
How to De-Risk a Startup - lpolovets
https://codingvc.com/how-to-de-risk-a-startup/
======
mapgrep
I completely nodded along with this — as advice for a normal, sustainable
business. But this is not what startups do.

The whole point of a "startup" as conceived in Silicon Valley and as desired
by VCs is that risk is HIGH. Let's set aside whether this is good or bad (I
would argue the drive for "100x or bust" returns is corrosive, but the word
"startup" is tied to that kind of risk/return model right now in the commonly
accepted definition).

So let's go through his principles and show what low risk means for
hypothetical business idea "XYZ":

-Founder has proven track record doing XYZ

-Lots of potential customers WANT to do XYZ

-Startup is making many hard (cash, full price) sales of XYZ

-XYZ is fully functioning and "amazing" and customers are loyal

-Prices are high

-Incumbents are successful

etc etc

When you have these kinds of attributes you have a nice business in an
established sector. By definition. Lots of customers, incumbents, and sales
means the XYZ idea has been well exploited. Great.

The whole point of a startup is to make a bold bet on something not entirely
proven and safe. That doesn't mean take DUMB risks, but this piece actually
says you should try to get your business to the sort of low risk situations I
list above.

But if you have an actually good idea you WANT to go into an area with few
incumbents and where potential customers are skeptical and where you have no
proven track record — because if something is genuinely NEW then guess what -
there are no incumbents because no one is doing it yet - many of the customers
don't know they need it because it doesn't exist yet - and you have no
experience in it because no one on the planet has done it.

I mean you can definitely argue that many startups today take excessive risks
and don't take basic steps to minimize risks. Absolutely. And you can also
argue that the world needs more sustainable practical businesses and fewer
100x startup attempts. I personally agree with that. But a substantial degree
of risk and of lack of "proof" for a business idea is what makes a startup a
startup. So if you want to de-risk a startup, find the sort of business that
will qualify you for a bank loan. Maybe a nice plumbing enterprise :-)

~~~
lpolovets
(I'm the post's author)

> The whole point of a startup is to make a bold bet on something not entirely
> proven and safe. That doesn't mean take DUMB risks, but this piece actually
> says you should try to get your business to the sort of low risk situations
> I list above.

I agree with you that startups are often making bold, unproven bets. The post
was trying to say that yes, you're starting somewhere risky, but how can you
de-risk your assumptions? How can you start proving the unproven? The proof
might be a 5-10 year process, but it's important. The goal is not to reduce
risk for safety's sake, but to validate that your end goals are reachable.

For example, if you came up with Snapchat 10 years ago, there would be many
risks, including "do people want ephemeral messaging?" and "can an engineer
build this product?" I would argue that the first risk is much more important
to validate, but a lot of founders -- especially tech founders -- would focus
on the 2nd risk. Using terminology from the blog post, the first risk starts
out at a 1, and the second starts out at a 4, but too many people would focus
on moving the 4 to a 5 instead of moving the 1 to a 3. A 3 still isn't a home
run, but at least you know you're on the right track.

~~~
edoceo
The risk is rarely CAN it be built. I think your point is to demonstrate it
SHOULD be built by following de-risk steps.

Lean, right?

~~~
lpolovets
Yep!

------
sonink
The real value in this post is maybe how the VC thinks about risk rather than
a how a founder should. The need for structure in something as ephemeral as
startup risk definitely stands out.

~~~
tommynicholas
I think that value is pretty big actually, it's something founders need to be
deeply aware of. I wrote about one instance where this comes up a lot here -
why raising money pre-launch is often easier than post-launch
[https://medium.com/@tommyrva/why-is-raising-your-seed-
round-...](https://medium.com/@tommyrva/why-is-raising-your-seed-round-pre-
launch-often-easier-c55364838ca1)

~~~
lpolovets
Great post. I think part of de-risking is that sometimes you find out your
assumptions don't hold. E.g. you thought there was a $5b opportunity, but
after launching you can quickly see that you were wrong. In that respect, it's
much better to fundraise before you launch because you wouldn't be able to
raise post-launch, but then you still have to figure out what to do after you
have money but find out your idea isn't great.

~~~
tommynicholas
100% true! I'll admit, I intentionally avoided addressing that in the post, I
wanted to focus on the tactics rather than the larger question the efficacy of
these tactics raise.

There's a counter-argument even I would make which is: if it's true that it's
easier to raise pre-launch for these reasons, does that mean you should? Not
sure.

------
tschellenbach
Many of the most successful startups started building a new product in a
market of unknown size. It often seemed small at the time. What you call high
market risk here, is actually (sometimes) the best situation in terms of
investment returns.

It's tough to be a VC.

------
jacquesm
That's a really nice structured approach to what risk is and how to classify
it but it doesn't actually address how to get rid of any specific risk and
that is what is required to actually get rid of the risk, the secret is in
between those line-items listing various stages of risk.

And quite a few existential risks in the start-up world are not so easily
classified to begin with, for instance, founder conflict is a huge risk and
yet didn't even make the list of examples here.

Still, very useful post but mostly from an analysis point of view, a 'where
are we and where do we want to go' rather than 'how are we going to get
there'.

------
tomblomfield
I've definitely met VCs who use this kind of mental model.

I'd add a couple more:

Technology Risk. Does what you're building require advances in technology that
don't yet exist?

Regulatory or Legal Risk. Do you need specific licences to launch your
product? How far through this process are you?

------
greghendershott
Great way to think about this.

Also -- although maybe too obvious to point out -- as you progress through
these stages:

\- You appeal to different kinds of investors. You may gain financing options
(~= the old joke/truth that "banks are happiest to loan you money if you don't
really need it").

\- You need somewhat different skills from people (especially yourself!).
Likewise you might be more attractive to different kinds of candidates.

\- Eventually there's a whole other set of risks, as you evolve into a bigger,
more mature company with high organizational entropy. :)

------
20andup
I never seen something like before. It's very good way of measuring
subjectively perceived risk. I am definitely using.

------
neogodless
I believe this should just be re-titled "how to identify risks in your
startup." Because often there are very real risks - and you should _not_ "de-
risk" them. You should just be aware of what they are, and make educated
decisions around those risks.

~~~
danieltillett
If you can easily de-risk then you should. Of course with most of the bad
risks it is impossible to de-risk because nobody know the answer.

------
AznHisoka
What about the risk of relying on a 3rd party platform? How to de-risk that?

~~~
nercht12
Maybe... [1] The platform is new, untested. [2] The platform is tested and out
of beta. [3] The platform has a decent number of users. [4] The platform has a
large userbase with good reviews. [5] The platform is a self-sustaining
(usually paid) service with good reviews and tons of users.

~~~
AznHisoka
I don't understand how those are ways to de-risk that risk.

As an example, I am talking about a company like "Buffer" or Twitter
developers that rely on the Twitter API for their startup.

~~~
nercht12
The original comment was ambiguous, so I just treated it as "picking a 3rd
party platform" and graded based on reliability of future existence. A number
of platforms go down for various reasons (esp. freemium-based). Don't you want
a platform that is mostly guaranteed to stick around while you use it?

------
danieltillett
This is a rather nice list from Leo, but it seems to be focused on the “lean”
model of building a MVP and iterating until you get product-market fit. How do
you de-risk opportunities where you can’t build an MVP and you have to invest
years in development before you have a product you can show the market?

------
graycat
Basically the whole post has one theme: The more you have already done on the
project, the less risk. That's not wrong, but it's weak because there is a
much better way.

E.g., as a teenager, I looked around the garage and saw an old lawn mower
engine, other raw materials, and tools and built a go cart. I drove it around
the neighborhood. So, according to the OP, I was well on the way, low risk, to
beating Ford? Nope!

What was missing for beating Ford? Sure, some larger planning that, to beat
Ford, could, should have been done at the beginning. Nearly all of that
planning should have been well before cutting any metal and well before any of
the steps in the OP.

So, net, what the OP is missing is any reasonable conception of good planning.

It is as if the OP believes that any planning is just so much hot air, pie in
the sky, BS, with a dime still won't cover a 10 cent cup of coffee. I'd say
that following the steps of _less risk_ in the OP without good, initial
planning is hot air, ....

Can good planning work? Yup. Maybe what the OP and Susa Ventures has in mind
doesn't use much in planning, but Boeing, Lockheed, Intel, ... make good use
of planning.

E.g., Lockheed planned the SR-71 as in

[http://iliketowastemytime.com/sites/default/files/sr71_black...](http://iliketowastemytime.com/sites/default/files/sr71_blackbird_leaking_fuel_cell19.jpg)

The project was approved basically with all the work just on paper, that is,
with none of the risk reducing project steps in the OP. And the project was
fully successful -- Mach 3 speed, 80,000 feet altitude, 2000 mile range
without refuling. Flew over hostile airspace taking pictures for years and
never got shot down. Why not shot down? Planning: Or, you are on the ground
and an SR-71 is about to fly over you and take your picture, again, Mach 3,
80,000 feet. So, how do you get an airplane or missile up there in time? Well,
in simple terms, with what was available then, you couldn't. So, you didn't,
and the SR-71 never got shot down. And this situation was clear just from the
planning on paper before any metal cutting.

Really, what was important for having a low risk project was the planning on
paper, before any metal cutting, and not the progress steps as in the OP.

And for serious projects, this situation on planning is quite general for,
say, large dams, long bridges, tall buildings, deep tunnels, huge ships and
airplanes, etc. Nearly all the important work that reduces risk is in the
initial planing and engineering essentially all just on paper. The OP totally
neglects this point.

War story example. Early in my career, I was writing applied math software in
a group at the JHU/APL, that is, Johns Hopkins University Applied Phsics Lab
in Maryland. The group was doing the orbit determination software for the
Navy's version of GPS, right, which was working several years before GPS by
the USAF. Yes, the project was for the navigation needed by the US Navy
missile firing submarines. Well, daily have to update the orbits of the
satellites; so, there is some good software there.

Actually in that group I was working on passive sonar software (another
interest of the US Navy), but I did learn the stories of how the Navy got
their version of GPS. It was basically a back of the envelope thing-y by some
good physics people. That done, there wasn't much risk. Then no doubt there
was a full project proposal that was peer-reviewed and reviewed otherwise.
Now, presto, bingo, with just that paper, basically have a low risk project
with the rest, including the rockets to launch the satellites, the software,
the satellites themselves, etc. all low risk. But according to the OP, before
the satellites and rockets are built, flown, etc., have high risk project.
Nope. And according to the OP, since no one had yet done a GPS, it was a high
risk project. Nope.

Basically the OP wants to have full confidence in a project essentially only
when it is done. Okay, but that's no help in risk removal early on for either
the project people or any investor. In fact, with good planning, even just on
paper, can remove nearly all the risk just at the beginning.

In the commercial world, also need to have happy users/customers; how to plan
for that? Pick a problem where the first good or a much better solution is a
must have for enough users/customers to have a low risk project.

The core problem of the OP is that they don't know how to evaluate project
plans just on paper and, that way, get low risk projects. Thankfully for US
national security, the US DoD very much does know how to do that, that is,
work with plans on paper and, then, have the rest low risk. So do Boeing,
Intel, etc.

For more, the OP seems to be from a group, Susa, that believes that in
_information technology_ the _technology_ is essentially just routine software
development and anything else about technology or planning is ignored. Well,
there was some software in the GPS project, but there was also a lot more that
made the project very valuable; the software part alone was basically low
risk; and with the good, initial planning just on paper, the rest of the
project was low risk. Then, the OP is ignoring projects that would be "very
valuable" because that value is not just in routine software.

Then, with some irony, the OP wants to invest in projects that have little
promise of much value even when the software is done, and that's not low risk
investing!

Indeed, as in

[http://www.avc.com/a_vc/2013/02/venture-capital-
returns.html...](http://www.avc.com/a_vc/2013/02/venture-capital-
returns.html#disqus_thread)

and

[http://www.kauffman.org/newsroom/2012/07/institutional-
limit...](http://www.kauffman.org/newsroom/2012/07/institutional-limited-
partners-must-accept-blame-for-poor-longterm-returns-from-venture-capital-
says-new-kauffman-report)

the average ROI of Silicon Valley information technology investing is low. It
does appear that what the OP describes is basically how such investors look at
projects. Thankfully for US national security, tall buildings, huge airplanes,
etc., such investors are not involved.

~~~
CalChris
From what I've read, Transit got its start at John Hopkins. First, they
verified that there was a satellite up there with some receivers they had
lying around. Then they predicted where it would be with some math. Then
someone what if'd whether they could reverse that problem with some brain
cells.

[http://www.derekchristensen.com/tracking-
sputnick/](http://www.derekchristensen.com/tracking-sputnick/)

While I agree that planning is important, very important, it can become
analysis paralysis quickly. Not the case with everything, but sometimes you
just have to do it, _most especially if you can do it_. I'm reminded of
Feynmann's o-ring experiment.

[https://www.youtube.com/watch?v=6Rwcbsn19c0](https://www.youtube.com/watch?v=6Rwcbsn19c0)

With your go kart example, it would be a good idea to try that out before
tackling Ford. A VC might not invest in you just because you built a go kart.
But you would plan better if you succeeded and you might not invest more of
your time if you failed.

Acid tests have their worth.

~~~
graycat
The planning, including relevant applied math and physics, maybe some of it
original, have been the keys to astounding DoD and many other projects done at
low risk.

Like anything else, the planning can fail, but typically it is much cheaper
than cutting metal, digging big holes in the ground, launching rockets, etc.

And if the planning fails, then just stop there -- cost so small it often
won't be noticed. If the planning is successful, passes various reviews, etc.,
then are in line for some great results at low risk. In the commercial world,
that would also be high ROI.

------
the_watcher
The sales risk section is a bit off to me. It's possible for 5 to be true
without any of the other stages to have ever occurred. That said, perhaps
that's irrelevant.

~~~
derricgilling
Some interesting points. Sales risk seems very focused towards enterprise
sales, but I believe having a go-to-market strategy is more important than
just having the ability to hire experienced salespeople. Some products don't
even need sales people, but the channels, partner platforms, etc should be
identified. Does this product rely heavily on inbound leads, require SEO or
content generation, etc?

Also, certain risks inherently trump others for early stage startups. Moving
from a 3 to a 5 under Product/Market Fit is a much more ideal compared to
moving recruiting risk from 1 to 3 or team risk from 1 to 3. (After all, it's
kind of moot to hire full time employees for every area if you don't even have
good P/M fit)

~~~
the_watcher
Yea, I was mainly commenting that it seemed like you could just skip the first
4 levels with the right product, which was something the other categories
didn't seem to have the same characteristic.

------
dkural
This guy clearly does not understand investing or what it means to be a
founder. There are three things that matter, the rest is noise:

1) Is there a big market? 2) Is the founding team GREAT? 3) Don't invest too
late.

That's it. Invest in great people pursuing big opportunities. Trust & help
them to be smart enough to figure the rest out.

More categories would simply distract. Most VCs invest in ideas with
meaningless total addressable markets ALL the time. They limit their upside
even if everything goes perfectly. They invest in subpar teams with no real
product or design talent. Most VCs would do better sticking to above.

Chris Dixon said wrote a blog post, which I wholeheartedly agree, where a lot
of amazing innovation first looks like a toy. Many of the biggest companies
are created by a founder realizing new tech X can impact a lot of value-added
activities A,B,C before everybody else realizes the same thing. If the VC is
twiddling thumbs looking for external validation beyond the founder, by
definition they're missing the train.

Things are "obvious" only in hindsight. Let's take building messaging apps.
Everyone now says it was so obvious - but it wasn't to Google, Inc. They
wasted time building Google+ while founders were building WhatsApp, Instagram,
SnapChat, etc.

Containers are another example. Docker folks realized certain properties of
the linux kernel can be utilized to great effect to solve a meaningful
problem. Imagine the VC who waited another year to de-risk.

~~~
Drdrdrq
The OP's advice wasn't meant for VCs, it was for the founders. Their role is
very different and the advice looks sound to me. Or do you disagree with it
from founders' perspective?

~~~
dkural
I mean it from the founders perspective as well, as a founder myself.

