041. Too Risky

This is Rich Maloy with SpringTime Ventures,bringing you the VC Minute,quick advice to help startup founders fundraise better.A startup told me the other day that an investor passed saying the business was too risky for them.And the founder was frustrated because isn't risk taking the very nature of venture capital?To me,this is the difference between risk and uncertainty.Risk is making a decision where the potential outcomes can be reasonably estimated.Uncertainty is where the risks are unknown.We invest in risky businesses,which means that we feel we've got a good grasp on the odds of different types of outcomes,including a zero return outcome.When we hit on uncertainty,that's when it becomes hard to get to a yes,because uncertainty is where we're unable to assess the risk.This is why investors have industry or market specializations.They've developed a better understanding of the risks involved,so there's less uncertainty for them.For example,we're not well versed on B2C business models and definitely not on selling physical products direct to consumer.When I look at these businesses,I see a lot of uncertainty;I don't even know where to begin.Whereas a Lightspeed or Lerer Hippeau have far less uncertainty because they have extensive DTC experience.They can better assess these businesses based on known risks.This is all the more reason to do your homework on investors before reaching out to them.Once you're on a call with investors,dig in on areas of uncertainty that they may have around your business.This risk versus uncertainty is my mental model,and other investors probably don't think about it like this.But you can ask investors what they think is the riskiest part of your business.Investors are comfortable taking risks,but if they can't assess it,then they're in the realm of uncertain and they're going to pass.