De-Risk Your Startup

Let’s take a side eye to the five general categories of risk that can doom your start-up and how you can best avoid them…

There are literally a million things that can kill your startup. Worrying about all of them will likely drive you nuts, and distract you from the “holes” right in front of you. So with an eye on the hole right in front of you, let’s take a side eye to the five general categories of risk that can doom your start-up and how you can best avoid them: product risk, market risk, financial risk, team risk, and execution risk.

Product risk is what most early stage founders and investors most commonly fail to measure. It is best framed in the economic measure of consumer surplus (the gospel of which I am an avid disciple). Are you producing something people want because the cost of acquiring it is far less than the value it provides to the user? To answer this question, you’ll need to listen (yes, stop talking) to a LOT of customers. Ask them how they do things, observe how they solve their needs. Question the root cause of those needs. Seek first to understand them before you begin showing off your so-called solution. When you can make something they actually want really badly for a cost far below what they are willing to pay, you have product fit.

Market risks that can doom your startup are most often found in distribution problems, market size, and competition/substitutes. Even if you have a product with massive consumer surplus for a party of one, you’ll never have a massive business if the total size of the market is minuscule, you can’t find a channel to get it to market, or if there is a competing solution that is half your cost. Most companies die because they fail to solve market risk by building effective sales channels. Too often VCs cite a company with a lack of product-market fit when in reality, the company has a great product and zero marketing. To solve this, focus on how you can make purchase decisions easy: convenient location of sale, ease of technology, elegant UI, one-click buy, marketing channel exploration, CAC/LTV ratios, etc. This is why we advocate for maker-founders to seek out help from proven marketing and sales guru investors who put in money and time into your company rather than advisors who both those things out of your startup.

Financial risk becomes a problem when the fundamental costs of doing business generate insufficient returns to sustain your business. Some are short term, like making payroll next week if your runway is going away. Some are longer term, like high upfront capital costs from inventory or equipment required to make or distribute your product/service. The key here is to keep a tight lid on costs and try to get profitable as fast as you can. Avoid splurging on that fancy office when a shabby one will do just fine (and use the savings to add the additional sales person who will help resolve this problem). If your company has significant upfront costs, you’ll need to carefully manage inventory levels and development expenses so that you don’t run out of runway before you’re ready to take off. Too often I hear founders complain that their company failed because they couldn’t get funding, when really, they couldn’t find a way to develop the product and market fit with the resources they had, when it was entirely possible to do so. They just failed to have a financial plan to match their access to resources. Yes, it does take longer to build a company without funding from VCs, and yes, we often don’t understand what we’re doing. So if you’re the smart founder who does “get it”, live within your means to do so.

Team risk is why most seed stage companies with $50k-$100k MRR fail to raise their series A. No one is going to drop $3-5mm on a company that, if the founder is hit by a bus tomorrow, blows into dust with them. Nor will a VC put real money into a team that has only product skills. If you want money to scale, you need to show that you can build a team that is better than the founder and has complete skills (product, marketing, sales, customer support, and finance). This means you not only need a team, but a team that says, “we’ve got this”. Hire folks who’ve done it before or have such impeccable academic qualifications that their abilities are not in doubt. Hire away a key person from a HOT growth company who has experience with the growth challenges you face right in front of you (note: Google is not a hot growth company, it is a stale corporate machine).

Execution risk will be the subject of a post later this month, but to summarize it best, it is when you get to $3mm in annual revenue and think you’ve “made it” when really, you haven’t even started the real race yet. The ability of a company to grow quickly under pressure, hire the right people, put in place proper culture, incentives, and relationships so that the company can prosper and run full speed is far, far harder than anyone thinks. Execution risk is the killer of would-be unicorns and turns them into someone’e distressed asset purchase or family business. Your ability to create a culture of performance aligned with your customers needs and economic value model will be the key to getting things done as you scale. If this is your start-up, DM me, and we’ll talk further. A paragraph here just doesn’t do that sentence justice.

So, overall, start thinking about how you can de-risk your startup by looking at these risks and how your daily activities, weekly and monthly goals help eliminate them as best possible. You’ll never get rid of them, but you can sure sleep better at night if you do.

Author: Joe Merrill

I'm a VC in Austin, TX.

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