3 ways to de-risk your business

“Starting a business is risky.” Because businesses can fail and the cost of failing is often high.

But founder Amy Hoy has a bone to pick with that logic. “Nobody says ‘petting a dog is risky’ — even though some dogs bite,” Amy analogizes. “Why? Because lots of dogs don't bite. If you stick your hand through a chain-link fence towards a stranger's slavering Rottweiler, nobody blames dogs in general… they blame you.” 😬

“Businesses,” she explains, “are the same; the risk is in the earliest choices you make, not the inherent nature of business.”

The problem is many founders follow an archetypal story in their early days:

  • Get a bolt of insight
  • Pursue a passion idea
  • Back-fill evidence
  • Hunt down buyers

To borrow Amy’s analogy, this is the extending-your-hand-to-a-slavering-Rottweiler route.

Sure, there’s a tiny chance it’ll be fine. But 9 times out of 10, the founder gets bit.

Amy elaborates, “No wonder most of these types of products don't catch on; they weren't designed, from the ground up, to reflect the real buying behavior of customers with money.”

The good news is, that isn’t the only way to start a business. There’s another way, and we’ve outlined some of it below. Think of it as the petting-a-friendly-golden route.

1. Start with a paying audience, not an idea 🤝 #

The approach Amy has been teaching since 2010 is this:

  1. Choose an audience that pays for things
  2. Really study them to find out what they do
  3. Build something you know they will buy (based on their actual buying behavior)
  4. Build trust with educational content (ebombs) rather than SEO (which could be taken away from you at any time)
  5. Don't quit your day job until you've got a stable income stream

Steps 1-2 depend on doing some seriously good customer research. As in, more than “a few people on Twitter mentioned x frustration.” Rather, you’ve got to observe and document the behavior and buying habits of your audience—to listen to what they say and, more importantly, to note what they do and pay for.

👉 For more specific strategies, read about Amy’s research process, plus how Rand Fiskin and Hiten Shah used a research approach to build each of their current ventures.

2. Explore your funding options (VCs aren’t the only route) 💰 #

VCs admit raising money in an economic downturn is difficult. First Round Review cautions, “If you do decide to raise capital in this climate, remember the fundraising process will likely take much longer now. Plan for six months, not the shorter timeline that some startups have enjoyed in recent years.”

Caveat: We’ve seen one client prove there are exceptions to this generalization. Even so, it’s good to know your alternatives. Those traditionally include:

There are non-traditional options as well. For example, when he started Sparktoro, Rand Fishkin and his co-founder, Casey, raised $1.3 million from angel investors. Then, they put the money into an LLC. The LLC pays investors back from profits SparkToro earns, meaning the investors own distributions units and participate in profit-sharing.

3. Don’t play on hard-mode: reach out to experts and save weeks of effort 💌 #

We’re big fans of a lean approach, but like any good idea, it can be distorted.

Alex Hillman explains many founders wait too long to ask for help and outsource. This is the idea of lean gone wrong. Generalist founders, who can do a bit of code, design, marketing, and other pieces themselves, are particularly prone to this pitfall.

Alex reminded me, “You don't have to learn everything the hard way. There's a world of experts out there, who you can buy an hour of their time and save weeks or months, and that is not an exaggeration.”

If you haven’t reached out to an expert before, here are Alex’s tips:

  1. Do your homework: Find out who the experts are in the problem you’re facing.
  2. Research those experts: Find out if they’ve published advice or guidance. Listen to podcasts they’ve appeared on, and see if the way they answer questions is helpful to you.
  3. Contact them: Reach out to them via their website or email, and offer to buy an hour of time.

When you do reach out, show you’ve done your research. Say something like:

“Hey _____, I listened to you on ____ podcast and I really loved the answer you gave about ____. I was wondering if I could buy an hour of your time to hear more.”

Offering to pay for their time is key, and don’t be surprised if the expert charges $200-$500 for this hour—that’s typical. It’s also well worth it if the hour saves you days, weeks, or even months of testing and guessing.

Remember... #

We mentioned last week that now’s not a bad time to start a business. If you want to dive deeper into why that’s the case, don’t miss the data and other de-risking tips in our recession-proof playbook. 📚