Risk and the Entrepreneur

“Don’t get into a spaceship with a madman. Hasn’t anybody ever told you that?” – Dr. Who

A startup is a temporary organization designed to validate a business model, to roughly quote Steve Blank.  Entrepreneurs seek out problems to solve, preferably problems that affect millions of people.  The biggest opportunities come from problems no one else has been able to solve, especially if they are really hard problems that cost a lot of time and money.

Here the thing; if you are playing in this space, it means you are trying to do something no one has done before.  There are no history, no data, and no trend charts.  There are no patterns and therefore, no prediction of the future can be calculated.  All the market research money can buy cannot predict even a 50% chance of success.  If you don’t believe that, look at how many new TV pilots fail… 65% over the last few years. (screenrant.com)

“Customers will tell you what they want but they won’t tell you what they’ll buy” (or watch on TV). – Chuck Witkowski

So now you come up with a new idea that’s going to change the world.  No one knows you and you haven’t done this before.  And, you need a lot of money you don’t have.  Plus there are statistics:  Only 2 out of 100 startups seeking funding will get it and of those, only 10% provide any substantial return on the investment.  50% of startups fail within 5 years.

Everyone will evaluate a startup, like any other business, in terms of risk, whether it’s calculated or perceived.  Your stakeholders will do it.  Your investors will do it.  Your new employees will do it.  Your spouse will do it.  Even your first customers (innovators and early adopters) are defined by their ability to take on risk.

Banks won’t touch a startup.  They typically require two years of financial statements that show statistically that you can generate enough profit to pay back the loan.  But for low capitalized businesses (no cash or hard assets) even this is not enough.  They usually require what’s called a personal guaranty, which means the founders will pay back the loan personally if the business fails.  Hence the saying:

“Banks only lend money when you don’t need it.”

Banks simply do not tolerate risk.  Investors on the other hand will tolerate some risk but they charge a hefty price, usually a relatively large portion of company equity.  Entrepreneurs are always surprised and usually offended to learn that an investor requires as much as 40-50% equity or more in return for a seed stage investment.  It’s the price they charge to offset your risk.

Here is the bottom line:  Anything in life carries risk, either known or unknown.  The difference is that entrepreneurs confront and embrace this risk while others blindly carry on oblivious to the fact they could loose their livelihood with no notice.

So how do you deal with risk?

“Entrepreneurs are no less risk averse than anyone else.  The difference is an entrepreneur identifies his or her risk and faces it head on.”

The entrepreneur’s job is to identify risks and craft a credible narrative around how you are going to manage them.  The story you tell others about your company must put at ease their innate sensitivity toward risk.  In every investor’s mind are the questions, “what about this?” or “what happens if…?”  If you can anticipate these questions in advance and bake into your narrative simple answers as a part of the story, you can begin to put at ease many concerns so that you can focus on the fundamentals of the business opportunity rather than dance around silly questions about market size or customer validation.

Better yet, confront the major elements of risk head on.  In future posts, we’ll discuss categories and frameworks to guide your thinking but for now, spend some time confronting the brutal facts about your business.  What are the things that are likely to kill you and what are you going to do about it?  Confronting the inevitability of risk in your business shows a focus on execution and a level of maturity in the CEO who has a plan to pull it off. You cannot eliminate risk.  The best you can hope for is to identify it and manage it.