Defining Market vs. Execution Risk — Which Is More Important & Why?

The topic of market vs. execution risk when it comes to startups is not a new one. Nonetheless, it is our view that a lot of entrepreneurs and a good number of investors today still do not fully grasp the inherent characteristics and realities of each type of risk. We’ll look to break things down in an easily digestible, concise format + touch on why execution risk is where we look to focus as we think about our efforts in Japan & Asia.

Let’s start with market risk.

The core question an entrepreneur or investor generally asks when evaluating an opportunity defined by market risk is: “Can this business exist?”. Forget about market sizing, team capabilities, capital efficiency for now…all we want to initially determine is whether we feel the envisioned business can ultimately develop a sustainable offering that a particular audience will look to use, consume or leverage.

Broadly speaking, market risk opportunities usually fall within the realm of consumer plays. The business is likely to be something entirely new with very few, if any, existing substitutes. You will be the first and you will create & define the market (if the market ever truly materializes). These opportunities are truly so-called lottery tickets. They are a swing for the fence, with a very high failure rate and are often pursued by entrepreneurs full of passion, energy and time with very little to lose.

What’s really interesting about market risk opportunities, however, is that the early odds of success are effectively equal for all teams executing in the space (assuming there is more than one, which in some cases, there is not early on). Take Facebook as an example. Facebook was not the first social network by any means, yet they were the ones who prevailed — as an investor, you could argue it was a total crap-shoot in 2004 in terms of trying to assess who had the best odds to take the crown. Few would have likely said Facebook. Another good example of a concept defined by market risk early on is Snap. When Snap was born, there was really no equivalent — Snap created an entirely new way to communicate.

You will commonly find inexperienced entrepreneurs dreaming up business concepts defined by market risk. An experienced team of start up professionals frankly has little, if any, advantage in attacking such an opportunity relative to a group of 25 year olds barely out of college. Proficiency in capital raising, engineering, hiring, and organizational structuring just isn’t really required to get these types of businesses showing legitimate traction early on — Facebook was initially hacked together between classes by a bunch of college kids to better connect with their peers, if you will, while Snap was arguably a fun side project among a small group of fraternity brothers looking for a new way to communicate with the opposite sex. These are not necessarily things that a 40 year old successful technology operator will dream up, let alone commit to building.

Now, on to execution risk.

As you are probably already thinking, opportunities defined by execution risk more often fall in the realm of the B2B world. Experienced operators and proven entrepreneurs are generally the ones building these businesses as success is far more influenced by the founding team’s industry know-how, relevant connections, developed skills and fluency in executing. These teams are often focused on an existing market where defined pain-points can be spotted and attacked by leveraging new technology, new distribution models, or new workflows, among other “tweaks”. These companies usually end up redefining a market space and providing value to users by improving the status quo by a significant multiple in some capacity.

The 40 year old experienced former product manager at Google will in most cases have better odds in beating out a 25 year old ex-Stripe engineer 3 years out of college in building an opportunity defined by execution risk.

Now, to tie all of this back to what we are looking to do in Japan specifically.

As we’ll look to further elaborate upon over the coming months, our aim in Japan is to build an enduring, entrepreneurial, operationally focused investment group that builds a growing portfolio of capital efficient technology enabled businesses. We are in the game of high-probability singles and doubles, not fingers-crossed home-runs and grand-slams. We have nothing against the home-run business concepts and investment model — it needs to exist and we have all the respect in the world for entrepreneurs and investors taking those swings and building world-changing companies. Our focus, however, is on providing valuable products & services that address clear gaps in niche markets for defined populations and doing so in a way where we can control our own destiny (i.e. be capital efficient), increase the probability of success (i.e. focus on smaller markets with few competitors, at least initially — think Peter Thiel’s thoughts re: monopolies: “you want to go after small markets”), and generate the internal resources & muscles to have the flexibility to reinvest (& potentially “exit”) where, how and when we see fit as markets & opportunities evolve.

Considering such, it is a no-brainer for us to focus exclusively on opportunities defined by execution risk. We will seek to tilt the odds in our favor as we build a growing portfolio of cash generative, enduring, valuable businesses initially supported by a team of experienced operators, engineers, salespeople, marketers and other professionals, alongside a growing roster of industry, government and other relevant contacts in Japan. This close-knit network of stakeholders, all intrinsically invested in the portfolio’s growth & success, will support the development of “un-sexy”, capital efficient business concepts, specifically nuanced for Japan, though broadly proven to be successful by global peers.

We’ve profiled a couple of such businesses already and we’ll look to continue to do so. As mentioned, we’ll also provide increasing clarity into our evolving vision we are setting out to build. We always welcome others to reach out, help out and / or point out where we are blind or faulty, so please don’t hesitate to touch base via Twitter.

Special thanks to Justin Kan for inspiring this post & helping to seed the thoughts laid out above!

Building & Investing In Capital Efficient Companies in Japan & Asia

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