As entrepreneurs, we accept risk. In fact, risk taking is the very thing that generates opportunity. If there was zero risk, there would be zero opportunity.

The paradox is that while we accept and need risk, we should do everything we can to eliminate it. In this post I’m going to talk about the value of risk, and how, as entrepreneurs, we can manage it to our benefit.

 

Why We Need Risk

There is a direct relationship between the amount of risk and the opportunity. The greater the risk, the greater the reward. You know the old saying, if it were easy, everyone would do it!

The goal is to solve a problem or fulfill a need that you see in a market. Because you are going into uncharted territory, there is risk. But the flip side is the reward.

Entrepreneurs are generally not risk-averse – we accept a certain amount of risk because we recognize the value in solving something that no one else has solved before, and the risk that goes along with that solution.

 

What Kills Startups

A recent study surveyed founders of failed startups to determine why they thought they failed. The top 12 reasons included, being outcompeted, regulatory or legal challenges, and a flawed business model. But the two top reasons cited were:

  1. Running out of money.
  2. There wasn’t a market need for the product.

While it’s undeniably true that running out of cash can kill a startup, I think that the number 1 and 2 reasons for failure are really two sides of the same coin. In other words, very often the reason startups run out of money was because there was no product / market fit!

The delusion that many founders are under is that if they just had a bit more money, they would have succeeded, when the reality is that no amount of money will fix a startup with a product on one wants to pay for.

Note the distinction between a product no one wants, and a product no one wants to pay for. There are many failed startups that had great product growth and users out the wazoo, but if no one will actually fork over their hard-earned cash, they are toast.

If you follow this blog, you might remember the startup that had posted a tale of woes where they had gone through 3 failed MVPs, and were about to pivot to the 4th, all in the hopes of finding a product that could gain traction. They had a lot of money – a huge runway, and a great team, but the products didn’t catch fire and they were struggling to understand how that could possibly be.

It's a classic example of how having too much money can actually be bad for a startup. The belief that building what they thought were great products over and over missed a critical step – product / market fit.

The converse is also true. If you have a great product / market fit, you can overcome a lot of challenges, including a small budget. We’ve all seen startups that bootstrapped themselves successfully with a small amount of cash, simply because they had a great product / market fit.

 

What You Can Control, and What You Can’t

In any business, there are things we can control and things we cannot. Sometimes, bad stuff just happens, and you couldn’t see it coming. Those include:

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Competitor enters the market, and you get crushed
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Regulations change
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There is a legal challenge you can’t defend
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Investor pulls out

That’s not a comprehensive list, but those are common problems that are generally beyond your control that can kick you in the teeth. Some of those things can be fatal to your business.

However, pretty much everything else that can kill a startup you do have control over, if not completely, then largely. Things you can control include:

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Talk to your customers to learn their pain points, needs, and wants
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Create a great Problem / Solution Fit & Product / Market Fit
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Validate your idea the right way with high resolution wireframes and prototypes
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Build an MVP that demonstrates your solution, further validating your product
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Creating a sustainable business model that is viable in the long run
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Building a great team

 

Using Design Thinking Principles to De-Risk Your Startup

When we consult with early-stage startups, one of the biggest problems we see is that they "fall in love with the solution, not the problem". It sounds cliched, but it really isn't. Founders that come in with "a great idea” but haven't tested or validated it in the right way, wind up building products that no one wants.

Founders should be doing everything they can to minimize risk, not introduce it. There are a lot of things they can't control, but what they can do is to validate our ideas properly to ensure they are building something someone actually wants.

For digital products, we do customer interviews (not surveys) to determine needs, wants and pain points - we fall in love with the problem. We build lightweight prototypes that allow us to simulate the full product to gauge user acceptance before we build the product. We learn from failure quickly, we iterate, and make sure that we know what has a high likelihood of success before we build an MVP!

VR Testing

Yes, startups run out of money and that will always be a challenge. But there are many very well-funded startups that didn't get traction, burned through enormous amounts of cash on teams, marketing, sales, and products, only to not get traction. They blame their failure on running out of money- if we just had 2 more million we would have made it! But the reality is, no amount of money is enough to throw at a product that no one wants to buy.

 

Summary

Risk is a natural part of the startup environment, and without it there won’t be a reward. However, we should also do everything we can to eliminate risk, and to mitigate risk when you can’t avoid it. Using Design Thinking we can reduce the risk of building expensive products that no one wants to buy.

 

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