Different types of risk

The idea that founders take on “risk” is a misleading generalization. It is far more informative to separate the specific types of risks that founders assume, including:

- Financing risk: You can’t raise money at various stages because you haven’t hit accretive milestones or your space isn’t appealing to investors.

- Product risk: You can’t translate your concept into a working and compelling product.

- Technology risk: You can’t build a good enough or, if necessary, breakthrough technology.

- Business development risk: You can’t get deals with other companies that you depend on to build or distribute your product.

- Market risk: Customers or users won’t want your product.

Timing risk: You are too early or too late to the market.

- Margin risk: You build something people want but that you can’t defend, and therefore competitors will squeeze your margins.

At the early stage, the main way to mitigate these risks is to recruit great people as cofounders or early employees. You shouldn’t recruit people that will give you a high likelihood of reducing these risks. You should recruit people that give you an unfair advantage. You should try to win the game before it starts.

Startups are hard, and risky. But if you lump all the risks together, you are playing the lottery. Talented entrepreneurs identify specific risks and do everything they can to overcome them.

36 thoughts on “Different types of risk

  1. Hong Quan says:

    By that logic, the number one risk that Founders face is

    8. Recruiting Risk: the inability to build a strong team.

  2. “You shouldn’t recruit people that will give you a high likelihood of mitigating these risks. ”

    “Great entrepreneurs identify specific risks and do everything they can to mitigate them.”

    Seems a bit contradictory. Perhaps word choice not quite right?

    Regardless, I very much agree with this:

    “You should recruit people that give you an “unfair” advantage. You should try to win the game before it starts.”

    Whereas you might feel guilty at getting the two years older captain of the soccer team to play on your kickball team in grade school, as far as startups go, you’d better shoot that high. 

  3. You’d say that inability to build a strong team trumps inability to correctly identify correct product, find market fit, and time it correctly? Seems strong team follows that risk being met, no?

  4. I must have miswritten this if it is unclear. I think about it as (in order): 1) have idea, 2) identify risks, 3) build team to give you an unfair advantage overcoming those risks.

  5. Silverborn says:

    So, learning moment for me….”
    1) have idea, 2) identify risks, 3) build team to give you an unfair advantage overcoming those risks.”  Seems a key skill is learning to identify which of the risks to mitigate first as it relates to your idea. Correct?

  6. I tried to make it clear that it was #1 at the end but perhaps the post wasn’t clear on that. Also the list wasn’t meant to be ranked.

  7. Silverborn says:

    BTW, great list of risks.  A lot of people, myself included, think first in terms of opportunity. It’s important to look at the other side of the coin as well.

  8. First being financing? Even financing has to be broken into seed, Series A etc which are all very different. And of course financing is only one of many risks.

  9. Yep, that makes sense. The specific piece I’m curious about is how far you’re thinking with regards to building team. 

    For instance, someone without your experience could read that and think “1. think of idea 2. think about biggest hurdles 3. hire 10 people that are good at those things”

    I’ve seen/been a part of that happening. 

    Whereas I will forever approach it as: 1. Formulate idea. 2. Test and verify largest risks. 3. Partner or hire minimum amount of people that can handle those challenges, and the next likely batch after they are done.

    I’m really not trying to turn this into a stupidly semantic argument. Just looking at what you’ve written and agreeing with it as I’d view it now, years into doing startups, vs what I and others have done in the past which is often well intentioned but misguided.

  10. Simon Murtha Smith says:

    I’ve always generally considered “founder’s risk” to be a personal financial risk, e.g. going without a salary in advance of a seed round or fronting money to build a prototype. After the seed round, the other risks are company risks, which are generally the responsibility of the founders, but aren’t direct risks.

  11. I think I agree with your formulation. If what I wrote comes across as the alternative formulation, I seriously miswrote this post. Maybe I am bringing too many of my own assumptions into this post. ???

  12. I tend to think all the risks are founder risks. If you raise money and then fail without having thought through the next risks, that seems irresponsible and will hurt you later.

  13. I definitely don’t read it as an alternative formulation. More that there is room for interpretations of it to range from how I said it to “Chris says think of idea and scale out team!” which to an inexperienced entrepreneur is often a really bad idea (I’m sure you’ve seen the 70% of startups fail due to premature scaling). 

    I would imagine that what you’ve written here is correct and makes sense to many who’ve done it a few times. If you’re not in that group, I think it wouldn’t be too hard to look at all the very real risks you’ve laid out and think “I know, the solution is more smart people”. 

    I do personally think that a great founder or two should be capable of handling many of those risks. I’d imagine whatever you do next, you’ll be the driving force behind handling at least 50% of them (in the early stages)?

  14. I love Disquq, but this formatting is really no fun, and the constant refreshing to catch the next post is frustrating. It’s one of the reasons I’ve started hacking on http://280.io
    Seems engaging on twitter isn’t the only hard env out there. 

  15. Yeah, for sure, didn’t mean to suggest to hire a bunch of people prematurely. If anything I fall in the extreme “hire slowly” camp. What I was thinking is a very well-targeted group of a few early employees and maybe investors who could help reduce key risks.

  16. Yes, and I want to make sure I’mclear in mythoughts–you definitelydidn’t suggesthiring prematurely. I think thetrick is that you arebetterpositioned than most to knowwhat is or is notpremature.

    Also,very much agree on early investorsand/or advisorsprovidinga huge amount of knowledge and help. Hard to be “early” in seeking that out. 

  17. Simon Murtha Smith says:

    For sure, irresponsible risk taking is going to hurt a founder (and those around them) in many ways.

  18. Product risk is whether you can build a nice product. It is surprising how often this trips up startups. Market risk = once you build it, whether there is demand for it.

  19. I think this is easy to misunderstand. Some entrepreneurs think, “ok, so I need to hire the big guns,” whether it is that marketing/bizdev person with tons of relationships in the industry or that head of engineering from bigco X.

    From what I’ve seen, those people excite investors (can help solve financing risk) but often come with a culture clash and rarely provide the results and impact of someone really hungry who is good but psyched to punch above their weight class.

  20. I think you forgot to mention “reputation bias risk”.  Peculiar to African startups

    It occurs when you are fighting an uphill battle where some people brand a certain nation or region as bad. Can a payments/collections service or product from Nigeria ever scale globally? I doubt it.

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