Manage Risk
Foster Trust: Don’t Just “Move Fast and Break Things”
An acceptance of failure and an audacious approach to rapid product and company development represent a cornerstone of Silicon Valley’s risk-taking culture. Coined by Mark Zuckerberg, “Move fast and break things” was Facebook’s mantra. He notoriously once said, “The idea is that if you never break anything, you’re probably not moving fast enough . . . At the end of the day, the goal of building something is to build something, not to not make mistakes.”1
Therefore, it is just fine if Silicon Valley’s products are imperfect. The important thing is getting versions out to customers for testing and then receiving feedback on the idea. Over time, the product will naturally improve as the kinks get worked out.
This culture of acceptance of failure extends beyond the way products and companies are built. It drives Silicon Valley’s relationship with society and laws: the attitude to move fast and break things is not exactly conducive to legal adherence. Many role models for young startups realized their success by starting in legal gray areas and operating under the radar as small companies. They look to change the laws as they scale. This was Uber’s playbook: enter a city, rapidly scale, and then rely on customer support to have the local laws changed.2
But in most emerging ecosystems, Silicon Valley’s blasé approach to product risk and company development, or its relationship with the law, does not work. Frontier Innovators view risk—particularly certain risks—as an externality that should be avoided or at least mitigated. This philosophy doesn’t mean that you don’t take risks. Managing risk is about determining upfront which risks are acceptable and which are nonnegotiable. It involves building a culture of risk management, thinking critically about the potential negative externalities of products, and engaging proactively with the ecosystem.
Life or Death
I once asked David Rosenberg, CEO of AeroFarms, what kept him up at night. Without blinking, he immediately answered, “Rule number one in farming is don’t kill your customer.” In short, food safety is David’s paramount concern.
AeroFarms is a Newark, New Jersey–based startup that is at the forefront of the vertical farming movement. Vertical farming is the growing of fruits and vegetables, often in constrained spaces in urban environments, by stacking the plants on top of each other (rather than horizontally, or side-by-side, as is typical on land).
While AeroFarms itself is relatively new (founded in 2004), its approach has been decades of research in the making. One of its co-founders, Ed Harwood of Cornell University, is known for his development of an aeroponics approach to vertical farming. Unlike hydroponics farms, where plants are grown in water, aeroponics involves growing plants in the air and feeding them with misted water. Ed accomplished important cost savings and efficiency gains by designing a patented cloth growth media. Like a well-strung hammock, the cloth holds plants upright. The plant’s roots perforate the cloth and grow into the air below, dangling like a marionette’s legs. They are misted with water at just the right time and in the right quantity to grow optimally.
Ed’s aeroponic insight transformed the traditional vertical farming business model in two essential ways. First, the inputs are lower. Using a mist on the exposed roots is more than 50 percent more efficient than hydroponics (which itself is 70 percent more efficient than growing plants in soil). Second, because there are no water basins, the crops are lighter and therefore stackable. By stacking up to twelve levels of plants to heights as great as forty feet, AeroFarms dramatically improves farm space utilization.3 The combination of higher stacking and fewer inputs allows for the construction of productive farms in urban environments where real estate is expensive.
AeroFarms expanded in 2011 when David, along with Marc Oshima—who had been working on a vertical farming initiative—approached Ed about merging their respective businesses. Together, the three men combined aeroponics with data analysis and process-driven innovation. By tracking inputs minute by minute (e.g., air composition, temperature, nutrient solution, and water pH) and observing the plant’s resulting growth and shape, they continuously improved the method over time.4
In addition to AeroFarms’ flagship farm in Newark, the company has now built eight farms, has more than 150 employees, and has raised about $200 million.5
The foundation of AeroFarms’ farming system is food safety. It is a baseline goal for everyone in the company. At AeroFarms, scaling starts with a deep understanding of the potential risk factors and an institutionalized structure and culture of risk mitigation.
This approach is a necessary consequence of the product. For David, a bacterial outbreak in his farms could literally kill his customers. An obsessive concern over food safety is warranted, because his company is reinventing the way food is produced and distributed.
Providing a safe product is table stakes; if AeroFarms fails on food safety, it will fail on everything. It is this understanding of and attitude toward risk that differentiates Frontier Innovators.
Different Products for Different Customers
Food safety may seem like an extreme example. Yet it is not an isolated one. As you have seen throughout this book, Frontier Innovators are offering different types of products to a different customer base.
In Silicon Valley, most startups solve customer pain points that aren’t a matter of life or death. Therefore, the consequences of failure typically are not catastrophic. These companies tackle problems higher on Maslow’s hierarchy of needs. If their Uber app stopped working, the average millennial would take a taxi (if these still exist in a few years), and if Venmo failed, they could get cash at the ATM (if these still exist in a few years). Some firms target the top of Maslow’s pyramid, self-actualization, including using and refining talents (e.g., MasterClass) and even transcendence (e.g., Calm or Headspace for meditation). These companies offer valuable services to their users. But they do not have life-or-death consequences to the customer if things go awry.
In this context, it is fine, most of the time, to move fast and break things. It is also much easier to build trust with users if the worst-case scenario is not that bad.
It’s different at the Frontier, as you have seen: more startups are solving critical needs or providing missing infrastructure. This includes physiological needs like food (e.g., AeroFarms), light (e.g., Zola), and health and education (e.g., Babylon Health and African Leadership University, which you will meet in chapter 11). Frontier Innovators are also offering products and services to a customer base that has more to lose. These customers are looking for trustworthy products, and it often takes a lot of effort to build their trust.
Frontier Innovators need to communicate their focus on risk management in order to build trust with their customers. In the early days of M-PESA and Zoona, as both were offering a product geared to the underbanked, the companies struggled to convince their users to adopt their systems. A customer’s perception of trustworthiness and safety was critical to product adoption, so much so that Zoona built it into its tag line: “Easy, Quick, Safe.” Product safety was built in to the product experience, specifically on cash-outs. The ability for customers to withdraw cash from the network of agents was viewed as a prerequisite to convincing them to put it into the system in the first place (many customers’ first transactions were small, just to test this ability with different agents). If agents always had cash for customers to pull out of the system, customers would trust the technology and would be more willing to put cash into the system.
Sometimes, building trust may require physical manifestation. Chris Folayan, founder of Mall for Africa, one of the leading e-commerce platforms on the continent, remembers early customers who doubted the online platform would make good on its promises of delivering goods ordered online. Chris had to build a “physical trust network.” As he explains it, “People are used to going to the market and meeting their suppliers face to face. In a digital world, this is not possible.”6
To solve this, Mall for Africa created physical pick-up locations. In the United States, Amazon’s edge is its convenience for home delivery. Yet, for Mall for Africa, success came by allowing customers to pick up from the company and see it was a real company. Chris doubled down on building trust with customers by partnering with well-known brands. The combination of being associated with trustworthy brands and demonstrating a physical presence helped drive customer adoption and has made Mall for Africa one of the largest players in the continent.
Frontier Innovators build reliable products that are worthy of trust, and they foster relationships with their customers to build that trust.
Innovation is an art and not a science. It is often said that entrepreneurs “build the plane as they fly it.” There will invariably be high risk in building a startup, whether it is in Silicon Valley, at the Frontier, or elsewhere.
Frontier Innovators start by determining which types of risk are acceptable and which are not—none more so than Dr. Consulta. Founded by Thomaz Srougi in 2011, Dr. Consulta is an ambitious startup that operates a leading chain of medical clinics in Brazil.
Free health care is enshrined in the Brazilian constitution. It covers everything from primary care to long-term hospital visits. Unfortunately, the public health care system is underfunded and has long wait times. As a consequence, more than a quarter of Brazilians have private health insurance, which allows them to access a faster, parallel system. The other three-quarters do not. Dr. Consulta’s vision is to offer an affordable primary care alternative to the remaining three-quarters of Brazilians who cannot afford higher-end options. It leverages technology to dramatically simplify many back-end processes and innovate on the medical clinic model to enable doctors to offer efficient, excellent care.
Like many Frontier Innovators offering critical products or services, Thomaz’s understanding of risk had serious implications for the way he built his business and scaled its operations. As Thomaz puts it, “On patient safety we have zero tolerance for risk. On everything else, we take highly calculated ones.”7 To deliver medical advice in its clinics, Dr. Consulta hired the best doctors it could find, refusing to compromise on the patient experience. But on everything else, the company looked to experiment and innovate. For example, its pricing, unlike most health care systems around the world, is highly transparent. In a recent Business Insider article, this model was likened more to a fast food restaurant than a medical clinic: it “doesn’t take insurance and lists its prices like a McDonald’s menu . . . At each doctor’s office, prices for procedures are listed out. For example, a general practitioner visit costs roughly $30 (110 Brazilian reals).”8
When the company creates a new product line, such as the recent installation of MRI machines (a first for clinics in Brazil), it didn’t experiment with the machine process, but only with clinic footprint and utilization. Dr. Consulta recently built an analytics platform that reviews patient trends to predict treatment results and improve care (as well as help researchers find better treatments or investigate new therapeutics).9
Dr. Consulta built risk management in to its product development as well. It chose to start in the hardest market: a favela in São Paulo. If the model worked safely there, the company knew it would work anywhere, as long as the product was valuable and resonated with customers. Once clinicians mastered it there, the model had sufficient slack to function everywhere else.
Dr. Consulta now has more than fifty clinics, employs more than two thousand doctors, and has served more than one million customers. It has garnered more than $100 million in venture capital funding from investors around the world to scale the model across Brazil.10 Each of its innovations continues to be done in a siloed and incremental way, keeping patient care as the primary and nonnegotiable objective.
VisionSpring, which looks to offer low-price eyeglasses in emerging markets, built risk management into its planned product evolution. Vision Spring wanted to offer glasses to children, but these required the most operational excellence and manufacturing intricacy. Therefore, the company staged product development to build its capabilities over time and manage the risk of offering a substandard product. It started with reading glasses, followed by prescription glasses for working-age adults. Only after mastering these steps did the company attempt glasses for children.11
For Frontier Innovators, high-quality products and services are a direct result of a considered approach to risk: deciding where it is not appropriate to take risks, as with food quality or patient care, while experimenting elsewhere.
To cement this focus on quality products and trust, Frontier Innovators often create an organizational culture that manages risks and empowers their employees to act when they see something.
David Rosenberg from AeroFarms built his organization and his team around risk management. To run his business, David reports to his board on seven operational key performance indicators (KPIs): (1) people safety, (2) quality and food safety, (3) yield, (4) operational efficiency, (5) inputs (e.g., nutrients, seed, energy), (6) price, and (7) labor. It is striking that his first two KPIs have to do with safety. After all, and as discussed in chapter 8, you are what you measure. As David says, “If we cannot deliver on people safety and quality, then nothing else matters.”12
Food safety runs through the reporting structure and is built in to the culture and fabric of the organization. Tim Bender is the head of engineering and reports directly to Roger Post, AeroFarms’ COO. Before working with AeroFarms, Tim spent fifteen years in senior leadership positions at ConAgra and ARYZTA, both industry leaders. One of his roles at AeroFarms is to constantly consider safety questions: Where might bacteria grow? What could hamper food safety? What processes need to be put in place to ensure quality?
Each farm has a head of food safety. Checks and balances are integrated into the reporting structure; safety managers report to quality assurance, who reports to the COO and not to the head of a farm. David knew that “there may be trade-offs between food safety and efficiency . . . [so] we put in place an organizational structure that allows for independent reporting, to make sure decisions are long-term focused for the good of all stakeholders.”13
AeroFarms was conscious it was creating a new food production process and there were no existing food safety industry standards. The best way to decrease risk was regular cleaning. Yet one of AeroFarms’ biggest cost drivers is labor associated with cleaning. How much cleaning is enough? David explains:
When I asked leaders in the greenhouse space, particularly in Europe, when they last cleaned their facilities, their answers were invariably centered around a particular [negative] event, and cleaning as a result of that “event.” For us, we decided to clean our facilities twenty-five times a year. We don’t know if that’s the right answer, and we’re pretty sure we’re overdoing it.14
AeroFarms’ cleaning figure of twenty-five times a year was not determined by policy nor by the head of engineering. It came from the bottom up; the staff on the safety team suggested cleaning be tied to another step in their process: harvest times. AeroFarms grows in fourteen-day cycles, resulting in twenty-five harvests per year. David says, “We are starting with a realistic and very conservative high bar. We will go from there as we figure out the right level.”15
While AeroFarms is on track for sales and plant openings, its commitment to cleaning has left it behind on its labor cost estimates because it has added the extra cleaning step. For David, it is worth it. The process may be overkill for now but needs to scale to many types of products. With food, you can’t learn by experimenting with a product that hits the market.
Building a comprehensive reporting structure for something like food safety fosters team alignment, creates momentum, and builds habit. As Charles Duhigg explained in his book The Power of Habit, these design choices go a long way in creating repeatable patterns of behavior. Ultimately, this creates a virtuous cycle that supports not only the evaluation and mitigation of risks but also organizational health overall.16
Considering Negative Externalities
Some people argue that startups must take a further step and proactively evaluate the potential negative consequences of a technology product at its inception. The Institute for the Future, in partnership with the Technology and Society Solutions Lab, recently published a guidebook that describes approaches to planning for and avoiding the potential negative uses of new products. They cover eight principal risk vectors, including truth, disinformation, and propaganda along with risk of addiction to products. They write as follows:
As technologists, it’s only natural that we spend most of our time focusing on how our tech will change the world for the better . . . But perhaps it’s more useful, in some ways, to consider the glass half empty. What if, in addition to fantasizing about how our tech will save the world, we spent some time dreading all the ways it might, possibly, perhaps, just maybe, screw everything up?17
The manual goes on to offer tactical approaches to building ethical action in to startup product development from the get-go.
Consider what this approach might have looked like at Facebook. Had Facebook’s board required a report of the volume of fake news going viral on the platform, the number of fake accounts created, or the siloing of echo chamber discussions on the platform, the company might have avoided some of its unintended, though highly foreseeable, externalities.
A more thoughtful approach to risk also translates to Frontier Innovators’ relationship with the law.
Break the Law or Make the Law
One of the most intriguing aspects of Frontier Innovation is the unique way innovators relate with the law in the ecosystems in which they operate. Achmad Zaky, co-founder and CEO of Bukalapak, the Indonesian e-commerce startup you met previously, sums it up well: “In many emerging markets [with high degree of economic informality] there are no rules. Therefore, we are not breaking them. More often than not, we are having open dialog with the government to make them.”18
Take the case of Uber in the United States versus analogous ridesharing startups at the Frontier. In developed markets, Uber avoided laws about pickup points and driver background checks; subsequently it saw investigations on its impact, and it lost licenses.19 It was an unregulated, disruptive force in a regulated, even unionized, industry.
In contrast, in many emerging markets regulated taxi industries don’t exist. Instead, some markets have hordes of unregulated, unlicensed, uninsured, untracked, and unidentified taxis. Car-sharing startups like Grab or Gojek in Southeast Asia or 99 in Latin America (and Uber in many of these markets as well) changed that. Drivers must present a photo ID to register and must have insurance to join these platforms. If something goes wrong, not to worry: every ride is tracked. This is by no means a foolproof system. For instance, there have been several reported cases of abductions of female riders in India by Uber drivers.20 Yet overall, many observers argue it’s safer than the informal, untracked alternative.
The same thing applies for a range of businesses. Square, one of the most prominent fintech success stories, created a revolutionary product that allows small merchants to accept credit cards. By providing them with an attachment that connects with their phones, Square frees merchants from the need to purchase expensive sales terminals like those in stores in shopping malls. Instead, Square merchants can use their cell phones and create receipts by email. In the United States, most of the merchants who adopted Square’s technology were already formal businesses that filed taxes and were regulated; they just happened to not accept credit cards.21
Square replicas have popped up worldwide—such as Clip in Mexico, Yoco in South Africa, and Ezetap in India. For many of the merchants they serve, accepting debit and credit cards represents their first transaction within the formal financial system. These are the shoe vendors at the street markets, the cell phone reseller on the busy street, or the neighborhood corner store in Mexico City, Johannesburg, or Delhi. In effect, they are becoming formal businesses for the first time.
In some exceptional cases, Frontier Innovators have to work closely with governments. As Yousef Hammad from BECO Capital, a leading Middle East venture capital fund, shared, “Governments are heavily involved. Without their buy-in, the private sector would not survive. You would effectively be starting to compete with the government.”22 Yousef was talking about the Dubai taxi industry, which is heavily linked with the government—meaning that Uber or Careem weren’t merely displacing a formal or informal industry, but a government-backed one. Working within the established system was therefore not a choice but a prerequisite.
Frontier Innovators aren’t simply bringing greater transparency into the industries within which they operate. They often are looking to create the regulatory infrastructure for their nascent industries. AeroFarms’ David Rosenberg understands he’s pioneering not only a business model but also an entirely new urban farming industry. Therefore, for him, his industry’s food must be as good as or better than existing alternatives. As the adage goes, “No one ever gets fired for hiring IBM.” In other words, any missteps by AeroFarms, or by any of its smaller competitors, risks alienating early customers and throwing the vertical farming industry back a decade.
Thus health and safety standards are crucial, not only for not killing the customers but also for the company and the sector’s ongoing growth. David explains: “If you calculate the press on vertical farming, Aero-Farms, one of the earliest and the current market leader, gets about fifty percent of it. People see us as a thought leader. But press also invites a lot of competition, which we’re increasingly seeing. The problem is that many up-and-comers are not even asking risk questions that we’ve already solved [e.g., how often to clean the plant]. I decided it was part of my duty to organize our peer group.”23 Consequently, AeroFarms colaunched the Food Safety and Urban Agriculture Coalition, which brings together leading vertical farming innovators, sets best practice standards, and lobbies the government for appropriate regulation (and in this case, more-stringent regulation).
Similarly, Zola was involved in the early development of the Global Off-Grid Lighting Association (GOGLA). M-PESA engaged with regulators before even thinking of offering mobile money accounts.24 Clip, the Mexican payment company, is deeply involved with its regulator, including advising on the recently adopted Mexican Fintech Act (a law that defines how and where innovators can offer financial products and services, within a prudential consumer context).25 Whether from necessity or smart business practice, Frontier Innovators often create regulation and formalize industries, decreasing risk to customers as well as themselves.
Why It’s Important
A seismic shift is under way. Consumers no longer tolerate Silicon Valley’s cavalier approach to risk. They are demanding a more responsible approach. Look no further than the recent backlash against Facebook and Twitter for enabling Russia’s 2016 US election interference and for the companies’ nontransparent use of customer data. Big technology companies are increasingly being called upon to mitigate the negative consequences of their products and to become better corporate citizens. It may be no coincidence that Facebook recently changed its motto to “Move Fast with Stable Infra[structure].”26 Mark Zuckerberg explained the rationale: “What we realized over time is that it wasn’t helping us to move faster because we had to slow down to fix these bugs and it wasn’t improving our speed.”27
The arrogance of Silicon Valley has no place at the Frontier—nor, increasingly, in Silicon Valley itself.
Frontier Innovators do not have the luxury to ignore product or business risk. They are offering fundamentally needed products and services, often to vulnerable populations. Therefore, they carefully evaluate the types of risk they’re comfortable taking, build in a margin of safety, consider the negative externalities of their products, and build a culture that supports these aforementioned approaches. Often, since they are creating industries, they look to formalize industries, create appropriate regulation, and engage with the ecosystem to strengthen best practices.
In the last six months of 2018, Facebook’s market capitalization tumbled from a high of $630 billion to $380 billion—a nearly $250 billion loss—in large part attributed to its users’ and society’s decreased confidence in the platform and its attitude toward product risk, in the wake of the Cambridge Analytica and other scandals.28 Frontier Innovators’ more measured approach to risk provides not only a valuable counterpoint to Silicon Valley’s brazenness but also an example (and a highly profitable strategy) toward which we should all aspire.