The 7 Practices That Can Minimize Startup Risk
When we speak of startup risk, we mainly refer to risk of failure. It is the consequence of failing to meet financial goals, growth expectations and needed demand to justify the risk of quitting a job, spending less time with family and friends and most importantly what we thought we could accomplish with our ideas, planning and execution. Unlike the common diversification investment strategy that we have been taught to follow, building several startups at once is likely to increase rather than minimize risk of failure. This is due to the time, money and energy needed just to get one startup off the ground. Building many startups at once is not the way to go. However, just like any financial investment where one can hedge the risk through different techniques and practices, hedging startup risk is also possible. Here are 7 practices that can significantly minimize startup risk.
Leave the biggest expenses for last
Traditionally, the steps that entrepreneurs take to build a startup go from prototype to raising funds, building a team then validating the market. The problem with this process is that the riskiest and most time-consuming activities come first. The chances of entrepreneurs receiving funding with just a porotype are near zero. If less than 10 percent of startups are funded, the odds are even lower for idea-only startups in such a competitive space. Furthermore, building an A team with just an idea or prototype is another big challenge that the founders have to face given the countless options that talents have.
Instead, when entrepreneurs focus on validating the market first, creating the prototype next, then building an A team to increase startup value, since one of the most valuable assets in an early stage startup is the team behind it, then taking all this to raise funds, chances are the startup will get funded quicker under a customer centric foundation, one that puts customer needs in front of the priority line. The flip side of the traditional startup development approach significantly reduces risk of failure since the biggest expenses and most time-consuming activities are made and done in response to customer demand.
Selling first, building next
How can we validate the market without a product or even a prototype? the short answer is by pre-selling. The longer answer is by maximizing customer understanding and non-scalably validating customer needs by selling a promise and performing the service by leveraging existing resources. This simply means customer interaction followed by discounted offers followed by serving customers manually until demand justifies product development and funding. The second fastest company to ever reach a billion-dollar valuation, Groupon, started with a Wordpress blog and by manually distributing PDF files with merchant vouchers.
Interview and build a relationship with one hundred potential buyers. If two weeks later you email them an irresistible pre-launch offer but no one buys or takes a minute or two to create an account, congratulate yourself; you saved months and thousands of dollars in product development. Make the necessary changes in the solution or business model then do it again. Proceed when people are willing to pull money out of their pockets, even if it’s just a dollar or two.
Alignment between concept and skill set
Time is money but ultimately it’s one of the variables we can control. Startup expenses (initial investment and working capital) are significantly reduced when the entrepreneur is equipped to perform the required tasks that take the startup from an idea to a fundable company, namely code and promote. With these two skill sets, entrepreneurs can perform the different customer understanding and development activities while having the necessary skills to code, iterate and release fast. With this, the initial expenses for starting a startup can be significantly minimized.
Working with complementary skills
The venture capital firm First Round Capital found that startup teams with more than one founder significantly outperformed solo teams by 163 percent. Furthermore, startup valuation for solo founders is 25 percent lower. The logic behind the benefit of the group is clear. Regardless of whether entrepreneurs’ set of skills are aligned with the concept or not, working with complementary skills is imperative for output maximization and more specifically in our context, risk sharing and minimization.
Focusing on what sells
Jason Fried founder of Basecamp is one of the best examples to follow in this regard. Basecamp was an offspring of a design agency that Fried and his co-founder started in the nineties. After evaluating company performance per product offered, they decided to focus their attention entirely on what sells. In their case, it was Basecamp.
With a big vision can come a lot of trouble. We tend to think big, in fact, too big too soon. We tend to look for the expansion and the hockey stick kind of growth that we risk of overlooking what deserves our full attention even if it is as little as one single feature or line of product. This can’t be more emphasized for risk minimization. Finding and focusing on the cash cow is key.
Keeping a job until pre-set goals are met
What will it take for you to go all in? What’s the magic number? set it, stick it on the wall and plan for it. Is it $2500 in monthly revenue? 500 active users? knowing the magic number is imperative. It becomes a benchmark that entrepreneurs can not only build a strategy around but also know when they get there. Set realistic, challenging and yet achievable goals that truly justify quitting a job or going part time. Your goals are your biggest motivators.
Building a list of mentors
According to MicroMentor, mentored entrepreneurs are 42 percent more likely to execute on their ideas and increase revenue by 83 percent as compared to 29 and 74 percent respectively for non-mentored entrepreneurs. When it comes to making strategic decisions, the best way to minimize risk is by hearing from those who have gone through a similar situation. At 12, Steve Jobs called Bill Hewlett, CEO of HP back then to ask for some parts that would allow him to build a frequency counter. Steve got the parts and a summer job. He reflects on his experience, “most people never ask, and sometimes that’s what separates the people that do things from the people that just dream about them.”
With risk at its lowest, it is time to build value and be rewarded for it. If it was easy, everyone would have done it. “I am now convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance,” says Steve Jobs.
If you liked the article, you’re going to like being part of our growing group of aspiring entrepreneurs here.
This is Abdo Riani, startup founder, mentor and research scholar.