- How to Identify and Offset Risk to Build a Business That Lasts - August 17, 2021
The following is excerpted from “Rogue Waves: Future-Proof Your Business to Survive and Profit from Radical Change” by Jonathan Brill (McGraw Hill, August 2021).
Netscape founder Marc Andreesen, now a prolific startup investor, describes entrepreneurial risk management in terms of peeling an onion. On day one of a startup, you have a bulb full of every possible kind of risk. Then you peel it away, one layer at a time. There are seven layers to consider. You start with the founding team, making it as reliable and prepared as possible. You validate the product concept. Then you examine the needed technology to minimize reliance on uncertain breakthroughs. This derisking continues through four more layers — product launch, market acceptance, cost of sales and cost of growth — until the whole process is as low stakes as possible.
All of this needs to happen for a startup to become viable. But in the hyper-growth markets where Andreeson’s venture capital firm invests, it rarely does. According to a study of 350 failed tech startups, 70% of those that made it past the earliest stages failed within 20 months. Of those:
- 42% failed because they weren’t making something people wanted
- 29% ran out of cash (though they raised an average of $1.3 million each)
- 23% had the wrong team
Juicers is a classic example of a company that failed to manage risk effectively. Cold-pressed juice was a growing market in 2017, and the idea was to have it available on demand in your home or office. Doug Evans was a seductive CEO with experience in the juice business. Yves Behar and Apple’s Jonny Ive, two of the most famous product designers in the world, were involved. Kleiner Perkins and Sequoia Capital were investing. Even Campbell’s Soup was backing it.
A whopping 97% of hardware startups fail, yet investors were drawn to the product like sailors to a siren. “It’s software. It’s consumer electronics. It’s produce and packaging,” said David Krane from Google Ventures. The high complexity should have been a warning, but the financiers were high on Doug’s juice, buying into the team and the product concept, instead of the miracles necessary to make it succeed.
In fact, Juicero had a lot of miracles that needed to occur:
- Every city where it operated would have to build a multimillion-dollar “fruit factory.”
- Each customer had to buy a massively complicated $700 juice machine that could apply 8,000 pounds of pressure to the packets.
- Customers had to download and order through a mobile app.
- Most of all, they had to want an $8 glass of fresh juice on demand on an ongoing basis.
As the onion was peeled, it became clear that Juicero was destined to fail. The machine made it to market, but hardly anyone bought it. People loved cold-pressed juice, but they weren’t prepared to invest in it at that level. And once it was revealed that the $700 machine was simply squeezing a pouch — which you could do nearly as efficiently with your hands — demand virtually evaporated.
“I was just naïve,” Evans said. “I was like Forrest Gump. I had no idea what it took to make a piece of hardware that could ship to consumers safely.” The problem with the “onion peel” approach is that it implies you can address threats and opportunities in the order that they surface. Juicero had a great founding team, a product that reviewers fawned over and technology that had been sweated out in every detail. What killed it were the final layers: it cost too much to make, and the market didn’t accept it.
In my experience, the more successful strategy is to slice through the onion rather than peeling it. In many cases, the most fatal risks are based on decisions made early on that don’t impact the project until much later (that’s Gestation, the G in VEGAS). At the same time, many of the elements that get derisked early on change so much before the launch that they must be reexamined. If you’re a typical tech startup founder, by the time you launch, you can expect to:
- Lose 20 to 50% of your founding team
- Deliver using a different technology than you prototyped with
- Change your product concept as you talk to customers
- Switch to a different sales channel than you originally thought you’d use
Notably, Andreesen Horowitz did not invest in Juicero.
So, what are your layers of risk, and are they worth the opportunity? No matter what you’re attempting, these layers are knowable, and even if you don’t know them, someone else does and is probably willing to tell you. More urgently, what can you do now to offset those risks later? Much of the answer comes down to performing the right experiments and having the right backup plans.
“Rogue Waves: Future-Proof Your Business to Survive and Profit from Radical Change” is available now and can be purchased via StartupNation.com.