Jack Be Nimble, Jack Be Quick…How to Handle Market Risk

Apr 22, 2010 - by Joel Lessem

Recently, I have been reading Steve Blank (founder of 8 technology companies) on how to successfully take a technology to market.   He has a tremendous blog with all his articles. Here is my summary of some of Mr. Blank's key points.

There are two types of risk for a Research and Development based company - market risk and technology risk. For example, technology risk applies to Life Sciences firms when they are searching for a cure for a terminal illness – it may take them 10+ years to prove the drug works.  If they find the cure, however, there really is not a market risk; the product will be in large demand.

For software companies, like Firmex, the market is risky.  When starting a software company you need to  align what you build with a significant group of customers (market).

When tackling risk, the fundamental source of failure is assumption.  Whenever you start a project the only thing you can safely assume is that your assumptions are flawed.

When starting a software venture, the most common mistakes are:

1. You assume you know your market/customers
2. You assume the market/customers will want to buy the product as originally conceived
3. You assume growth is simply executing on these early assumptions.

With all these assumptions, software firms capitalize their risk with full management teams and large marketing/development budgets and burn through a lot of capital.  If the assumptions are not 80%+ correct, the company heads in the wrong direction at the high rate of speed.  It’s kind of like  taking a drag racer full of jet fuel on a windy rally course; eventually, you careen off track and crash. This inability to ‘steer,’ or adapt, is part of the reason the majority of venture funded start-ups are not profitable or don’t provide good returns to investors.

The key to launching a successful product is to develop feedback loops with customers and be agile in developing your product. As Steve Blank and others attest, you have to continuously “pivot” your business model and make quick adjustments to trigger commercial growth in your enterprise.

As I like to say at Firmex - there is “nothing sacred here." We keep an open mind and constantly test our assumptions, "pivoting" our product according to customer need and demand.  This credo has proven both effective and profitable.  I am grateful for veteran entrepreneurs like Steve Blank who can help technology companies be both capital efficient and successful.