Mind to Market

Monday, April 23, 2007

Three Risks of a Startup

In a conversation with Duane Knight the CFO of Denver Biomedical, recently acquired by Cardinal Health, he mentioned the three main risks of a startup company. Although you may be saying "just three?" I thought these summed up the topic, I like lists of three and no one would read this blog if I listed fourteen. So here goes:

1. Management Risk
2. Technical Risk
3. Market Risk

Management risk encompasses all the risks involved with the management team: do they have experience, can they execute the business plan, can they work together and can you even round up the right people. Startups are especially difficult because highly qualified people may not be available or may not want to quit more stable jobs for the volatile environment of a startup.

Technical risk is the risk involved with the product or service the startup intends to sell. A startup by its very nature is usually trying to do something that hasn't been done before whether that's a new drug compound or new food product. New drugs have especially high technical risks due to the uncertainties when administered to humans. In comparison, software is relatively low risk. That may come as a surprise to those organizations that have pumped millions into IT systems only to have them scrapped. But software is more adaptable and, when managed properly, most IT projects eventually hit their targets.

Market risk is the risk associated with all those things concerned with selling the product/service: does the market need such a product, are there competing products, will the market buy enough for the company to eventually make a profit?

The startup company must deal with each risk and develop ways to reduce these risks in order to build value in the company; the lower the risk, the greater the value. Eventually, with enough work, patience, money and luck, the risk can be managed to the point where the company can actually forecast their revenues and profits a month, quarter or even a year in advance. A sure sign that the company's ready to go public.

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