A Construct For Thinking About Startup Risk Reward
I have a proposed construct to use when thinking about the amount of effort, time, and risk it will take to build, operate and exit your startup. Let’s call it The Startup Hurdles Race Theorem (theorem because it’s so much more pretentious than theory).
The variables in this construct are:
- Distance – How long is the race? Iis it 50 meters or 100 meters? Can you get from start to exit in 5 years or 15?
- Number of Hurdles – Is this a 3 hurdle race or a 10 hurdle race where the hurdles include factors like, raising capital, gaining customers, creating demand in a new market, customer acquisition, finding talent, chicken and egg market, etc
- Hurdle Height – Are these hurdles easily crossed or more difficult to traverse. Is the competitor a vulnerable Yahoo or a Goliath Google? Do you need 100 customers or 100M to break-even?
- Purse – Are you playing for a small pile of pennies or a large pot of gold? Is this going to be a huge exit?
Investors tend to view Enterprise Startups as batting for average and Consumer Startups as batting for slugging percentage. That is because:
- Enterprise tends to encounter fewer, lower hurdles and yet the enterprise tend to have lower revenue and profit potential and therefore exit at lower dollar amounts.
- Consumer is expensive to acquire customers, difficult to differentiate, and yet have massive revenue and profit potential which when successful can translate to higher exit values.
How far do you have to go in your startup race? How high and how many hurdles are there left to cross. Are you likely to finish first and win this race? Investors are going to judge your business plan by evaluating these factors. Address them whether you are seeking investors or evaluating if this idea that so consumes you is worth an investment of your effort.