Risk Identification: How Much Risk Are You Really Taking on With Your Startup?

“Startups are risky.”

This sentence may be one of the most dangerous in the business founder’s lexicon…

Each year, similar statements lead smart founders to create startups taking on absurd (or unexpected) levels of risk.

Although as many as 90% of startups fail according to certain studies, that number can be hugely misleading.

Risk levels and failure rates vary by industry, segment, experience level, and several other factors.

According to a study by the Harvard Business School (2008):

  • Serial entrepreneurs have a 30% chance of succeeding in their next venture;
  • First-time entrepreneurs have an 18% chance of succeeding;
  • Entrepreneurs who have failed before have a 20% chance of succeeding.

As you can see, starting points are not equal, just like risk levels are not equal.

Top-line stats about startup failures say very little about the risk level of individual startups.

Risk Identification: Fatal vs Recoverable Risks

The myth of the successful founder who comes up with an idea, sticks with it, and wills into existence a successful organization making little to no changes to his/her original vision is pervasive. It’s also more myth than reality.

According to a study by Harvard Professor Clay Christensen, nearly 93% of the products that ultimately became successful started off in the wrong direction. In startups, pivots are the norm, not the exception.

Going through the customer development process is one of the hardest things you can do.

To be able to keep your team (and yourself) motivated, you want to avoid dead ends and keep failing forward, ever closer to your goal.

You’ll encounter fatal risks, when there is no option but to go backward and change one of your business’s foundational assumptions.

Although founders with sufficient startup runway and motivation can always muster a pivot, fatal risks – like vision pivots – can cost you a co-founder, a funding round, or the will to keep going. They’re obviously best avoided:

Risk 
 Identification: The B2B Startup Pivot Pyramid
Risk Identification: The B2B Startup Pivot Pyramid

How to Do Proper Risk Identification for Your Startup

“You don’t want to create your own momentum; you want to ideally ride on momentum that already exists.” – David Cancel, Serial Entrepreneur.

Idealab co-founder Bill Gross founded over 100 companies in the last 30 years. Analyzing hundreds of startups using 5 key dimensions – idea, team, funding, timing, and business model – he found that the biggest factors influencing the success or failure of businesses were the Timing and the Team / Execution:

Risk Identification: Top 5 Factors in Success Across More Than 200 Companies
© The single biggest reason why startups succeed | Bill Gross

Creating a successful business means achieving success in many areas:

  • Timing;
  • Team;
  • Execution;
  • Idea;
  • Business Model;
  • Funding;

But also…

  • Market Size: Are there ways to expand beyond your original customer segment and grow the market?
  • Channels/Go-to-Market: Can you repeatedly reach buyers and prospects? Can you scale that process?
  • Competition: Can you create sustainable differentiation in the market?
  • Pricing Power: Do you have the ability to increase prices and capture additional revenue from existing accounts?
  • Recruiting Power: Can your business recruit top talent in the market?
  • Value Proposition: Is your value proposition sustainable in the long run?
  • Costs: Is your cost/revenue model sustainable long term?
  • Etc.

The more aspects of the business model are uncertain or unproven, the riskier the business. The riskier the business, the longer the path to success will be.

Although innovating on many factors at the same time can lead to great disruptions and innovation (Airbnb, Uber, etc), it’s not a requirement for success (Salesforce, Slack, etc).

There are no awards for taking on more risk than the competition. Proper risk identification and risk mitigation only help make your life easier.

Risk Identification & Risk Acceptance

The easiest way to minimize the risk of failure in innovation is to build off something that already exists, changing only a few key parts of the model while leveraging your unique competitive advantages.

However, for various reasons – be it ego, personal interest, ambition, etc – founders rarely do that.

For the writing of Lean B2B, I interviewed Martin Ouellet, the founder of recruitment software startup Taleo.

At the time of the interview, Taleo had recently been acquired by Oracle for $1.9 billion, and his co-founder, Louis Têtu, was already working on Coveo, an enterprise search solution.

Têtu had recruited several key employees from Taleo’s upper management and Ouellet had been invited to join the team.

Although Ouellet could have joined a business he felt was very similar to Taleo in terms of market, product, and dynamics, he made the decision to build something completely different: a gaming studio. He knowingly took on more risk, accepting that he would be able to re-use very little of his knowledge and expertise in this new venture.

To Ouellet, taking on a greater level of risk was a decision he wanted to make.

Although startups are risky, it’s important to do proper risk identification upfront, understand the risks you’re taking on, and work to test and validate risky assumptions.

Stay lean. Don’t let fatal risks surprise you.

14 Ways B2B Entrepreneurs Can Extend their Startup Runway to Go the Distance

I’ve never seen a B2B company get to anything much under 18 months. — Steve Wood, B2B Serial Entrepreneur

Startups are difficult.

It can take anywhere between 6 months and 3 years to get a business off the ground. To succeed, founders have to be ready to go the distance.

This means shortening your time to product market-fit, being resilient, and extending your startup runway.

I started HireVoice, my previous startup, with little to no money and no income stream.

Quickly, I had to cut spending and use my line of credit.

Although having little to no money keeps you hungry, the stress bears down on you. I can’t say I was completely thinking straight; the financial pressures are one of the core reasons why I shut down the business. It was clear that I had to find ways to increase my ability to take risks.

To help founders go the distance, I created the following list of ways to extend startup runways with their Pros and Cons:

Using Personal Finances to Extend your Startup Runway

Your Own Savings

  • Pros: In some ways, tapping into your savings to fund your business is the ideal solution. You keep all control and become your own investor. Since you’re working from cash on hand, you don’t pick up debts, and have a clear picture of your time horizon. This can be a good path however…
  • Cons: Self-funding your startup means you’re not accountable to anyone for the way you spend your money. This can mean spending on the wrong things and over-spending, but also not knowing when to pull the plug because of your ego or other reasons. At the end of the day, if your investment doesn’t pan out, you can be left with significantly less savings and little to show for it. As the saying goes, it’s always better to spend someone else’s money than your own.

Credit

  • Pros: Using credit gives you the flexibility to decide when you spend and go beyond your own cashflow. It typically doesn’t require approval and can be used very quickly.
  • Cons: With yearly interest rates as high as 25%, it’s quite likely that it will take years to repay the investment. In fact, you’ll probably pay multiples of it. Although some founders have managed to fund their business on credit card debt, it’s definitely not the wisest long-term way to extend your startup runway.

Bank Loans

  • Pros: Unless you’re willing to mortgage your house or other assets you own, bank loans won’t be an option. Banks rarely fund early tech projects because you need liabilities to get a bank loan.
  • Cons: See above.

Extending your Startup Runway with Revenue

Startup Revenue

  • Pros: Startup revenue is the healthiest way to create your startup runway. By getting clients or prospects to pre-pay for your product, you can start your business with money in the bank, and a pretty clear sign of product-market validation
  • Cons: Depending on the industry and the market, pre-selling may not be an option. Clients may want to see a working solution before making a purchase. More so, to create sustainability, pre-selling requires selling big-ticket items, which may take a long time to sell. All in all, this is the healthiest option because it incorporates validation, but you may need a secondary source of income to get there.

Keeping Your Job

  • Pros: Guaranteed income. There’s a lot of built-in waiting time in the early days of a startup. Keeping your job means you can experiment with the comfort of having a full-time wage. As you build and get validation, you can gradually reduce your working hours. Working in an organization is also a great way to find business ideas (Read: How to Find B2B Business Ideas in Your Workplace).
  • Cons: Because of work (days don’t always end at 5pm / weeks are tiring) and other life and family commitments, it can be difficult to get a lot going with a full-time job. Splitting your attention can make it difficult to get real results. With a job, you’re almost always choosing between building your startup and your other personal obligations. This is one of the reasons why starting up is easier when you’re young.
14 Ways B2B Entrepreneurs can Extend their Startup Runway to Go the Distance
Startup Runway – Finding Product-Market Fit on Savings Vs. While Keeping Your Job (Startup Burn Rate)

Consulting

  • Pros: Consulting is one of the most common ways to extend your startup runway. Depending on you expertise and rate, it can provide a good cash influx when needed. By picking your clients carefully, you might even be able to turn your consulting gigs into a successful product business (e.g. clientstrapping).
  • Cons: I funded my work on Flagback and Psykler with consulting. Although you can find ways to get better control over your schedule (e.g. blocking days, only accepting short mandates, etc.), consulting makes it difficult to control your schedule and maintain a high level of focus. It’s also very difficult to turn down money and mandates, which can really sidetrack your business.

Secondary Product Revenue

  • Pros: This is how I’m funding my current startup, Highlights; a mix of book and course sales and some affiliation revenue. This reduces the financial pressure, allows me to capitalize on assets I’ve already created and, because sales are very transactional, it gives me freedom to focus on building Highlights.
  • Cons: The secondary products take time to build, and surprise, they also take time to maintain (products don’t sell themselves!). If you don’t already have a secondary product that sells, it can mean taking a step back to take 2 steps forward. More so, as your secondary products start to make real revenue, you’ll be tempted to focus exclusively on your secondary products.

Micro-Tasks & Micro-Projects

  • Pros: You can do micro-tasks or small projects – logo design, user testing feedback, quick translations, quick development projects, etc. – to earn a side-income. Because of the short duration of the projects, you get better control over the workload and schedule. (Note: Bart Boch created a great list of micro-projects here).
  • Cons: Depending on your background and past income, this can feel like working for nothing or cheapen your personal brand. Although there should be less client management, meetings and waiting, it’s also quite likely you’ll have to deal with those.

Investment

Money from Friends & Family

  • Pros: Friends and family members will be more likely to invest because they know you better than other investors. Because they’re not professional investors, their expectations of return and the pressure they’ll give you will be a fraction of the pressure you’ll get from investment firms. This can both be good and bad.
  • Cons: If your startup project works, your friends and family make money (Great!), but if it doesn’t… you run the risk of damaging important relationships in your life. Startups are risky, a lot of them fail to scale past early adopters, beware of raising money from family and friends.

Angel Investors

  • Pros: There are a lot more angel investors than there are investment firms. Angel investors can be a nice hybrid between friends and family and an investment firm. Because they often were entrepreneurs themselves they can provide helpful mentorship. Angel investors generally don’t have the same timetable and expectations of return that VCs do.
  • Cons: Raising capital from angel investors leads you down a certain path for your business. It comes with expectations for growth and progress. Since angel investors are often solo, they’ll rarely become the lead investor of your funding round, so you’ll need to supplement their investment with other investors or other types of investments.

Venture Capital Funding

  • Pros: If your business has the potential to grow big and you want to go fast, venture capital money might be the best path forward for you. There are a lot of good VC funds and accelerators in B2B, so you can find a good partner who will open doors and guide you to the finish line.
  • Cons: Not everyone is a fit for VC funding. Even if your business qualifies, it may be a mindset you don’t wish to follow. Raising capital from VCs means going for a home run with all the pressure and expectations that comes with it. Raising this kind of capital is a move you’ll have a hard time coming back from and it can be a significant distraction (raising a round often takes 6+ months of work).

Independent and Bootstrapper-Friendly Funding

  • Pros: These past few years, there have been a growing number of investment vehicles for bootstrappers and lifestyle entrepreneurs. Funds like Indie.vc, Earnest Capital and TinySeed invest money without the expectation of a liquidity event (e.g. an acquisition). Their investments come with mentorship from other bootstrapped entrepreneurs.
  • Cons: Although these funds’ expectations are different, raising capital takes time and has an impact on your business’s trajectory. Seeing that these options are fairly new, I’ll wait to see how they work out for the founders partaking.

Grants & Contests

  • Pros: Grants can come in many shapes and forms. By positioning your business for various grants you can raise equity-free funding. Often times, this money will be tied to certain processes and activities your business needs to do. For example, in Canada you can get grants and credits for hiring people of certain backgrounds, including certain multimedia components, doing research & development, etc., etc.
  • Cons: Most grants and contests won’t bring in a ton of capital. Since the pitches will all be different, it will require a lot of work and preparation to get several grants. In some countries, it will difficult to keep on top of all the grants and subsidies your business can benefit from.

Alternate Funding Vehicles

  • Pros: The funding landscape is changing quickly. Equity crowdfunding has been one of the most interesting new options for founders these past few years. With equity crowdfunding, you get to raise capital from hundreds of, often smaller, non-professional investors. This usually means maintaining complete control over the decision-making processes as equity owners are more like backers than traditional investors.
  • Cons: Equity crowdfunding has not been legalized in all countries and jurisdictions. It typically works best for business to consumer products with strong brands as it requires a lot of campaigning to attract investors. It can be a huge distraction for your business, so you have to consider the pros and cons.

What’s the Best Way to Extend your Startup Runway?

The best way for you will depend on:

  • The nature of the project;
  • The expected duration (note: it always takes longer than expected!);
  • Your expected time commitment and availability;
  • Your financial situation;
  • The expected velocity (e.g. how fast do you want to go?);
  • The financing options at your disposal (e.g. not all businesses can raise VC money)

The right solution will most likely be a mix of the options above (e.g. R&D, grants, and angel funding). For each option, you’ll need to consider the tradeoff between risk and velocity.

No matter the approach you choose, make sure you consider the individual runway of all business partners and the key employees. The more similar their situations, the easier it will be to guarantee that their individual incentives are aligned.

More on Startup Runway

3 Reasons Why B2B SaaS Companies Fail to Scale Past Early Adopters

There are countless reasons why B2B SaaS companies fail to scale.

According to CB Insights’ analysis of 269 startup post-mortems, the top reasons for startup failure are lack of market demand, competition, team, cashflow, and pricing:

3 Reasons Why B2B SaaS Companies Fail to Scale Past Early Adopters – Top 5 Reasons for Failure
CB Insights – Top 5 Reasons Why SaaS Companies Fail

With this post, I wanted to highlight the 3 main reasons for failure when it comes to scaling a B2B software-as-a-service company:

1. B2B SaaS Companies Mistake Early Adopters for a Market

The classic mistake is to confuse a few early adopters with an actual market. Not being able to replicate early successes leads to growth and sales slowing down.

Early adopters leave as quickly as they arrive. They can leave you with a ruined startup if you don’t make a push for the early majority.

At LANDR, where I used to work, I dug into the profiles of the company’s early early adopters – the first power users. I was hoping to do customer interviews with them.

Turns out that, 2 years in the life of the company, less than 20% of the early adopters were still using the product. The others had moved on to other products or opportunities.

As a market segment, early adopters aren’t really known for their loyalty.

2. They Try to Scale Too Quickly

Premature scaling is one of the most consistent predictors of startup failure. As a founder, it’s something to fear.

Startup Genome says premature scaling happens when entrepreneurs “focus on one dimension of the business and advance it out of sync with the rest of the operation.”

It can be:

Hiring too fast:

Virtual assistant startup Zirtual hired almost 500 employees over the course of a couple years. Their cashflow wasn’t calculated properly. They let go of 400 employees overnight via email. The next week, they got acquired by Startups.co for, probably, dimes on the dollar.

Hiring too fast is one of the biggest killers of startups raising money.

Focusing too heavily on early adopters:

Learning Management startup RateMySpeech invested heavily in a product that only appealed to 5 percent of their initial target market. In other words, they built it for outliers.

Lack of demand caused the end of their business.

Spending too much cash:

With raising money comes the pressure to spend money. And demonstrate progress to investors at all cost.

With sufficient cash, you can always get more users or customers. It doesn’t mean that this approach will be “scalable” though. Churn often kills B2B SaaS companies when they have bad retention metrics (See: How to Run Customer Exit Surveys to Improve Product Retention). It’s one of the main reasons why SaaS companies fail.

3. They Don’t Really Have Product-Market Fit

You’re taking a huge risk if you decide to scale-up without proven Product-Market fit. There’s no guarantee that a market for your product exists. Even if it does, it might not be able to sustain your business.

Without Product-Market fit, major investments in marketing, sales and customer success are premature.

No amount of sales and marketing savvy can sustainably sell a product nobody needs.

When problems appear, it’ll be impossible to determine whether the business is stagnating because of inefficient growth strategies, or because the product doesn’t fully have product-market fit.

Y Combinator CEO Sam Altman says: “Hiring before product/market fit slows you down. Hiring after it speeds you up. Until you get product/market fit, you want to a) live as long as possible and b) iterate as quickly as possible.”

Lean Startups don’t try to scale their businesses until they have product-market fit. You need a car to put gas in the tank!

Product-Market fit is a per segment / per product thing. It constantly needs to be improved.

Make sure you avoid these 3 mistakes. If you’re not sure you have full Product-Market fit, check out the Lean B2B book; it helped thousands of startups on their way to product-market fit.

More on Why SaaS Companies Fail