De-risking Startups

2019, Nov 20

I came across this interesting article that provided a framework for reducing the risk of startups. I found the article to be helpful in assessing startups. That link provides a more comprehensive view, but I summarized it for myself for own records.

Risk can be categorized into 4 stages:

  1. It has never been done, but you think you can do a good job
  2. You have done something similar to it previously
  3. People can attest that you have done something similar to it before
  4. People can attest that you have done it before and there is no risk in you doing it again

Essentially, you want to prove that it can be done and that people want it.

When evaluating a new startup, you can break it down into these main risk points

Product/Market Fit: Is it something people want?

B2B:

  1. You think people want to use it
  2. Businesses have shown interest and possibly given you an LOI (Letter of Intent)
  3. Businesses are willing to spend time on unpaid pilots
  4. Businesses are willing to pay for pilots

B2C:

  1. You think people want to use it
  2. Close affiliates (family/friends) are using it
  3. Unaffiliated users are using it, but the cost of acquisition (CoA) is high
  4. The user base is growing organically or quickly at low CoA

Product Development Risk: Do you have the team to build the product?

  1. Self-proclaim you can build the product or have worked with agencies that can create the product
  2. You have worked in the field directly responsible for building the product
  3. You have led teams for building the product
  4. You have a prototype that works

Recruiting Risk: Can you can grow the team?

  1. You've never hired anyone before, or people do not like to work with you
  2. You've done some recruiting
  3. You've managed/maintained teams
  4. You’re can recruit in-demand candidates

Sales Risk: Can the product be sold effectively?

  1. You don't have sales experience
  2. You’ve done sales, but not the type that is needed
  3. Sale cycles are long, but you've done the type of sales needed
  4. You've managed sales teams and have shot sale cycles

Market Risk: Can you prove you you have potential? (for some reason $1b is considered the unicorn status now. I think that's a lot of money)

  1. Target market is small or unknown
  2. There are reports that give an estimate of market size (e.g. Gartner report) or there are top-down analysis of market size (i.e. "people spend xperyearonthisproblem")orbottom−upanalysis(i.e."wethinkwecancapture10x per year on this problem") or bottom-up analysis (i.e. "we think we can capture 10% of this problem and charger themx") You found a Gartner report that gives an estimate of market size.
  3. There are proof points to validate the market size (i.e. "X people have shown interest and the tests showed that each user would be willing to pay Y")
  4. Incumbent companies are huge and demonstrate that there’s a big market

Funding Risk: Can you raise enough capital to reach the milestones needed?

  1. All funding will be dependent on raising multiple rounds of funding
  2. There is no cushioning between raising another round (i.e. 12 months is needed to get $1m in revenue and 3 months to raise Series A, and there are only 15 months of runway), but you have some experience raising venture capital
  3. You've raised a lot of venture capital before and/or have sufficient funding to not rush a round and aim for strategic rounds
  4. With some to no effort or sacrifice, you can break-even or become profitable without additional capital

Short-Term Competition Risk: Are you a disruptor to the industry?

  1. The market is saturated with competitors of all sizes
  2. There are many competitors but are legacy or poorly-funded startups
  3. There are very few competitors, but some differentiators between you and them
  4. There are no competitors and there is a high barrier to entry (which you have already solved)

Long-Term Competition Risk: Did you have first mover advantage?

  1. You are the first mover and no competitive advantage
  2. You are the first mover, but with little competitive advantage
  3. You have moderate competitive advantages with brand perception and better economics
  4. You have strong competitive advantages, like network effects or proprietary datasets, that get stronger as you grow
# startups