Misunderstandings About Startup Risk

Posted on April 7, 2009
Filed Under Business, Decision Making |

People say that startups are risky. True. But so are many things in life. (In times like these, almost all corporate jobs are just as risky.) What most people seem to mean, when they talk about startup risk, is that it’s all outside of your control, as if you are just gambling with your capital. Nothing could be further from the truth.

All business has an element of chance and randomness, but that doesn’t mean that everything is out of your control. On the contrary, startups are all about finding the right risk/reward profile to tackle. Startups are about finding risks you can live with, or risks that you can minimize that perhaps others can’t. Good entrepreneurs find ways to increase their odds of success. They find ways to minimize the risk of failure.

There are lots of different types of risks that affect startups, and the trend lately among web entrepreneurs is to tackle the wrong risks. Unfortunately, too many people have chosen to take on the “no revenue model” risk - the one where they assume if they can build traffic, they can find a revenue model. I don’t like that risk because, compared to other startup risks, too much is outside your control. If you have to use advertising as your fall back position for monetization, you are at the mercy of the current online advertising climate. If you have to start charging people after months of freebies, then you suddenly have to deal with mispricing risk, finding target customer risk, and more potential competition risk.

So what risks should you target with your startup? I like startup ideas that target the market size risk. In other words target an idea where the biggest risk is the risk that the market for your product may be small. If you can minimize your customer and pricing risks by making sure early on that people really will pay for your product, then market size risk is an acceptable exposure because, particularly for technology companies, markets are growing and changing all the time. You could find yourself part of the next big thing.

When you think about risk and startups, don’t think of it as “everything is up to chance.” Think of the risks you can tolerate, the risks you can minimize, and the risks where you have an advantage over others.

Comments

2 Responses to “Misunderstandings About Startup Risk”

  1. Ryan Kohn on April 7th, 2009 7:27 pm

    A great way to keep the risk small is to focus on high satisfaction for a small number of people.

    This works in two ways:
    1) the people who love you will want to help you grow; and
    2) you minimize the reach of your mistakes.

  2. laurence haughton on April 9th, 2009 3:38 pm

    Great points Rob.
    Another advantage for the start-up who chooses to take the market size risk is that he or she will actually learn all it takes to meet and exceed the expectations of real “paying” customers (someone very different than the “non-paying customer”). You get yourself off Fantasy Island actually find out how much you need to learn and all the complications you never imagined.
    Once you can learn all the little things required, and can rehearse what it takes to do them well, you become a much better manager and leader for a bigger future. You can reduce the risks of growth.

  • About Rob

    Rob is co-founder of Backupify.com. He likes value investing, the Rolling Stones, college basketball, artificial intelligence, economic history and people who think independently.