Force of Good

Market Risk

Dec 11, 2007

Last week I wrote a brief article about the management risk inherent in new ventures.  This week I turn to a second category of risk, market risk.

Market risk is simply that the predicted market for the startup's new products turns out to be substantially less then what the founders forecast.  Or put another way, that huge fourth or fifth year hockey stick projection in your business plan is a gross overestimation of reality.  This could be to not knowing the correct size of the potential customer base, the price they might be willing to pay, how quickly they are willing to adopt the new product, or the changing market environment.  In a nutshell it is overestimating the need and demand for your product.

When you are starting a company a good deal of the market adoption assumptions are best guesses and prone to wide error.  This risk can be reduced by gaining customer adoption and market traction that enable management to gain confidence and better estimate the addressable market.  If you are talking to angels/VCs about investing in your venture, it is good to know if they require that your market be validated through customer adoption.  Some do.  Some don't.  Sometimes it depends on the nature of the other risks.

Regardless, if you are talking to potential investors, remove two sentences related to market risk from your repertoire.  "These numbers are conservative" and "If we only get 1% of the market."  They are death I tell you.  Death.  You need to do your homework better then that.

Posted in Startups
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