After briefly defining both management risk and market risk this week I am turning to the topic of product risk.

Product risk is commonly referred to as technology risk.  It is the likelihood that a startup will fail to produce the product it sets out to create.  Or put another way, can the product be built? 

Are you trying to send a rover to the moon or making a simple web app?  A highly complex software application that involves things such as applied cryptography, artificial intelligence, cognitive computing, machine learning, natural language processing, or semantics involves a much higher degree of product risk than a simple based web app like Twitter.

If your potential product is a highly complex
piece of software that has not yet been developed it carries a great deal of product risk.  This risk can be reduced by assembling a team that has built a like product in the past and getting them going down the road of building it.  A prototype has less risk than a concept.  An alpha less risk than a prototype.  A beta less risk than an alpha.

Build the product to reduce product risk.

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.

Over the weekend about 20 co-founders of Atlanta Startup Weekend, the creators of Skribit, got together to move the product to the point where we could extend the number of beta users in the wild. 

My biggest task during the day was to give a presentation over lunch about the state of the corporation and what I termed "Startup 101".  This included a discussion of the four generic categories of venture risk.   I thought it would be good for the team to think about these risks in relation to Skribit to understand what it might take to make the company successful.

One of the risk factors that we discussed was management risk.  When I told the group that I felt like the company’s management risk was extremely high people were aghast.  The comment that stuck in my head was "we have more then 20 people here, we have more then enough to handle any situation that may come up."  True enough. 

But more people is not necessarily a good thing.  Management risk might be defined as the probability of the venture failing to meet its business objectives due to not having the people with the appropriate skills in leadership positions or due to poor teamwork.  Management risk is about both skill and teamwork.  You have to have both to reduce it.

As an example, when Fred Nixon, Vince Zappa, and I were working on the Alele concept, we were perceived as having relatively low management risk.   We had worked together at a successful startup for a number of years and our skill sets were rather complimentary, containing what is needed to get a startup off the ground.  The feedback we heard from investors was "We like the team."

Conversely (not to pick on all the good folks that helped bring Skribit to life, they have done great work), 49 co-founders who have never worked together as a team, regardless of the amassed skill set, has a high degree of management risk.  The teamwork aspect is a high hurdle.  Coordinating the effort of that many people is difficult.  The 20 we had over the weekend is much more efficient than 49 but still too many.  Don’t get me wrong.  Having 20 people that want to stay actively involved in the project is fantastic, I have achieved the goal of bringing together a segment of the Atlanta startup community.  But as the concept moves forward a core team is going to form in some manner to remove the management risk.  The founders are smart, they will figure this out.

Before the holidays hit us I intend to do a brief writeup on the other categories of venture risk.