Diagnosing Unforeseeable Uncertainty in a New Venture
Christoph H. Loch
Professor of Technology Management, INSEAD,
Boulevard de Constance, 77305 Fontainebleau, France,
christoph.loch@insead.edu
Michael E. Solt
Professor of Finance, San Jose State University,
One Washington Square, San Jose, CA 95192-0070,
solt_m@cob.sjsu.edu
Elaine M. Bailey
General Partner, Novus Ventures,
20111 Stevens Creek Boulevard, Ste. 130, Cupertino, CA 95014,
ebailey@novusventures.com
September 2006
Ref #: AF-06-002
Abstract
Many startups undergo major adaptations of original business models before succeeding. When tackling new markets or technologies, unknown unknowns, or unforeseeable influences, emerge that cannot be planned for or mitigated by traditional risk management techniques. At the same time, important decisions about the management systems of the startup must be made at the outset, before unknown unknowns reveal themselves. How can this conundrum be resolved? Based on work in decision theory, we propose that a venture management team can diagnose problem areas vulnerable to the presence of unknown unknowns, although not the influences themselves. A case study demonstrates that a diagnosis of unknown unknowns at the outset of the venture is indeed possible under plausible circumstances. Based on the case study, we propose a diagnosis process for unknown unknowns. Successful diagnosis of unknown unknowns allows the management team to choose appropriate management systems for the venture. Although one case study is not sufficient to establish generalizability, it suggests hypotheses to be tested and avenues for further work in how to address situations of unforeseeable uncertainty.