The Risks of Ed-Tech Entrepreneurship, Part 2

A few months ago, I wrote about why I think ed-tech startups are often less risky than startups in other industries. You can read that post here: The Risks of Ed-Tech Entrepreneurship. However, there are still many other risks that ed-tech entrepreneurs face. In fact, an advisor once explained that for any startup to be successful, it must be able to tackle the following risks:

Technology Risk: Will your product actually work?

PW-42-1.jpgIn the beginning, you may have a vision for the startup idea/product that you want to create, but you probably haven’t developed the first version of your product yet (or really, your minimum viable product). So the first hurdle for all startups is always whether or not you can actually develop the product that you envision. Part of the challenge for many ed-tech startups is finding the technical talent to help turn your vision into a reality.

Market Risk: Is there enough interest in your product?

Once you have your product/MVP, you need to be able to demonstrate that there’s actual market interest in your product, i.e., you’re not the only one who thinks that this is a cool and useful. Check out this post for some thoughts about determining your market size. Of course, this process is not linear. Ideally, you should be testing out the market risk long before you develop your product. In fact, that’s part of the reason why writing a business plan can still be a helpful exercise, because it forces you to analyze your potential market and you can use this info to inform the development of your initial product.

Business Risk: Is there willingness to pay the price?

PW-42-2.jpgThis next category of risk is slightly different than the market risk described above. Market risk asks whether there are enough people interested in your product. Business risk asks whether these interested people are willing to pay the price that you need to charge to be able to sustain the business. You may think this is the same thing, but it’s really not. Many entrepreneurs quickly learn that plenty of people will express interest in your product, but disappear once they realize they actually have to pay for it.

Willingness to pay is something that’s really important to test out in your research and customer interactions. It can also be really helpful to find market data and/or comparables to other similar products. If you find that the vast majority of the people who are interested in your product are only willing to pay $5 for it, but you need to charge at least $10 to make the product, let alone make a profit, then you’re in trouble.

Financial Risk: Do you have a sufficient margin to be profitable?

PW-42-3.jpgThe final category of risk is whether you can adequately sustain and grow the business over time. In other words, you need to have your costs go down so that your profit margins go up over time. If it costs you as much to sell to your 10,000th customer as it did to sell to your 1st customer (i.e., your costs to build, market, sell your product don’t change with economies of scale), then it’s going to be very difficult for your business to grow. This point may be somewhat moot for many ed-tech startups, because many develop software tools which by nature have large upfront development costs that decline over time, but it’s an important question to consider as you develop your financial projections.

Although I mentioned that the process of addressing/resolving these risks isn’t linear, in some ways, these risks are listed in the order in which they will likely apply to most startups. For example, if you don’t have a product that works, then there’s not much point in worrying about whether or not people are willing to pay a certain price for it. But ultimately, all four of these risks will apply to you as you make the leap from having an idea, to having a startup, to having a thriving business. 

Thoughts? Let me know @professorword!

Until next time,

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Photo Credit: Flickr user JakeRust, GotCredit, and Derek Gavey

 

 

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