the business? Can I grow revenue, reduce costs, make it run better? They take execution risk, not market risk.
And then you have people — the startups I often invest in — who take technical risk. The example I give: let’s say I’m Domino’s Pizza and a startup comes to me and says, “We have a robot that will replace that worker you have in the back who’s checking his phone, picking his nose, calling in sick every fourth day — the one who’s supposed to take the dough, put the cheese and sauce on it, and slide it in the oven. Here’s the deal: our robot will produce a perfectly circular dough with perfect thickness, add the exact amount of cheese, bake it to the exact time, every single time. It’ll never call in sick. It can work 24/7. It’ll never complain or ask for a raise.”
If you could deliver such a product, it would be essentially zero market risk. Of course Domino’s would want to replace more expensive, harder-to-manage labor with something cheaper and easier to manage. The only question is: can you actually make a robot that delivers on that promise reliably? That’s technical risk. This is what you see in a lot of biotech, pharmaceutical, and defense contracts — can they actually make a product that lives up to the spec?
Wrapping Up: Know Your Risk [00:19:30]
Shaan: So those are the four types.
Mediocrity — the biggest risk of all. Safety — not taking enough risk. Eyes Wide Shut risk — assuming something is safe when in actuality it’s riskier than you think. And the last one: knowing whether you’re attempting market risk, execution risk, or technical risk, and being honest with yourself about what type of risk you’re taking when you go into this endeavor.
The goal is not to avoid risk. It’s to understand it, and then work your way around it.
I think that’s it. Instead of a Question Friday, I did a Framework Friday. Let me know what you think. I’m @ShaanVP on Twitter — that’s S-H-A-A-N-V-P — and you can find me there. Framework Friday is in the books. Have a good weekend.