Want to Add To Your Startup’s Value? Start by Subtracting Risk

Here is the golden rule of startups:  Value goes up, as risk of failure goes down.  As a result, one of the primary goals of founding teams should be removing risk from a new venture.

There are lots of flavors of risk when it comes to startups – and they vary from industry to industry.  Some sectors (such as healthcare and financial services) are fraught with regulatory risk.  Others must deal with risks around intellectual property, taxes and duties, environmental issues and more.  There are a few risk varieties however, that are nearly universal for startups in any industry.

Adoption Risk

Simply stated – this is the risk that customers won’t buy your finished product; and we can’t think of a business in which failure in this category is not a complete company-killer.

More often than not, encountering this problem is related to a lack of properly understanding customer needs, the competitive landscape and market dynamics.  Creating a beautiful product or service that nobody wants to buy is not a “business”, thus it is the job of early-stage companies to quickly get out and prove to themselves and investors that there is indeed a market of willing customers ready to buy (literally) their value proposition.

We can make great strides in removing adoption risk from our business by (wait for it…) talking to our potential customers! The earlier we do this in the business-building process the better.  As mentioned in earlier posts there are some key assumptions we all make about our customers when we start a new company and its incumbent upon founders to get out and test these assumptionswith real customers – as soon as possible.

Removing adoption risk by getting out in front of customers and experts and talking through their pain, and learning about the competition and market dynamics is one of the fastest and cheapest activities we can do to remove risk from our startup – all the more reason to do it first!

Product Risk

This is pretty much the opposite reciprocal of adoption risk.  What good is a hungry market full of early-adopters if you can’t deliver them a decent and desirable product to use. The key questions here are things like: “Can it be made?”(i.e. is it feasible), and at minimum, “Does it adequately kill the customer’s pain or create a worthy gain (i.e. is it desirable)”.

These are the types of risk that can be mitigated significantly by the use of prototyping.

Testing desirability is Job 1 in this category.  Like adoption risk – it tends to be fast and inexpensive to arrive at high-level answers to questions about adoption.  You might not get all of the information you need with a low-fidelity prototype, but you will certainly get a long way in understanding if a customer will buy the finished product – even if they need to squint their eyes a bit to imagine what the final version might look/behave like in the wild.  The key here is to develop a prototype with just enough detail to gain clarity of whatever question you need answered – and no more.  (More will be written about this topic in future blog posts)

Feasibility is a different story and often a bit harder to test.   The basic idea is that in order to be feasible, a product can’t be based on magic at its core. Cold fusion is great – and no doubt there is a market for it – but is it possible to actually deliver its value in a product?

Feasibility can be validated by speaking with subject matter and technical experts early on in the development of your business.  At worst, an early conversation about technical feasibility might let you know what constraints you should keep in mind as you go out in the world to test desirability of a possible offer.

On the flip side, whale staplers are totally a totally feasible product to deliver on, but are they desirable to a large enough segment to create a high-growth business?

This question brings is to…

Business Viability Risk

In a nutshell, a business’ viability is a measure of whether or not the venture can make money.  As we all recognize these days, “viability” is no longer a synonym for profitability or revenue. In some cases all it takes for a business to be viable is attracting a critical mass users to its platform (see Instragram) or achieving proof-of-concept for its technology so that it can be acquired by a strategic buyer (as is the case with many of medical technology companies).

Today, there are many business are “built to sell” and not “built to grow”.  We will not argue in favor of one model over another, but regardless of the model and metric one uses to assess viability, it is very likely that that some of the core assumptions underlying the business model can be tested early and cheaply!

If you are starting a business that is built to sell, get out and learn about the metrics and proof points that drive desirability in your chosen sector.  Is it the number of eyeballs on your website or app, your revenue, number of repeat users, profit, achieving technical milestones, a certain regulatory approval? Learning which of these create compelling value for your ultimate customer is something that is possible to learn as early as the other elements of desirability mentioned above.

If you are starting a company that is built to grow, evaluating the strength of your business model should quickly follow your tests of desirability and feasibility (often its hard to evaluate “viability” until you know exactly what you are building and for whom). Viability should exist at the “unit level” as well as at scale.

Tools you can you to test viability range from conversations with experts to the good-old excel model.  The latter is a great tool with which to run  “if, then” scenarios.  Don’t simply use your pro forma and cash flow statement to highlight what the future for your successful company might look like, use them test different scenarios and sensitivities related to your business model.  Think about it like a financial simulator.  The more honest you are about your inputs in these simulations the more valuable your outputs will be in helping you asses viability risk.

Execution Risk

Finally we come to execution risk. It is exactly what it sounds like – can you and your team actually deliver?  This one is the most difficult to “test”, and is more something that needs to be demonstrated through action.

One way to mitigate execution risk is to have people on your team that are experienced operators with a track record of accomplishment and “getting stuff done”.  Ideally they will have done this in the context of another growth business, but a demonstrated track record at a larger organization within the domain is a close-second. Having an experienced team will instill confidence in outsider go along way in alleviating many of the typical concerns that investors will have about a startup’s ability to realize its business model.

Though tricky to test, it is possible (and recommended) to speak to potential investors about the gaps they may see in your management team and what execution-proof-points they would require before making an investment.  This will at least give you some guidance on the gaps that may exist, and investors may even provide recommendations and connections to people that can help you fill them.  Worst-case scenario – its good to be aware of the market’s concerns, and have thoughts prepared to address them when they come-up during sales and investment presentations.

So as you can tell – there is a common theme forming on this blog.  Get out and test ideas in the wild!  The value of your business and your limited time depend on it!