On Taking Risk

As part of any entrepreneurial pursuit, founders and VCs engage in various mating rituals that are as much about judging risk as they are about judging opportunity.

Over the weeks and months of pitching, founders and VCs manage to assign some subjective meaning to various parts of the risk stack.

Risk stack for startups

During most of this process, your pitch is that each of these is either

  • solved,
  • understood, or
  • will be managed so as not to hurt your chances of success.

However, your reality is that risk along each of these axis, if not taken earliest possibly opportunity will GROW exponentially. Risk is good when quantified early and taken early. Unknown risk equals infinite risk for startups.

The risk stack is contained only by explicitly addressing each component of it as early as possible – before or at least at the first financing.

Another danger is that risk not taken turns toxic in startups. What I mean is the effects of that risk will start to influence other areas. For example, if user related risk is the highest risk not taken, lack of knowledge about how users perceive your product or interact with your product will quickly seep in to other decision-making. In this instance, not knowing the user’s ability to understand the value will invariably lead to sub-optimal decisions across design, features, and operations.

If there is anything I have learnt in the past few years in my experiments in small investments and working with early stage teams, it is that I am learning how to help founders figure out risk and perhaps help them take more risk as soon as possible.

My mission statement as an individual investor is that “Hello, my name is rohit. How may I ¬†help you take more risk.”

p.s. Business model intentionally not part of the risk stack. That is a composite risk which merits more thought before I can say anything meaningful about it.

 

  • http://www.neemware.com Mads Srinivasan

    Rohit, Succinct article. I have a comment/question on the diagram. In the diagram, do you have the risks listed in the order that is taken by a startup (or) the order varies based on the startup. IMO, the order varies. For example, a team will be tackle the risks on Idea, Tech and Team, before tackling the financial risk.

    • https://twitter.com/#!/rohit_x_ rohit

      Mads,
      The risks are listed in the order of their importance to a startup. the order in which they may take them (imho) is ‘address largest risk first’ (BRFO not FIFO). If financing is the largest risk, address it first by quantifying and figuring out what should you build (product or validation?) to attack financing risk for VCs.

      rohit

      • http://www.neemware.com Mads Srinivasan

        Thanks Rohit for the clarification.