9 ms·

How to De-Risk a Startup

240 points by lpolovets 10y ago

jacquesm 10y ago
That's a really nice structured approach to what risk is and how to classify it but it doesn't actually address how to get rid of any specific risk and that is what is required to actually get rid of the risk, the secret is in between those line-items listing various stages of risk. And quite a few existential risks in the start-up world are not so easily classified to begin with, for instance, founder conflict is a huge risk and yet didn't even make the list of examples here. Still, very useful post but mostly from an analysis point of view, a 'where are we and where do we want to go' rather than 'how are we going to get there'.
tschellenbach 10y ago
Many of the most successful startups started building a new product in a market of unknown size. It often seemed small at the time. What you call high market risk here, is actually (sometimes) the best situation in terms of investment returns. It's tough to be a VC.
20andup 10y ago
I never seen something like before. It's very good way of measuring subjectively perceived risk. I am definitely using.
sonink 10y ago
The real value in this post is maybe how the VC thinks about risk rather than a how a founder should. The need for structure in something as ephemeral as startup risk definitely stands out.
- tommynicholas 10y ago
  I think that value is pretty big actually, it's something founders need to be deeply aware of. I wrote about one instance where this comes up a lot here - why raising money pre-launch is often easier than post-launch https://medium.com/@tommyrva/why-is-raising-your-seed-round-pre-launch-often-easier-c55364838ca1 https://medium.com/@tommyrva/why-is-raising-your-seed-round-...
  - lpolovets 10y ago
    Great post. I think part of de-risking is that sometimes you find out your assumptions don't hold. E.g. you thought there was a $5b opportunity, but after launching you can quickly see that you were wrong. In that respect, it's much better to fundraise before you launch because you wouldn't be able to raise post-launch, but then you still have to figure out what to do after you have money but find out your idea isn't great.
    - tommynicholas 10y ago
      100% true! I'll admit, I intentionally avoided addressing that in the post, I wanted to focus on the tactics rather than the larger question the efficacy of these tactics raise. There's a counter-argument even I would make which is: if it's true that it's easier to raise pre-launch for these reasons, does that mean you should? Not sure.
- the_watcher 10y ago
  Agreed, however, if you're a founder who plans to raise money, they're helpful barometers to look at.
- gwbas1c 10y ago
  Having seen a lot of founders who are just poker players, or full of hot air, this article provides a good objective way to unemotionally evaluate a startup. This is important, because it's really easy to get excited about something that just isn't going to go anywhere because the leader is charismatic.
deleted 10y ago
[deleted]
etf-to-mark 10y ago
Worked in 10 startups as a contractor, got to see some interesting trends, and also compared with fellow developers in other startups. We found that one or more of the following indicators would reek strongly of a startup that has a big technical risk (e.g. poor architecture choice, obscure platform and language decisions, etc.) 1. CTO or lead developer has worked for Google. 2. CTO or lead developer decides to use AWS as they "feel" it is right to do so. 3. CTO or lead developer decides to use Python, but wants to write in EE Java. Some the code becomes contaminated by statics, getters and setters, and verbose POJO style approaches, and very unpythonic code. 4. CTO or lead developer decides to criticise or rewrite good Pythonic code from experienced Python developers into the in-house Java EE style.
graycat 10y ago
Basically the whole post has one theme: The more you have already done on the project, the less risk. That's not wrong, but it's weak because there is a much better way. E.g., as a teenager, I looked around the garage and saw an old lawn mower engine, other raw materials, and tools and built a go cart. I drove it around the neighborhood. So, according to the OP, I was well on the way, low risk, to beating Ford? Nope! What was missing for beating Ford? Sure, some larger planning that, to beat Ford, could, should have been done at the beginning. Nearly all of that planning should have been well before cutting any metal and well before any of the steps in the OP. So, net, what the OP is missing is any reasonable conception of good planning. It is as if the OP believes that any planning is just so much hot air, pie in the sky, BS, with a dime still won't cover a 10 cent cup of coffee. I'd say that following the steps of less risk in the OP without good, initial planning is hot air, .... Can good planning work? Yup. Maybe what the OP and Susa Ventures has in mind doesn't use much in planning, but Boeing, Lockheed, Intel, ... make good use of planning. E.g., Lockheed planned the SR-71 as in http://iliketowastemytime.com/sites/default/files/sr71_blackbird_leaking_fuel_cell19.jpg http://iliketowastemytime.com/sites/default/files/sr71_black... The project was approved basically with all the work just on paper, that is, with none of the risk reducing project steps in the OP. And the project was fully successful -- Mach 3 speed, 80,000 feet altitude, 2000 mile range without refuling. Flew over hostile airspace taking pictures for years and never got shot down. Why not shot down? Planning: Or, you are on the ground and an SR-71 is about to fly over you and take your picture, again, Mach 3, 80,000 feet. So, how do you get an airplane or missile up there in time? Well, in simple terms, with what was available then, you couldn't. So, you didn't, and the SR-71 never got shot down. And this situation was clear just from the planning on paper before any metal cutting. Really, what was important for having a low risk project was the planning on paper, before any metal cutting, and not the progress steps as in the OP. And for serious projects, this situation on planning is quite general for, say, large dams, long bridges, tall buildings, deep tunnels, huge ships and airplanes, etc. Nearly all the important work that reduces risk is in the initial planing and engineering essentially all just on paper. The OP totally neglects this point. War story example. Early in my career, I was writing applied math software in a group at the JHU/APL, that is, Johns Hopkins University Applied Phsics Lab in Maryland. The group was doing the orbit determination software for the Navy's version of GPS, right, which was working several years before GPS by the USAF. Yes, the project was for the navigation needed by the US Navy missile firing submarines. Well, daily have to update the orbits of the satellites; so, there is some good software there. Actually in that group I was working on passive sonar software (another interest of the US Navy), but I did learn the stories of how the Navy got their version of GPS. It was basically a back of the envelope thing-y by some good physics people. That done, there wasn't much risk. Then no doubt there was a full project proposal that was peer-reviewed and reviewed otherwise. Now, presto, bingo, with just that paper, basically have a low risk project with the rest, including the rockets to launch the satellites, the software, the satellites themselves, etc. all low risk. But according to the OP, before the satellites and rockets are built, flown, etc., have high risk project. Nope. And according to the OP, since no one had yet done a GPS, it was a high risk project. Nope. Basically the OP wants to have full confidence in a project essentially only when it is done. Okay, but that's no help in risk removal early on for either the project people or any investor. In fact, with good planning, even just on paper, can remove nearly all the risk just at the beginning. In the commercial world, also need to have happy users/customers; how to plan for that? Pick a problem where the first good or a much better solution is a must have for enough users/customers to have a low risk project. The core problem of the OP is that they don't know how to evaluate project plans just on paper and, that way, get low risk projects. Thankfully for US national security, the US DoD very much does know how to do that, that is, work with plans on paper and, then, have the rest low risk. So do Boeing, Intel, etc. For more, the OP seems to be from a group, Susa, that believes that in information technology the technology is essentially just routine software development and anything else about technology or planning is ignored. Well, there was some software in the GPS project, but there was also a lot more that made the project very valuable; the software part alone was basically low risk; and with the good, initial planning just on paper, the rest of the project was low risk. Then, the OP is ignoring projects that would be "very valuable" because that value is not just in routine software. Then, with some irony, the OP wants to invest in projects that have little promise of much value even when the software is done, and that's not low risk investing! Indeed, as in http://www.avc.com/a_vc/2013/02/venture-capital-returns.html#disqus_thread http://www.avc.com/a_vc/2013/02/venture-capital-returns.html... and http://www.kauffman.org/newsroom/2012/07/institutional-limited-partners-must-accept-blame-for-poor-longterm-returns-from-venture-capital-says-new-kauffman-report http://www.kauffman.org/newsroom/2012/07/institutional-limit... the average ROI of Silicon Valley information technology investing is low. It does appear that what the OP describes is basically how such investors look at projects. Thankfully for US national security, tall buildings, huge airplanes, etc., such investors are not involved.
the_watcher 10y ago
The sales risk section is a bit off to me. It's possible for 5 to be true without any of the other stages to have ever occurred. That said, perhaps that's irrelevant.
- derricgilling 10y ago
  Some interesting points. Sales risk seems very focused towards enterprise sales, but I believe having a go-to-market strategy is more important than just having the ability to hire experienced salespeople. Some products don't even need sales people, but the channels, partner platforms, etc should be identified. Does this product rely heavily on inbound leads, require SEO or content generation, etc? Also, certain risks inherently trump others for early stage startups. Moving from a 3 to a 5 under Product/Market Fit is a much more ideal compared to moving recruiting risk from 1 to 3 or team risk from 1 to 3. (After all, it's kind of moot to hire full time employees for every area if you don't even have good P/M fit)
  - the_watcher 10y ago
    Yea, I was mainly commenting that it seemed like you could just skip the first 4 levels with the right product, which was something the other categories didn't seem to have the same characteristic.
tomblomfield 10y ago
I've definitely met VCs who use this kind of mental model. I'd add a couple more: Technology Risk. Does what you're building require advances in technology that don't yet exist? Regulatory or Legal Risk. Do you need specific licences to launch your product? How far through this process are you?
mapgrep 10y ago
I completely nodded along with this — as advice for a normal, sustainable business. But this is not what startups do. The whole point of a "startup" as conceived in Silicon Valley and as desired by VCs is that risk is HIGH. Let's set aside whether this is good or bad (I would argue the drive for "100x or bust" returns is corrosive, but the word "startup" is tied to that kind of risk/return model right now in the commonly accepted definition). So let's go through his principles and show what low risk means for hypothetical business idea "XYZ": -Founder has proven track record doing XYZ -Lots of potential customers WANT to do XYZ -Startup is making many hard (cash, full price) sales of XYZ -XYZ is fully functioning and "amazing" and customers are loyal -Prices are high -Incumbents are successful etc etc When you have these kinds of attributes you have a nice business in an established sector. By definition. Lots of customers, incumbents, and sales means the XYZ idea has been well exploited. Great. The whole point of a startup is to make a bold bet on something not entirely proven and safe. That doesn't mean take DUMB risks, but this piece actually says you should try to get your business to the sort of low risk situations I list above. But if you have an actually good idea you WANT to go into an area with few incumbents and where potential customers are skeptical and where you have no proven track record — because if something is genuinely NEW then guess what - there are no incumbents because no one is doing it yet - many of the customers don't know they need it because it doesn't exist yet - and you have no experience in it because no one on the planet has done it. I mean you can definitely argue that many startups today take excessive risks and don't take basic steps to minimize risks. Absolutely. And you can also argue that the world needs more sustainable practical businesses and fewer 100x startup attempts. I personally agree with that. But a substantial degree of risk and of lack of "proof" for a business idea is what makes a startup a startup. So if you want to de-risk a startup, find the sort of business that will qualify you for a bank loan. Maybe a nice plumbing enterprise :-)
- beejiu 10y ago
  If risks didn't reduce over time, why would valuations increase over time? (Let's say that Risk = Probability[Future Value < Current Value])
- bo1024 10y ago
  I think you're conflating together changes a business can make to its approach that are "global" or high-level versus "local" or low-level. I don't think the article is advocating only starting a company in a space where it's easy to get to low-risk. If you enter a high-risk area, that's totally fine and good, but (as I read the article) it's still a good idea to try to move all of your indicators toward less risky rather than more. The question you're getting at is whether one takes drastic steps like pivoting toward a more established industry where it's easy to lower risk. I'm not sure the author is advocating that.
dkural 10y ago
This guy clearly does not understand investing or what it means to be a founder. There are three things that matter, the rest is noise: 1) Is there a big market? 2) Is the founding team GREAT? 3) Don't invest too late. That's it. Invest in great people pursuing big opportunities. Trust & help them to be smart enough to figure the rest out. More categories would simply distract. Most VCs invest in ideas with meaningless total addressable markets ALL the time. They limit their upside even if everything goes perfectly. They invest in subpar teams with no real product or design talent. Most VCs would do better sticking to above. Chris Dixon said wrote a blog post, which I wholeheartedly agree, where a lot of amazing innovation first looks like a toy. Many of the biggest companies are created by a founder realizing new tech X can impact a lot of value-added activities A,B,C before everybody else realizes the same thing. If the VC is twiddling thumbs looking for external validation beyond the founder, by definition they're missing the train. Things are "obvious" only in hindsight. Let's take building messaging apps. Everyone now says it was so obvious - but it wasn't to Google, Inc. They wasted time building Google+ while founders were building WhatsApp, Instagram, SnapChat, etc. Containers are another example. Docker folks realized certain properties of the linux kernel can be utilized to great effect to solve a meaningful problem. Imagine the VC who waited another year to de-risk.
- Drdrdrq 10y ago
  The OP's advice wasn't meant for VCs, it was for the founders. Their role is very different and the advice looks sound to me. Or do you disagree with it from founders' perspective?
  - dkural 10y ago
    I mean it from the founders perspective as well, as a founder myself.
neogodless 10y ago
I believe this should just be re-titled "how to identify risks in your startup." Because often there are very real risks - and you should not "de-risk" them. You should just be aware of what they are, and make educated decisions around those risks.
- danieltillett 10y ago
  If you can easily de-risk then you should. Of course with most of the bad risks it is impossible to de-risk because nobody know the answer.
AznHisoka 10y ago
What about the risk of relying on a 3rd party platform? How to de-risk that?
- nercht12 10y ago
  Maybe... [1] The platform is new, untested. [2] The platform is tested and out of beta. [3] The platform has a decent number of users. [4] The platform has a large userbase with good reviews. [5] The platform is a self-sustaining (usually paid) service with good reviews and tons of users.
  - AznHisoka 10y ago
    I don't understand how those are ways to de-risk that risk. As an example, I am talking about a company like "Buffer" or Twitter developers that rely on the Twitter API for their startup.
    - nercht12 10y ago
      The original comment was ambiguous, so I just treated it as "picking a 3rd party platform" and graded based on reliability of future existence. A number of platforms go down for various reasons (esp. freemium-based). Don't you want a platform that is mostly guaranteed to stick around while you use it?
- lpolovets 10y ago
  (I'm the post's author.) A few ideas: 1) Integrate w/multiple platforms if that's an option, so that you're not dependent on a single platform. E.g. if you are integrated with 10 messaging platforms it's better than being tied 100% to WeChat. 2) If you're using the platform for distribution or infrastructure rather than something like data or social networks, then you can gradually work on building infrastructure in-house or on looking for other distribution channels. 3) Offer something to the platform that they value so that they don't have an incentive to limit your usage. For example, maybe you can data sources that let you provide valuable analytics and insights to the platform when combined with the data and users you get from them.
greghendershott 10y ago
Great way to think about this. Also -- although maybe too obvious to point out -- as you progress through these stages: - You appeal to different kinds of investors. You may gain financing options (~= the old joke/truth that "banks are happiest to loan you money if you don't really need it"). - You need somewhat different skills from people (especially yourself!). Likewise you might be more attractive to different kinds of candidates. - Eventually there's a whole other set of risks, as you evolve into a bigger, more mature company with high organizational entropy. :)
throwaway_xx9 10y ago
This is a very useful checklist for technical founders to: 1) evaluate potential "business co-founders", most of whom are losers 2) evaluate if they're on track monthly, and fire their loser non-technical co-founders if they can't score 4's and 5's. Just write it into the partnership agreement.
danieltillett 10y ago
This is a rather nice list from Leo, but it seems to be focused on the “lean” model of building a MVP and iterating until you get product-market fit. How do you de-risk opportunities where you can’t build an MVP and you have to invest years in development before you have a product you can show the market?

240 points by lpolovets 10y ago

That's a really nice structured approach to what risk is and how to classify it but it doesn't actually address how to get rid of any specific risk and that is what is required to actually get rid of the risk, the secret is in between those line-items listing various stages of risk. And quite a few existential risks in the start-up world are not so easily classified to begin with, for instance, founder conflict is a huge risk and yet didn't even make the list of examples here. Still, very useful post but mostly from an analysis point of view, a 'where are we and where do we want to go' rather than 'how are we going to get there'.

tschellenbach 10y ago

Many of the most successful startups started building a new product in a market of unknown size. It often seemed small at the time. What you call high market risk here, is actually (sometimes) the best situation in terms of investment returns. It's tough to be a VC.

20andup 10y ago

I never seen something like before. It's very good way of measuring subjectively perceived risk. I am definitely using.

sonink 10y ago

The real value in this post is maybe how the VC thinks about risk rather than a how a founder should. The need for structure in something as ephemeral as startup risk definitely stands out.

tommynicholas 10y ago
I think that value is pretty big actually, it's something founders need to be deeply aware of. I wrote about one instance where this comes up a lot here - why raising money pre-launch is often easier than post-launch https://medium.com/@tommyrva/why-is-raising-your-seed-round-pre-launch-often-easier-c55364838ca1 https://medium.com/@tommyrva/why-is-raising-your-seed-round-...
- lpolovets 10y ago
  Great post. I think part of de-risking is that sometimes you find out your assumptions don't hold. E.g. you thought there was a $5b opportunity, but after launching you can quickly see that you were wrong. In that respect, it's much better to fundraise before you launch because you wouldn't be able to raise post-launch, but then you still have to figure out what to do after you have money but find out your idea isn't great.
  - tommynicholas 10y ago
    100% true! I'll admit, I intentionally avoided addressing that in the post, I wanted to focus on the tactics rather than the larger question the efficacy of these tactics raise. There's a counter-argument even I would make which is: if it's true that it's easier to raise pre-launch for these reasons, does that mean you should? Not sure.
the_watcher 10y ago
Agreed, however, if you're a founder who plans to raise money, they're helpful barometers to look at.
gwbas1c 10y ago
Having seen a lot of founders who are just poker players, or full of hot air, this article provides a good objective way to unemotionally evaluate a startup. This is important, because it's really easy to get excited about something that just isn't going to go anywhere because the leader is charismatic.

deleted 10y ago

[deleted]

etf-to-mark 10y ago

Worked in 10 startups as a contractor, got to see some interesting trends, and also compared with fellow developers in other startups. We found that one or more of the following indicators would reek strongly of a startup that has a big technical risk (e.g. poor architecture choice, obscure platform and language decisions, etc.) 1. CTO or lead developer has worked for Google. 2. CTO or lead developer decides to use AWS as they "feel" it is right to do so. 3. CTO or lead developer decides to use Python, but wants to write in EE Java. Some the code becomes contaminated by statics, getters and setters, and verbose POJO style approaches, and very unpythonic code. 4. CTO or lead developer decides to criticise or rewrite good Pythonic code from experienced Python developers into the in-house Java EE style.

graycat 10y ago

Basically the whole post has one theme: The more you have already done on the project, the less risk. That's not wrong, but it's weak because there is a much better way. E.g., as a teenager, I looked around the garage and saw an old lawn mower engine, other raw materials, and tools and built a go cart. I drove it around the neighborhood. So, according to the OP, I was well on the way, low risk, to beating Ford? Nope! What was missing for beating Ford? Sure, some larger planning that, to beat Ford, could, should have been done at the beginning. Nearly all of that planning should have been well before cutting any metal and well before any of the steps in the OP. So, net, what the OP is missing is any reasonable conception of good planning. It is as if the OP believes that any planning is just so much hot air, pie in the sky, BS, with a dime still won't cover a 10 cent cup of coffee. I'd say that following the steps of less risk in the OP without good, initial planning is hot air, .... Can good planning work? Yup. Maybe what the OP and Susa Ventures has in mind doesn't use much in planning, but Boeing, Lockheed, Intel, ... make good use of planning. E.g., Lockheed planned the SR-71 as in http://iliketowastemytime.com/sites/default/files/sr71_blackbird_leaking_fuel_cell19.jpg http://iliketowastemytime.com/sites/default/files/sr71_black... The project was approved basically with all the work just on paper, that is, with none of the risk reducing project steps in the OP. And the project was fully successful -- Mach 3 speed, 80,000 feet altitude, 2000 mile range without refuling. Flew over hostile airspace taking pictures for years and never got shot down. Why not shot down? Planning: Or, you are on the ground and an SR-71 is about to fly over you and take your picture, again, Mach 3, 80,000 feet. So, how do you get an airplane or missile up there in time? Well, in simple terms, with what was available then, you couldn't. So, you didn't, and the SR-71 never got shot down. And this situation was clear just from the planning on paper before any metal cutting. Really, what was important for having a low risk project was the planning on paper, before any metal cutting, and not the progress steps as in the OP. And for serious projects, this situation on planning is quite general for, say, large dams, long bridges, tall buildings, deep tunnels, huge ships and airplanes, etc. Nearly all the important work that reduces risk is in the initial planing and engineering essentially all just on paper. The OP totally neglects this point. War story example. Early in my career, I was writing applied math software in a group at the JHU/APL, that is, Johns Hopkins University Applied Phsics Lab in Maryland. The group was doing the orbit determination software for the Navy's version of GPS, right, which was working several years before GPS by the USAF. Yes, the project was for the navigation needed by the US Navy missile firing submarines. Well, daily have to update the orbits of the satellites; so, there is some good software there. Actually in that group I was working on passive sonar software (another interest of the US Navy), but I did learn the stories of how the Navy got their version of GPS. It was basically a back of the envelope thing-y by some good physics people. That done, there wasn't much risk. Then no doubt there was a full project proposal that was peer-reviewed and reviewed otherwise. Now, presto, bingo, with just that paper, basically have a low risk project with the rest, including the rockets to launch the satellites, the software, the satellites themselves, etc. all low risk. But according to the OP, before the satellites and rockets are built, flown, etc., have high risk project. Nope. And according to the OP, since no one had yet done a GPS, it was a high risk project. Nope. Basically the OP wants to have full confidence in a project essentially only when it is done. Okay, but that's no help in risk removal early on for either the project people or any investor. In fact, with good planning, even just on paper, can remove nearly all the risk just at the beginning. In the commercial world, also need to have happy users/customers; how to plan for that? Pick a problem where the first good or a much better solution is a must have for enough users/customers to have a low risk project. The core problem of the OP is that they don't know how to evaluate project plans just on paper and, that way, get low risk projects. Thankfully for US national security, the US DoD very much does know how to do that, that is, work with plans on paper and, then, have the rest low risk. So do Boeing, Intel, etc. For more, the OP seems to be from a group, Susa, that believes that in information technology the technology is essentially just routine software development and anything else about technology or planning is ignored. Well, there was some software in the GPS project, but there was also a lot more that made the project very valuable; the software part alone was basically low risk; and with the good, initial planning just on paper, the rest of the project was low risk. Then, the OP is ignoring projects that would be "very valuable" because that value is not just in routine software. Then, with some irony, the OP wants to invest in projects that have little promise of much value even when the software is done, and that's not low risk investing! Indeed, as in http://www.avc.com/a_vc/2013/02/venture-capital-returns.html#disqus_thread http://www.avc.com/a_vc/2013/02/venture-capital-returns.html... and http://www.kauffman.org/newsroom/2012/07/institutional-limited-partners-must-accept-blame-for-poor-longterm-returns-from-venture-capital-says-new-kauffman-report http://www.kauffman.org/newsroom/2012/07/institutional-limit... the average ROI of Silicon Valley information technology investing is low. It does appear that what the OP describes is basically how such investors look at projects. Thankfully for US national security, tall buildings, huge airplanes, etc., such investors are not involved.

the_watcher 10y ago

The sales risk section is a bit off to me. It's possible for 5 to be true without any of the other stages to have ever occurred. That said, perhaps that's irrelevant.

derricgilling 10y ago
Some interesting points. Sales risk seems very focused towards enterprise sales, but I believe having a go-to-market strategy is more important than just having the ability to hire experienced salespeople. Some products don't even need sales people, but the channels, partner platforms, etc should be identified. Does this product rely heavily on inbound leads, require SEO or content generation, etc? Also, certain risks inherently trump others for early stage startups. Moving from a 3 to a 5 under Product/Market Fit is a much more ideal compared to moving recruiting risk from 1 to 3 or team risk from 1 to 3. (After all, it's kind of moot to hire full time employees for every area if you don't even have good P/M fit)
- the_watcher 10y ago
  Yea, I was mainly commenting that it seemed like you could just skip the first 4 levels with the right product, which was something the other categories didn't seem to have the same characteristic.

tomblomfield 10y ago

I've definitely met VCs who use this kind of mental model. I'd add a couple more: Technology Risk. Does what you're building require advances in technology that don't yet exist? Regulatory or Legal Risk. Do you need specific licences to launch your product? How far through this process are you?

mapgrep 10y ago

I completely nodded along with this — as advice for a normal, sustainable business. But this is not what startups do. The whole point of a "startup" as conceived in Silicon Valley and as desired by VCs is that risk is HIGH. Let's set aside whether this is good or bad (I would argue the drive for "100x or bust" returns is corrosive, but the word "startup" is tied to that kind of risk/return model right now in the commonly accepted definition). So let's go through his principles and show what low risk means for hypothetical business idea "XYZ": -Founder has proven track record doing XYZ -Lots of potential customers WANT to do XYZ -Startup is making many hard (cash, full price) sales of XYZ -XYZ is fully functioning and "amazing" and customers are loyal -Prices are high -Incumbents are successful etc etc When you have these kinds of attributes you have a nice business in an established sector. By definition. Lots of customers, incumbents, and sales means the XYZ idea has been well exploited. Great. The whole point of a startup is to make a bold bet on something not entirely proven and safe. That doesn't mean take DUMB risks, but this piece actually says you should try to get your business to the sort of low risk situations I list above. But if you have an actually good idea you WANT to go into an area with few incumbents and where potential customers are skeptical and where you have no proven track record — because if something is genuinely NEW then guess what - there are no incumbents because no one is doing it yet - many of the customers don't know they need it because it doesn't exist yet - and you have no experience in it because no one on the planet has done it. I mean you can definitely argue that many startups today take excessive risks and don't take basic steps to minimize risks. Absolutely. And you can also argue that the world needs more sustainable practical businesses and fewer 100x startup attempts. I personally agree with that. But a substantial degree of risk and of lack of "proof" for a business idea is what makes a startup a startup. So if you want to de-risk a startup, find the sort of business that will qualify you for a bank loan. Maybe a nice plumbing enterprise :-)

beejiu 10y ago
If risks didn't reduce over time, why would valuations increase over time? (Let's say that Risk = Probability[Future Value < Current Value])
bo1024 10y ago
I think you're conflating together changes a business can make to its approach that are "global" or high-level versus "local" or low-level. I don't think the article is advocating only starting a company in a space where it's easy to get to low-risk. If you enter a high-risk area, that's totally fine and good, but (as I read the article) it's still a good idea to try to move all of your indicators toward less risky rather than more. The question you're getting at is whether one takes drastic steps like pivoting toward a more established industry where it's easy to lower risk. I'm not sure the author is advocating that.

dkural 10y ago

This guy clearly does not understand investing or what it means to be a founder. There are three things that matter, the rest is noise: 1) Is there a big market? 2) Is the founding team GREAT? 3) Don't invest too late. That's it. Invest in great people pursuing big opportunities. Trust & help them to be smart enough to figure the rest out. More categories would simply distract. Most VCs invest in ideas with meaningless total addressable markets ALL the time. They limit their upside even if everything goes perfectly. They invest in subpar teams with no real product or design talent. Most VCs would do better sticking to above. Chris Dixon said wrote a blog post, which I wholeheartedly agree, where a lot of amazing innovation first looks like a toy. Many of the biggest companies are created by a founder realizing new tech X can impact a lot of value-added activities A,B,C before everybody else realizes the same thing. If the VC is twiddling thumbs looking for external validation beyond the founder, by definition they're missing the train. Things are "obvious" only in hindsight. Let's take building messaging apps. Everyone now says it was so obvious - but it wasn't to Google, Inc. They wasted time building Google+ while founders were building WhatsApp, Instagram, SnapChat, etc. Containers are another example. Docker folks realized certain properties of the linux kernel can be utilized to great effect to solve a meaningful problem. Imagine the VC who waited another year to de-risk.

Drdrdrq 10y ago
The OP's advice wasn't meant for VCs, it was for the founders. Their role is very different and the advice looks sound to me. Or do you disagree with it from founders' perspective?
- dkural 10y ago
  I mean it from the founders perspective as well, as a founder myself.

neogodless 10y ago

I believe this should just be re-titled "how to identify risks in your startup." Because often there are very real risks - and you should not "de-risk" them. You should just be aware of what they are, and make educated decisions around those risks.

danieltillett 10y ago
If you can easily de-risk then you should. Of course with most of the bad risks it is impossible to de-risk because nobody know the answer.

AznHisoka 10y ago

What about the risk of relying on a 3rd party platform? How to de-risk that?

nercht12 10y ago
Maybe... [1] The platform is new, untested. [2] The platform is tested and out of beta. [3] The platform has a decent number of users. [4] The platform has a large userbase with good reviews. [5] The platform is a self-sustaining (usually paid) service with good reviews and tons of users.
- AznHisoka 10y ago
  I don't understand how those are ways to de-risk that risk. As an example, I am talking about a company like "Buffer" or Twitter developers that rely on the Twitter API for their startup.
  - nercht12 10y ago
    The original comment was ambiguous, so I just treated it as "picking a 3rd party platform" and graded based on reliability of future existence. A number of platforms go down for various reasons (esp. freemium-based). Don't you want a platform that is mostly guaranteed to stick around while you use it?
lpolovets 10y ago
(I'm the post's author.) A few ideas: 1) Integrate w/multiple platforms if that's an option, so that you're not dependent on a single platform. E.g. if you are integrated with 10 messaging platforms it's better than being tied 100% to WeChat. 2) If you're using the platform for distribution or infrastructure rather than something like data or social networks, then you can gradually work on building infrastructure in-house or on looking for other distribution channels. 3) Offer something to the platform that they value so that they don't have an incentive to limit your usage. For example, maybe you can data sources that let you provide valuable analytics and insights to the platform when combined with the data and users you get from them.

greghendershott 10y ago

Great way to think about this. Also -- although maybe too obvious to point out -- as you progress through these stages: - You appeal to different kinds of investors. You may gain financing options (~= the old joke/truth that "banks are happiest to loan you money if you don't really need it"). - You need somewhat different skills from people (especially yourself!). Likewise you might be more attractive to different kinds of candidates. - Eventually there's a whole other set of risks, as you evolve into a bigger, more mature company with high organizational entropy. :)

throwaway_xx9 10y ago

This is a very useful checklist for technical founders to: 1) evaluate potential "business co-founders", most of whom are losers 2) evaluate if they're on track monthly, and fire their loser non-technical co-founders if they can't score 4's and 5's. Just write it into the partnership agreement.

danieltillett 10y ago

This is a rather nice list from Leo, but it seems to be focused on the “lean” model of building a MVP and iterating until you get product-market fit. How do you de-risk opportunities where you can’t build an MVP and you have to invest years in development before you have a product you can show the market?