Why Founders Should Take Even More Risk
Read time: 4 min
Behind every iconic company is a radical, risk-laden idea.
But as the startup ecosystem grows, we’ve seen a decreasing appetite for risk and an increased emphasis on predictability.
That's why founders and funds are returning to what's familiar, choosing to invest more time and money in Climate software than complex hardware.
Big mistake.
To build iconic companies, founders must take MORE risks, not less.
I fear the pendulum has swung too far in the wrong direction, stifling the creation of groundbreaking companies.
Today, I’m sharing a framework for all founders to evaluate startup risk.
Market Risk vs. Execution Risk
Market risk is the gamble that people may not want what you’re building.
Execution risk is the challenge of executing your idea better than the competition.
High-market risk ideas are often the best bet for first-time entrepreneurs.
They can avoid incumbents and competitors.
Experienced entrepreneurs, on the other hand, often take on more execution risk because they trust their ability to execute.
What are the Market Risks?
Product Risk: Do people want your product?
Is your founding insight addressing a clear pain point?
How big is the problem you’re solving?
Scale Risk: Is there a big enough market?
Avoid starting companies where the potential market is too small for venture-backed economics.
Competitive Risk: What is the competitive landscape?
Defensibility is key to a company’s value. Network effects are the best defense.
70% of tech market capitalization over the last 20+ years comes from companies with strong network effects.
Timing Risk: Are users ready for it?
Legal Risk: What is the regulatory environment?
Iconic companies often navigate regulatory hurdles. Uber tackled transport regulations, Airbnb faced housing authority issues, and YouTube dealt with copyright.
What are the Execution Risks?
Team Risk: Can you recruit world-class talent?
Are you located in a talent-rich ecosystem?
Can you attract top candidates for key roles?
Product Execution Risk: Can you build it?
Here is the truth about the Investors’ Perspective on Risk
Investors generally favor companies with high market risk but low execution risk.
Why?
Remember the key to winning in Venture Capital: ALWAYS Follow the Power Law!
VCs thrive on high-variance investments.
The Math?
An execution risk company might have a 30% chance of a $200M outcome…
A market risk company might have a 10% chance of a $1B+ outcome 💰🦄🎰
They bet big for the chance of huge outcomes.
Conclusion
One of the things that drew me to Silicon Valley 14 years ago was the spirit of pure innovation and risk-taking.
This spirit has attracted innovators and technical talent from all over the globe.
With its culture of bucking norms, trying the unproven, and pursuing innovation for its own sake, it was a magnet for people with radical ideas who were crazy enough to go all in.
Let's keep that spirit alive.
Embrace risk, innovate boldly, and build the iconic companies of tomorrow.
Oh, and while we're at it, let's innovate on alternative forms of growth...
It's time we busted the old economic model of perpetual economic growth...
But that's for another post 😉
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Stay frosty and embrace risk,
This is great. Will tweak our deck slightly.