cdixon blog

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.