Professional Documents
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RiskandReward
Whatdowemeanwhenwetalkaboutrisk?Simplystated,riskexistsinanysitua onwhere thereisapossibilityofanoutcomethatwewouldratheravoid. Unforeseencircumstancesandtheirnega veconsequencesaretheveryessenceofrisk.Ifwe couldpredictthefuture,therewouldbenouncertainty,andtherewouldbenorisk.
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TheRiskManagementFramework
RiskManagementistheartandscienceofthinkingaboutwhatcouldgowrong,and whatshouldbedonetomi gatethoserisksinacosteec vemanner. Inordertoiden fyrisksandgureouthowbesttomi gatethem,werstneeda frameworkforclassifyingrisks. Allriskshavetwodimensionstothem:likelihoodofoccurrence,andseverityofthe poten alconsequences.Thesetwodimensionsformfourquadrants,whichinturnsuggest howwemighta empttomi gatethoserisks:
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QuadrantA:IgnorableRisks
Costeec venessisanimportantconsidera onindecidinghowwefaceuptorisks.Risks withrela velyminorconsequencesandarela velylowlikelihoodofoccurringthosein QuadrantAofourframeworkobviouslyarentworthspendingalotof meworryingabout. Anexampleofalowlikelihood,minorconsequenceriskmightbethepossibilityofge nga at reonyourwaytoarou nemee ng.Assumingyouserviceyourcarregularlyandyou driveonmaintainedroads,aat remightcauseyoutobelatetoamee ngonceeveryten years.Itsnotabigdeal.
QuadrantB:NuisanceRisks
Thenextcategoryofrisksarethosewecallnuisancerisksli lethingsthato enseemto gowrong,butwhoseimpactsareeasyenoughtominimizethroughstraigh orwardchanges inbehavior.Therearecountlessexamplesofnuisancerisksandsimplesolu ons:
Theprinterrunsoutoftonerwhileyourepreparingtheproposalforthecustomer mee ngthatstartsin30minutes.Solu ons:dontwaitun lthelastminute,andalways keepextratoneronhand. Yourleadengineergetstheuthreedaysbeforethescheduledreleasedateofyourrst customerbeta.Solu ons:createadevelopmentprocessfreeofdependenciesonanyone person,andbuildincon ngenciesforthefactthatalmosteverythingseemstotaketwice aslongandcosttwiceasmuchasyouoriginallyexpect. Youknockamugofcoeeintoyourlaptopkeyboardandcoatyourharddriveincream andsugar,makingyourmarke ngplaninaccessible.Solu on:useso waretoperform automateddailybackupssothatyoulllose,atmost,adayofworkifyoudestroyyour computer.
Withali lecommonsense,nuisancerisksshouldntcauseanylostsleep.
QuadrantC:InsurableRisks
Risksthatcouldhavemajorconsequencesbutarerela velyunlikelytohappenareo en insurable.Insuranceistheprac ceofspreadingthecostofanimprobablelossacrossagroup,
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Property&CasualtyInsurancecanmi gatelossesfromre,the ,andnaturaldisasters; KeyExecu veInsurancecanmi gatelossesfromthedeathorincapacita onofa managementteammember; LiabilityInsurancecanmi gatelawsuitsresul ngfromproductdefectsoronsiteinjuries tovisitors; Errors&OmissionsInsurancecanmi gatelawsuitsfromdisgruntledcustomers;and Directors&OcersInsurancecanmi gatelawsuitsincasesofnegligence,harassment,or discrimina on.
QuadrantD:TheCompanyKillers
NowwecometotheCompanyKillers:theriskswithbotharela velyhighlikelihoodof occurrenceandmajorconsequences.TheseriskscansinkstartupsandFortune500companies alike.Thesurvivalofyourventuredependsonyourabilitytoiden fyandmi gatethe companykillers. Thethingthatmakescompanykillerssodeadlyisthattherearesomanyofthem.Individually, theymayseemmanageable,butcollec vely,theyrepresentatruechallengeforany entrepreneur. Forexample,supposeyoumanagetodis llyourworlddowntojusttencompanykillersand youthinkyouveeliminated90%oftheriskineachcategory: 1. Theresa90%chancethatyouveiden edagenuinemarketneed; 2. Theresa90%chancethatyouraddressablemarketisasbigasyouthinkitis;
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In reality, these factors are not sta s cally independent and theres probably some overlap among these factors Im just using this to illustrate a point,
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MarketRisks
Marketrisksrefertowhetherornotthereissucientdemandforwhatyouhavetooerat thepriceyouset.Manyinventorshavediedpenniless,clingingtothebeliefthatthemarket wouldbeatapathtohisdoorifhedesignedthebe ermousetrap. Fortune500companiesspendbillionsonmarketresearch,andeveryyear,theyintroduce productsthatareaninstantop.Ontheotherhand,in1943,thepresidentofIBMallegedly predicted,Ithinkthereisaworldmarketformaybevecomputers. Unlesswhatyousellisacommodity,thereisnoeasywaytoknowhowthemarketwill receiveanynewproduct.Feedbackfromfriends,surveysofpoten alcustomers,focusgroup tes ng,andbetates ngareallusefultechniquesforhelpingtogaugemarketacceptance. However,nobodynotyou,notyourbestfriend,notyourventurecapitalistcanknowfor surewhetherpeoplewillspendmoneyonyoursolu onun lyouactuallytrytosellit.
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Compe
veRisks
veadvantagesthanitthinks.Ifthere
Everyventurehasmorecompe torsandfewercompe
ismoneytobemadebysa sfyingapressingneedinthemarketplace(isthereanyotherway tomakemoney?),youcanbesurethatplentyofothersaregunningforthatsameconsumer dollar. Businessisacontactsport,andsomeofyourcompe torswillplayrough.Theyllcopyyour businessmodel.Theylltrytooutinnovateyou.Theylltrytooutspendyouonmarke ng. Theyllstartpricewars.Theyllstartrumorsaboutyourproduct.Theylltrytodoanendrun aroundyourpatents.Theylltrytostealyourtradesecrets.Theylltrytopoachyourbest people.Justbecauseyoureparanoid,itdoesntmeantheyrenotouttogetyou. Tostayaheadofyourcompe on,youmustcon nuouslyaskyourselfandyourtrusted
Technology&Opera onalRisks
Itsonethingtosayyouregoingintothebusinessofmakingandsellingwidgets.Itsquite anotherthingtomastertheactual mechanicsofmakingandsellingwidgets. Technologyandopera onalrisksbroadlycovereverythinghavingtodowithexecu on:Can
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FinancialRisks
Theendoftheroadforanybusinessisrunningoutofcash.Somedays,whenyourean entrepreneur,itseemslikeallroadsleadthere. Forstartups,thebiggestnancialriskstemsfromnothavingaPlanBincaseinvestorsand lenderssayno(ordontsayyesquicklyenough).Manyentrepreneursfailbecausetheymake themistakeofbe ngeverythingonbeingabletosecureoutsidenancing. Itstruethatmanytypesofcapitalintensivebusinessesdorequiresignicantstartupfunding. Butifyourearookieentrepreneur,theoddsofndinganinvestorwillingtotakeahugerisk onyouareslim.Itmaybemoreprudenttostartabusinessthatrequiresamoremodest amountofini alfunding.Youllalsowanttohavetwoseparatebusinessplans:onefor growingthebusinessifyouhappentosucceedatndinganinvestor,andonefor bootstrappingthebusinessifyouhavetogoitalone.
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PeopleRisks
Peopleare,atthesame me,themostcrucialandleastpredictableelementofanybusiness. Therightcombina onofexperience,contacts,andtemperamentamongthefoundingteam canvastlyincreaseaventuresoddsofsuccess.Failuretorecruit,mo vate,andretainthe rightpartnerscanspelldoom. Companiesfallapartwhenitdevelopsmajorri s:whenonefac onwantstomoveoneway, whileothersseekadierentresult. Asanentrepreneur,oneofyourmostimportantresponsibili esistoestablishaclearvision andculturethattheen reteamcanrallybehind.Everybodyneedstorowinthesame direc on.Everybodyneedstobeabletotolerateeachotherforeightyhoursaweek.You mustmanagestrongegos,mediatepersonalityclashesanddisagreements,andreininrogue teammembers. Acompanyisonlyasstrongasitsweakestlink.Dontletpersonalrela onshipscloudyour judgment:youroldcollegeroommatemightbeagoodmarketer,butshemaynotbethebest persontomarketyourspecicproducttoyourspecictargetmarket.Ifyoudiscoverthata memberofyourteamisntgoingtoworkout,youneedtoxitquicklybeforethesitua on getsworse.
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SystemicRisks
Systemicrisksarethosethatthreatentheviabilityofen remarkets,notjustasinglerm withinamarket. Forexample,risingdefaultratesinthesubprimemortgagemarket,andthesubsequent dominoeectamongnancialins tu onscreatedbylinkagesembeddedinmortgagebacked securi esandcreditdefaultswaps,havehadaprofoundimpactontheglobalnancial system. Thereareplentyoflesswidespread,butnolessreal,examples:Aspikeinthecostoffuelis squeezingtheen repassengerairlineindustry.Theavailabilityoflowcostskilledlaborin emergingeconomiesischallengingtheviabilityofmanydomes cmanufacturingbusinesses. Asuspectedcaseofmadcowdiseasecancorralbeefsalesformonthsoryears.
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2010CayenneConsul ngLLC
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CAYENNECONSULTING
2010CayenneConsul ngLLC
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Engagingcommonsensetorecognizeandmi gatethemostobviousrisksinacost eec vemanner,usingsomeofthetechniquesdescribedinthisar cle;and Developingacultureofrespondingtounan cipateddevelopmentsthatis,pu ngout resinacalm,ra onalway.
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2010CayenneConsul ngLLC
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