Startup risk management can be confusing. Risk management is typically associated with managing an investment portfolio that is balanced and diversified. This principle can be applied to investors in startup companies, but not startup founders who are committing all of their capital to high-risk startups.
Here are three principles to help you manage risk effectively as a founder.
1. Let yourself be Lucky!
It is essential to realize that everyone is playing the game partially blindly in startups.
Markets are complex. Startups, being innovative and unproven, add another layer of complexity. Don’t let the illusion of understanding the needs fool you. No one on the planet can correctly predict cause or effect in complex systems.
“In theory, a theory is the same as practice. “In practice, they are not.” – Albert Einstein.
Unexpected and unexpected are the best predictors of success and failure. Fortunes can’t be made by spending decades analyzing and carefully calculating and then making one big wager. Instead, they’re made by constantly testing hypotheses and reality until one leads to an unexpectedly large win.
Therefore, startup founders don’t have to be market analysts or theoreticians. It is to be an empiricist. You will run small experiments, test out ideas, and then compare them against reality.
It would help if you also continued to put low amounts of time, money, and effort into ideas with high upside potential. Over time you will become lucky, and one successful experiment would be more rewarding than the failed ones.
2. Fail fast
You can’t afford to hold too many positions (i.e., more than an investment portfolio manager). Make a lot of bets at once, unlike an investment portfolio manager. As a founder, your chances require time and effort, and when you are not investing time into a project, entropy undermines your progress.
This means you will have to place your wagers one at the moment. Diversification can be achieved by performing many experiments. Time is your most precious resource.
Resilience is often quoted as the number one quality for startup founders. Strength does not necessarily mean trying to force the marketplace to accept your idea. It is about being involved as an entrepreneur and continually testing new ideas.
So, fail fast. When an idea has low market traction, it is time to pivot, iterate or try something completely new.
3. Complexity is Your Enemy
First, keep in mind that you are only gambling pennies. The money you spend on pennies will not buy you much complexity or sophistication. You are limited in time and resources. To build something too complicated takes too much effort. A failure is a likely outcome, so it’s not wise to invest too much money in an uncertain outcome.
Complexity naturally builds around successful projects because of this. It is not something that successful projects have at the beginning.
Second, and more importantly, complexity increases your risk of failing. It’s a terrible situation to build a car that doesn’t work.
It is better to build your skateboard. By doing this, the chances of your board failing are far less likely. This means you can fix and improve your skateboard by yourself.
- You can be lucky by constantly trying new products and services. It would help if you tried things with a slight downside (low investment in time and money) and a significant upside.
- You should quickly discard any ideas or projects that do not receive positive feedback from the market. You can try something else.
- Would you please keep it simple?