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 :-)
> 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.
To heck with SnapChat. Gads, it became a fad
as young women stood in front of their
bathroom mirror and used their
smart phone to take imprudent pictures
of themselves. No one knew that this
would be a fad, but anyone could guess
that the fad had a lot wrong with it,
would get a lot of push back, and
would not last very long.
Instead of all that nonsense, to get
around the 'product/market fit' risk,
here is how: Pick a problem where the
first good or a much better solution
will be a must have for a sufficiently
good, large, dedicated, whatever audience
of users/customers to make a business
worth $10+ billion.
The classic would be a safe, effective,
cheap one pill taken once cure for
any cancer. So, have a problem, cancer,
and the first good solution, the one
pill, and it is a must have for a lot
of people -- ballpark half of the
population will die of cancer before
anything else.
So, with that pill, have product/market
fit so strong that just on a rumor
the front doors of the company will be
mobbed by people desperate for the pill.
That situation is what you want to aim for.
Well, everyone can see the problem of
cancer, but so far no one knows how
to make that pill. If making the
pill were easy, then that problem would
have been solved by now.
In information technology, can do
much the same thing: The problem
is already out there and fairly
easy to see.
But, there is
no free lunch here, no royal road,
no ten easy steps. Instead, if lots
of people know how to solve the problem,
then it would have been solved by now.
So, need to attack a problem where
not many people know how to solve it.
In particular, need a problem that just
routine software is not nearly sufficient
for a good solution.
Next, when have the problem and the solution,
the risk is already way, way down,
but have yet to cover ANY of the risk
reduction techniques in the OP.
So, the real key to risk reduction and
high ROI for startup projects is to have
good solutions that nearly no one else
knows how to do.
For now, for information
technology, the best approach to such
solutions is original research in applied
math, typically based on advanced
prerequisites. An advantage is that
such work can
be reviewed reliably. And passing such
review, now have a low risk project
where the rest of the work to high ROI
is routine. That's the goal, right?
I just gave you the magic, golden,
secret sauce, right?
THAT'S, for now, how to do
information technology startups with
high ROI and low risk, right from the
beginning, that is, based on, say, a
project proposal on paper
with the math included.
The ante in that game is to be able
to read, review, check, at least direct
such work, in the math.
I doubt that
there is a single VC firm in the
US that can do that. The NSF can.
So can ONR, and DARPA. So can high
end journals in applied math. So can
the applied math departments of
leading research universities.
But VCs? Nope. With at most
a tiny number of exceptions:
History majors from
Williams College? Nope. Computer science
chaired profs at leading
research universities? Nope. Silicon
Valley entrepreneurs? Nope.
So, we're talking something rare
and exceptional. Well, we know that
except for luck that is a necessary
condition for $10+ billion. So,
we have to be able to work effectively
with things that are exceptional.
I think you're conflating together changes a business can make to its approach that are "global" or high-level versus "local" or low-level.
I don't think the article is advocating only starting a company in a space where it's easy to get to low-risk.
If you enter a high-risk area, that's totally fine and good, but (as I read the article) it's still a good idea to try to move all of your indicators toward less risky rather than more.
The question you're getting at is whether one takes drastic steps like pivoting toward a more established industry where it's easy to lower risk. I'm not sure the author is advocating that.
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 :-)