3 Types of Start-up Risk: Market, Product & Execution Risk

I’ve been looking at a bunch of very (very!) early stage start-ups for the Capital Factory over the past two weeks. It’s interesting how most start-ups don’t consider their idea/start-up in terms of the three standard types of risk: market risk, product risk and execution risk. Taking the time to think through how to mitigate such risk over the course of a start-up’s life is critical because of the ever-evolving complexity between things a start-up can control and those it can not.  Of course, the other side of the risk “coin” is opportunity and potentially reward. As cliche as that sounds, it’s the truth, which of course is how all good cliches are born.

It’s always fun to google around and see how others have covered this topic; sometimes in similar ways and sometimes in very different ways. As with all these inherently subjective posts, this blog is based on my experience and my opinion.

Market Risk

Market risk is simply the risk (and therefore opportunity) of an idea within a particular market. It’s the obligation of the start-up to answer the question: “Why should my idea and my team exist in this market at this time?”

Very common things to talk about in this category of risk are “market entry strategy” and “market readiness” for a particular product or service. Market Risk assessment should take the “time-to-market” into consideration as well:  bringing a new semiconductor to market takes much longer than launching a bit of software or an iPhone app. What might happen in terms of competition, pricing, and market health by the time this product/service comes to this market?

Market risk, by definition, is one of the first types of risk that start-ups must consider as it represents the context for their product, team, and business in general.

Example

A contemporary example of “market risk” for a start-up would be a dependency on the shift of traditional advertising dollars to the digital realm, and in particular, ad dollars being disproportionately targeted at that start-up’s business.  Depending on how one counts, the traditional media (Viacom, News Corp, NBC-Universal, etc) and traditional advertising (Omnicom, WPP, Interpublic) industry is about a HALF TRILLION dollar industry.  That’s an enormous market and it is easy to see why hundreds of start-ups and hundreds of millions of dollars of investment are chasing opportunities in that market.  That said, the traditional media & advertising market is a peculiar one:  deeply adverse to change, commonly technologically challenged, highly insular, and very service/relationship oriented.  For even the best web application, a business model that rounds off to simply “we will make money from on-line advertising” is basically (a) not thoroughly thought out; and (b) crippled by market risk in today’s environment:  said plainly: there is significant “market risk” for this businesses compared to one that has a viable, alternative (freemium or subscription model, for example) path to revenue.

Another example of market risk is an idea that is significantly ahead of its time (or too late) for a particular market.  The broadband infrastructure market (DSLAMs and Cable Data type products) had a narrow, 3-year market window: 1996-1999, for the most part.  Trying to enter the broadband infrastructure market much before 1996, when dial-up Internet access was growing quickly and wildly dominant, would have been significantly risky.  Trying to start a new broadband infrastructure company after 1998-1999, when the major telcos and cable companies (and vendors like Alcatel and Cisco) had made their decisions, was equally risky if not impossible.

Next time (or very soon): Product and Execution risk discussions…

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