I have been thinking a lot about risk recently, in preparation for a course I am thinking to teach on "Assumptions, Risks and Forecasting".
Peter Drucker defined a business as a set of assumptions, where the key task is to know the assumptions. Risk as I define it is "variance in cash flow" and not the traditional economic, government, market and technology risk factors most people think about. Those factors are not risks unless they impact cash flow. One of the benefits of this approach to risk is that one does not obsess about risks such as competitors until one sees their effect on cash flow in terms of customer attrition, average selling price, repeat purchase rate. However, notice that all the numbers that show the effect of competition are hopefully all on your weekly/monthly KPI dashboard. Effectively, the assumptions captured in the KPIs are the risks. Note that all the "risks" in the business are properly identified at the time the assumptions for the first forecast are prepared.
In "How to Start a Startup CS183B", Marc Andreessen makes an interesting point about risk:
"So you come in and pitch to someone like us. And you say you are raising a B round. And the best way to do that with us is to say I raised a seed round, I achieved these milestones. I eliminated these risks. I raised the A round. I achieved these milestones. I eliminated these risks. Now I am raising a B round. Here are my milestones, here are my risks, and by the time I raise go to raise a C round here is the state I will be in. And then you calibrate the amount of money you raise and spend to the risks that you are pulling out of the business. And I go through all this, in a sense that sounds obvious, but I go through this because it is a systematic way to think about how the money gets raised and deployed. As compared so much of what's happening these days which is “Oh my god, let me raise as much money as I can, let me go build the fancy offices, let me go hire as many people as I can.” And just kind of hope for the best. " (excerpted from genius.com; my emphasis)
At each inflection point one should have a clear idea of what assumptions are being confirmed and "eliminated". A roadmap/timeline of assumption confirmations would be an interesting idea in an investor presentation. Sure to raise money because of the quality of the insight, except maybe with Andreessen.
A previous post on the assumptions and risk theme: Business Model Assumptions.
Image credit: de.wikipedia.org