How to De-Risk a Startup

In a previous post, I wrote that startups are collections of risks, and that the best way to make progress on a company (and to get higher valuations from investors) is to address the biggest risks as quickly and thoroughly as possible. But how do you actually mitigate different types of risk? How do you convince yourself that you have product/market fit? How do you persuade investors and employees that you can build a lasting company? How do you demonstrate to early adopters that you’re good at building products?

This post contains a (non-exhaustive) list of common startup-related risks, the spectra along which those risks might be classified, and some tips and heuristics for mitigation. The further you move from “high risk” to “low risk” along each spectrum, the stronger your valuation, perceived progress, and likelihood of success will become.

The entries on each risk spectrum are rated from 1 (high risk) to 5 (low risk). Your goal is to move away from the 1’s and toward the 5’s. For example, if you were trying to prove to a friend that you could bake a great cake, then the risk spectrum might look like this:

High-level Principles

Most of the example risk spectra that follow can be summarized by three core principles:

Principle #1: showing is better than telling.

Principle #2: external validation is stronger than your personal opinion.

Principle #3: more data is better.

9 Risk Spectrum Examples

As a caveat, the following are based on my personal risk “ratings.” Other people might look for different proof points or have different ratings for the same proof points.

1. Product/Market Fit Risk

Goal: prove that you’re actually building something that people want.

B2B version:

B2C version:

Another perspective:

2. Product Quality Risk

Goal: prove that you can build a great, high-quality product.

3. Team Risk

Goal: prove that you’ve assembled a great team for achieving your vision.

Your product requires strong execution across many functional areas (eng, sales, UX design, etc.) and…

4. Recruiting Risk

Goal: prove that you will be able to grow your team effectively. (This is a very real risk in Silicon Valley, where demand for good engineers is much higher than supply.)

5. Sales Risk

Goal: prove that your team can sell the product effectively.

6. Market Risk

Goal: prove that if you execute well, you can make enough money to become a huge company (e.g. $1b+ exit potential).

7. Funding Risk

Goals: prove that you have enough capital to reach the milestones needed to raise more money on better terms (if you want to), and that you have a viable back-up plan if you can’t raise money on your ideal timeline.

8. Short-Term Competition Risk

Goal: prove that you’re differentiated from existing players in the market.

9. Long-Term Competition Risk

Goal: prove that as you become successful and other companies try to copy you, you will be able to maintain your strong position.

How to De-Risk

Step 1: Do an honest self-assessment of your company’s major risk areas.

Step 2: List ways to move from high risk to low risk along each risk spectrum. If you’re not sure what you can do, ask investors, advisors, or other founders.

Step 3: Create short-term and long-term risk mitigation plans for your company. Some of the action items might be small and easy, like running an AdWords test to estimate customer demand and market size. Other actions will take time, like figuring out an elegant way to bake network effects into your product or finding a good VP of Sales when no one on your team has sales experience.

Miscellaneous Tips

Ultimately, addressing risks is not something you should do for investors, it’s something you should do for yourself. If you’re thinking of dedicating years or even decades of your life to something, it’s worth understanding where your biggest challenges will be and how your can incrementally address those challenges.

Tags: De-risking
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