Why everything about startups and business is about risk

Why everything about startups and business is about risk
Photo by Valentín Betancur on Unsplash

Everything about startups  and business is about risk, i.e. one can look at everything in startups and business in general through a risk lens. This arguably applies to life in general. I’m not a risk professional but this is a concept that I’ve mulled over for quite some time, but have taken far too long to put down. I’m sure this isn’t an original idea either, and of course it’s risk vs reward.

A startup is a temporary organization formed to search for a repeatable and scalable business model - Kauffman Founders School

Startup founders take on inordinate amounts of risk when building out their companies from scratch. The risk of physical and mental burnout, market rejection and overall failure are all very real. Figuring out product-market fit, business model, governance, compliance with regulation is fraught with twists and turns and loads of mistakes will be made. The idea would be to figure out a way to assess and manage impact and reward vs risk when taking decisions. This is easy to put down on a post, but rather difficult in real life.

Of course one shouldn’t spend too much time worrying about what could go wrong (it can be easier said than done), but navigating that middle ground is not necessarily straightforward:

“You must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be.” ~ Stockdale’s Paradox

Founders in a startup bear varying degrees of risk too. Each individual has a unique background and circumstances (e.g. saved funds, kids in school, large inheritance etc) in their life. Each contributes to the success of the startup in varying degrees too. (A logical outcome of this is that ownership should not necessarily spilt out equally. I think that should be an exception rather than the norm. Slicing Pie is a useful resource for this. )

Founders have family and dependents, and they share considerable risk - house mortgaged to pay off major debts, income deferred or lost, loss of time with spouse and kids. This is more pronounced in societies such as in the African context and extends to the wider family. Family - more so immediate family - stand to benefit and not necessarily materially: kids learning the value of good leadership, integrity, hard work and perseverance as they watch a parent put in the hours, sweat, tears to build up an ethically run business scaling across different countries.

Early employees in a startup take on a considerable amount of risk. There is the attraction of a mission worth embarking on, but this doesn’t take away the tremendous risk and responsibility that early employees in a startup (or a new business in general) take on. They typically earn less than their peers in more established companies and work far longer hours. They however learn lots of things and grow in leaps and bounds as a result of taking on roles outside their area of specialty and comfort, getting to take on huge responsibilities. One sinks or hopefully swims.

It goes without saying that, if a startup takes on early investors, it means that they believe in the mission and stake their funds and reputation. Early stage investing is a risky affair. It’s however needed for the establishment and growth of a vibrant startup ecosystem. Angel investors who have previously started and scaled companies oftentimes make the best early stage investors. They understand the risk.

Building product and getting early customers is about identifying the riskiest elements and tackling these first (not tackling the fun bits :) ). It’s relatively easy to make assumptions without validating these in real life with real customers - more so validating the riskiest first and at the least cost. When a startup is no longer a startup - it’s still about risk, e.g. of being disrupted by a younger nimbler startup, or a newfangled AI powered platform.

There is no such thing as zero risk, and some of the largest advancements in innovation, in technology have been by risk taking, persistent founders taking on audacious problems and building successful businesses.

Everything is about risk and reward.