04: The Risks That Specializing Presents#

Transitioning from a generalist to a specialist market position, or from one specialist market position to another, is not risk-free. The primary risks are @TODO.

In this section, I will focus on the downside potential inherent in risk. Every risk also has the potential for upside; that’s why we take risks in the first place! I want to inform you about what can go wrong with specializing, but I don’t want to completely discourage you from considering it.

@NOTE: I might be able to work a high-level mention of “the beachhead strategy” in to this section.

You might get seduced into category creation without the needed resources. The ideas that the best ways to specialize are to totalize the idea of narrow focus and “become a category of one” or to “create a new category so you can own it” are pretty prevalent out there. These are not bad ideas when applied to the right context. For a soloist or small firm, category creation[@TODO: footnote explaining] is a risky, costly long shot. A company that is spending venture capital or public markets money can survive the potential downside if the category creation effort doesn’t work out; a soloist or small firm might not. You can successfully become a “category of one” and find that the market needs more education to understand your new category than you can afford, more marketing to think of it in a buying situation, or worse, the market simply doesn’t care about the category you’ve invented. These are the downsides of mis-applying extreme versions of the idea of specializing.

No business with incredible potential works great on day 1. The conundrum: every day you keep working away at building a business that’s not working great now but could plausibly work better in the future is either another day of sunk cost or another day closer to the breakthrough/critical mass. The problem is, you just don’t know which it’s going to be. You might find this breakthrough/sunk-cost conundrum stressful and discouraging. Most of us don’t make our best decisions when we’re stressed.

Even if you don’t feel stressed about it, specializing usually takes time to yield results even when you get the decision right, and so there’s the same kind of problem that plagues any system with delayed feedback loops, which can make it hard to navigate. You might be on the brink of seeing a leading indicator of success or actual success and “flinch”, causing you to burn your investment (like buying high and selling low right before the market rebounds). @NOTE: reference thinking in systems to see if there’s a nice summary of why delayed feedback loops make things hard.

If you treat your specialization decision as a reversible or changeable decision that first functions as a test of market demand or an experiment (this is generally a good approach), you might churn and confuse the market, causing lost opportunity, until you settle down into a specialization that works well. Some experimentation on a cadence that your market can tolerate works well, but too-fast cycling between too-different specializations is likely to cause your market to lose confidence in you.

The form of specialization that yields the most immediate benefit (vertical) is the hardest one for most tech folks to adopt. I’ll explain the 5 specialization approaches later, but for now think of vertical specialization as focusing exclusively on a single industry, aka a market vertical. This specialization approach tends to feel boring and overly restrictive to many developers. This reduces adoption of what is often the most high-leverage form of specialization. Even if you’re bought into the idea of vertical specialization, people in tech often lack a naturally-occurring “beachhead” in any one vertical. In somewhat cartoonish terms: most of you have spent your career keeping up with tech rather than building useful business relationships in any particular vertical. While on paper this is only a minor devaluation of the real-world value of specialization for you, in practice it can be a very challenging problem to overcome.

The easiest way for you to specialize is a platform specialization, which is also the most risky way, except when it works out well, and then it can work out REALLY well, and those folks become especially visible and admired, making it both the easy and socially appealing way to specialize, further complicating things. I’ll elaborate on this more later. @NOTE: this needs a heavy-handed rework.

It’s easy for you to conflate difficulty/complexity with economic value (this is largely the hourly billing model’s fault), and be pulled towards specializations that are difficult/complex but don’t deliver robust economic value, or ones that do deliver economic value in the context of a job (or a value chain of employees working together), but they don’t quite work in the context of a firm, consultant, or agency.

Risk is the combination of uncertainty, potential upside, and potential downside. What’s missing from this definition is magnitude; how big is the upside or downside? We’ll talk about the magnitude of the downside as the potential for harm.

For the vast majority of the human population, a paper cut does not cause enough harm to effect health, much less cause death. That’s why no parent gasps and rips a sheet of blank printer paper out of their child’s hands while scolding them about the risk of handling paper. When the child picks up an X-ACTO knife, the gasping and scolding begins because the magnitude of potential harm has increased.

For the vast majority of you, most of the risks described above have a paper cut-level of potential harm. They can’t singlehandedly cause sufficient harm quickly enough to permanently put you out of business. Even if you have only minimal runway in terms of saved cash, you likely have other forms of resilience, like the ability to pick up short-term, part-time contract work, for example.

The risk that carries the greatest potential for harm is the first one I described above: you might get seduced into category creation without the needed resources. This one is so potentially serious because:

  • Most people understand that category creation requires time. This causes aspiring future category owners to be willing to invest 2 to 3 years in the endeavor.

  • This rather lengthy timeline causes aspiring future category owners to expect feedback loops to be similarly lengthy.

  • If you’ve made a heavy investment in category creation that has weakened your business, and if the lengthy feedback loops finally start delivering signals that your investment will not work, then you are now dealing with:

    • 2 to 3 years of sunk cost

    • Trying to correct things from a position of weakness

This can be a very difficult position to be in.

If any of the other downsides described above come to pass, the likely harm is:

  • 6 to 18 months of crappy financial performance while you course-correct

  • You get a “bad taste in your mouth” about specialization and never try it again

I list the second item as a harm because it might prevent you from getting specialization right on the second or third try and so the bad taste in your mouth could cause significant opportunity cost. But overall, most of the risks of specialization are unable to cause fatal harm to your business; bruises, not breaks.