What startups can learn from Nassim Taleb
I was first introduced to Taleb’s “Fooled by Randomness” by a fellow poker player, poker being a excellent education in startup risk concepts.
The mix of probability concepts and ancient wisdom struck a chord with me. Taleb’s Incerto series, which expands on this theme, has had the biggest influence on my thinking of any book. It addresses the problem of how to live in an uncertain world, that we can’t predict, and contains many lessons that I think are valuable for startups.
Taleb himself is an abrasive character, and not everyone’s cup of tea. I am on the long list of people he’s blocked on twitter, although at some point I was forgiven. But there’s much to learn from contrarians, and “bullshit detectors” on the search for truth.
I know I irritated people by using terms like “ergodicity” at Prolific, but I think some ideas about risk of ruin, anti-fragility, asymmetric outcomes, and via negativa rubbed off on the culture. Below are some useful ideas from Taleb’s books for startups;
Should you join a startup or become a dentist?
Taleb presents dentistry as an exemplar of a stable profession that operates in what he calls "Mediocristan," where outcomes are more predictable and less subject to extreme randomness.
He contrasts this with professions in "Extremistan" like becoming a rock star, or joining a startup, where success is highly unpredictable and follows power law distributions.
You need to be aware of your exposure to risk in joining a startup, how ruinous would failure be for you? How do you feel about swapping predictable income for the possibility of an extreme outcome
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However, there is no reward without risk (if you don’t see the risk, look harder). Rewards without putting you own “skin in the game” are empty.
“The three most harmful addictions are heroin, carbohydrates, and a monthly salary.” - Nassim Nicholas Taleb
A monthly salary creates a dependency, and corporate life can become numbing, preventing you from taking risk and experimenting.
"What matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing." - Nassim Nicholas Taleb (Skin in the Game)
Taleb tells a fable in Skin in the Game of a wolf encountering a domestic dog, who enjoys regular meals, treats, and affection. Upon noticing the collar around the dog's neck, the wolf chooses to reject this comfortable life in favor of his freedom but “Freedom is never free” - there are real downsides and risks.
Taleb also emphasizes the importance of having direct exposure to risk "skin in the game". For startups, this might mean founders keeping significant equity, or ensuring all team members have meaningful ownership stakes.
Venture capital and ergodicitity
Taleb's concept of ergodicity focuses on the difference between individual outcomes over time versus group outcomes at a single point in time. This is a confusing sounding concept, but bear with me, as it’s very powerful.
N people gambling once in a casino (ensemble probability) is fundamentally different from one person gambling N times (time probability). In the latter case, the individual faces an eventual risk of ruin that stops the game entirely.
Non-ergodic systems contain absorption barriers - points of no return like ruin or death - where the process stops completely. Once these barriers are hit, there's no recovery or continuation.
Russian Roulette demonstrates non-ergodicity clearly: while a group of 100 people playing once has a 16.7% death rate, a single person playing multiple times eventually reaches certain death.
VC portfolios are non-ergodic systems, individual outcomes can significantly differ from ensemble averages. So your VC investor is playing a different game to you, and their incentives and risks, are different from yours.
For the VC, many failures are acceptable to maximise the potential payoff of the best bets. But for the individual startup failure is much more costly, the game ends.
Of course startup failures don't mean actual death, failure might be quite different for a 20 year old in SF, for an early employee etc. They are also aren't just about losing money, are you risking reputation, relationships, opportunities?
You can also think of capital allocation to asymmetric bets within the company as a similar “portfolio approach”. You can afford to have some bets fail in order to capture the largest outcomes.
Innovation advances by tinkering
Taleb argues that innovation, of knowledge and technology, primarily advances through "stochastic tinkering" rather than planned, top-down research. This approach involves making small experimental adjustments while remaining open to unexpected discoveries and serendipitous outcomes.
A pretty good analogy for a startup getting to product-market fit.
The overall innovation system, or capitalism, is good in so far as it harnesses these incentives, and rewards risk taking (not skills or hard work). To do this it must also allow for failure, avoid cronyism, and lack of "skin in the game" which leads of hiding risk and systemic failures.
We are all fooled by randomness, especially investors
"Mild success can be explainable by skills and labor. Wild success is attributable to variance” - Nassim Nicholas Taleb (Fooled by Randomness)
Successful startups owe significant portions of their success to luck, though founders often create post-hoc narratives attributing their success to deliberate choices. This narrative fallacy leads to overconfidence and misunderstanding of what truly drives success.
"Remember that nobody accepts randomness in his own success, only his failure” - Nassim Nicholas Taleb (Fooled by Randomness)
Investors in startups are particularly fond of trying to “pattern match” when what worked before won’t necessarily work again. Startup founders should be sceptical of advice from successful entrepreneurs who may be exhibiting survivorship bias. This is why first principles thinking is so valuable.
As noted in my first post, the biggest mistake I saw from new hires coming into Prolific, was trying to apply the pattern of success from their previous startups, when it wasn’t appropriate to the context. And consistent hiring mistakes I made were overrating previous success in a different context. Now I think about Taleb’s surgeon paradox when hiring.
Antifragility
Antifragility is a property of systems that grow stronger and more capable when exposed to stressors, shocks, volatility, or disorder. Unlike robustness, which merely resists change, antifragile systems actively benefit from disruption and chaos.
Typically startups are harnessing an inflection point, perhaps a new market, platform shift, or even regulatory environment. Startups should seek to benefit from disruptions and market shifts, even those they haven’t yet predicted.
This might be through organisational design, strategy, business model, risk management or culture - all of which should seek to embrace change and adaptation.
As an aside here, Taleb notes the intangible benefits of network effects in big cities.
"Collect as many free nonlottery tickets (those with open-ended payoffs) as you can, and, once they start paying off, do not discard them. Work hard, not in grunt work, but in chasing such opportunities and maximizing exposure to them. This makes living in big cities invaluable because you increase the odds of serendipitous encounters - you gain exposure to the envelope of serendipity." - Nassim Nicholas Taleb (The Black Swan)
This is why it’s easier to build a unicorn in SF than Oxford.
Whats the point of getting rich?
Nassim Taleb defines "fuck you money" as having enough wealth to gain independence without the burdens of excessive wealth. His key insight is that there's an optimal range - too little money makes you a slave to wages, while too much money makes you a slave to your net worth.
Too much wealth leads to a risk of preference capture:
“When people get rich, they shed their skin-in-the game driven experiential mechanism. They lose control of their preferences, substituting constructed preferences to their own, complicating their lives unnecessarily, triggering their own misery. And these are of course the preferences of those who want to sell them something.” - Nassim Nicholas Taleb (Skin in the Game)
Beyond optimising for freedom of how to spend your time, what do you actually want to use money for? Beware of thinking you've developed a taste for Michelin star restaurants.
Via Negativa
Taleb explores the concept of via negativa (removing rather adding) both in knowledge and decision making, and with regard to complexity.
For example early stage products begin to lose coherence as you add more and more features in. Occasionally a reset, and deletion of features is needed, and improves the overall experience. Or as Gerry McGovern once put it “websites don’t poop”
The same goes for organisational complexity, it tends to build up over time to fit new needs, but more rarely are processes or redundant teams removed or reassigned.
Learning to say no to almost everything is a key to effective focus, a defining factor of success in startups. Steve Jobs famously said that innovation comes from saying no to 1,000 things, taking pride in the things Apple didn't do as much as what they did do.
Via negative is also connected to my favourite mental model - inversion. Avoiding stupidity is easier than seeking brilliance.
Wittgenstein’s ruler
Wittgenstein's Ruler, a concept introduced by Taleb, states that when measuring something, you may actually be learning more about the measuring tool than the object being measured.
"Unless you have confidence in the ruler's reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler" - Nassim Nicholas Taleb (Fooled by Randomness)
When venture capitalists reject startups, their feedback often reveals more about their own investment biases and past experiences than the actual potential of the startup.
Startup metrics and attribution models can act as unreliable rulers. When measuring business performance, the data might tell you more about your measurement biases than your actual business growth, so be wary of taking data at face value when making decisions.
