Is Starting this business Difficult? It Depends…

Are you considering launching a business? If so, you might be wondering, "Just how difficult can it be?" The answer isn't as straightforward as you might think. Let's dive into the complexities of starting a business and explore the various factors that contribute to its difficulty.

Every Business is on a Spectrum

Running a business is challenging, no doubt. However, the degree of difficulty varies. Businesses exist on a spectrum, from easy to complex, and each comes with layers of risk or difficulty. Not all risks apply across the board. The key lies in understanding these layers and deciding your threshold of acceptable risk.

Layers of Risk

There are several kinds of risks involved when building a business. Not all of them will apply to your business:

1. Technology risk: Can you build the product or service?
2. Demand or product-market fit risk: Do people want what you're selling?
3. Distribution risk/difficulty: Can you sell your product or service?
4. Execution risk: Can you deliver a great product or service?

There are other kinds of risks that I'm largely bucketing under execution (i.e., regulatory, financial, team, scaling, etc). I won't focus on execution risk today and we'll tackle the details of execution risk another time.

For the purpose of this newsletter, I won't discuss technology risk and assume that's not the kind of business we're considering. I have no background building companies like SpaceX or Nvidia to have anything useful to say on the topic.

We'll focus on demand risk and distribution risk.

Demand Risk: Do They Want What You're Selling?

Demand risk is about understanding if people want to buy your product or service. There's a spectrum of demand risk:

• High risk: Novel products or services (e.g., commercial space travel)
• Low risk: Well-established services (e.g., legal services)

Key Questions for Demand Risk:

1. Do people buy what you're selling?
2. Does your business model exist?

Awareness of the problem your business solves can help mitigate demand risk. Take this risk with open eyes and clear indicators to help establish product-market fit.

Assessing Demand Risk:

• Product or service: Is someone selling what you're planning to sell today?
• Business model: Is someone selling it the same way you're planning to sell it?

The first one is easy to answer. Think legal services. The second involves the business model. As an example, paying for a doctor visit vs paying for a virtual doctor visit. One has been around since the dawn of time. One has only recently become commonly adopted. If you're planning to take on the latter you'll need to crack educating buyers as to why this approach is better. It's a different form of "new" and you need to de-risk demand in this instance.

Why does demand risk matter?

You need to know what problem you're solving to be effective. If you're taking on demand risk do it with eyes wide open and have clear signals that will help you know whether you've established product market fit.

Why wouldn't you take demand risk?

There are a few reasons to not take on demand risk. You want to:

• Passion: You love a particular product or service and want to improve on it.
• Limited resources: If you have limited time, money, or expertise, taking on demand risk can be particularly challenging. Proving a new market exists often requires significant investment.
• Need for immediate income: Businesses with demand risk often take longer to generate revenue. If you need to make money quickly, a business with established demand might be a better choice.
• Risk aversion: If you're not comfortable with the possibility of your business idea failing due to lack of market demand, you might prefer a more proven business model.
• Competitive advantage in execution: Your strengths might lie in operations, marketing, or customer service rather than in product innovation. In this case, you might be better off competing in an established market where you can differentiate through superior execution.
• Industry regulations: In heavily regulated industries, proving demand for a new type of product or service might require navigating complex legal and compliance issues.
• Personal stress tolerance: Dealing with the uncertainty of whether there's a market for your offering can be stressful. If you prefer more certainty in your business ventures, avoiding demand risk might be better for your well-being.
• Funding requirements: Investors might be more hesitant to fund a business with significant demand risk, especially if you're a first-time entrepreneur. If you need outside funding, a business with proven demand might be easier to finance.

Distribution Risk: How Do You Reach Your Customers?

Your business could live in the physical world or the digital one. Regardless, you need to distribute your product or services effectively. That's where distribution risk comes in.

Methods of Distribution:

There are a few main ways your business can distribute its product or services:

1. Foot traffic
2. Paid advertising (i.e., Google ads, Facebook ads, etc)
3. Organic search (i.e., Google, YouTube, etc)
4. Organic social (i.e., Facebook, Instagram)
5. Partnerships and affiliate marketing
6. Sales (lots of flavors here - outbound, referrals, networking)

I'm ignoring a few channels here and taking some liberties with the bucketing. That said, I think it's a good starting point.

Assessing Distribution Difficulty:

The key concept here is product-channel fit - can you generate revenue at scale for your business with a particular channel? Most businesses will develop multiple channels to help them scale, the key is figuring out which one will be your first and what it will take to crack. Consider these factors:

1. Customer Behavior
2. Channel Alignment with Product/Service
3. Purchase Frequency and Value
4. Scale Potential
5. Cost of Acquisition
6. Time to Results
7. Control and Dependence
8. Competitive Landscape
9. Regulatory Considerations

By thoroughly assessing these factors, you can better understand the difficulty of distribution for your specific business and make informed decisions about which channels to prioritize.

Choosing Your Starting Point

When deciding which distribution channel to start with, evaluate your constraints:

• Money
• Time
• Expertise

Choose your strategy based on your goals and constraints. If you're not satisfied with your constraints, strategize to eliminate them.

Conclusion

Starting a business is not easy, but knowing what risk you're willing to take on makes it manageable. Remember, the key is to be intentional about your risk level. There are multiple types of businesses you can start, depending on your risk appetite.

With this insight, you're better positioned to embark on your entrepreneurial journey, armed with robust risk management strategies. Stay tuned as we take deeper dives into other types of business risks in future posts.