Startup fallacy: Low Reward != Low Risk

You’ve heard it before. Things that tend to have higher risk exhibit higher reward, and lower risk exhibit lower reward. You’ve seen it in Las Vegas casinos. You’ve seen it in your 401k choices. You’ve seen it in adventures. And you’ve probably seen it in business. But there’s logical trap that snags a lot of people.

When thinking of ideas for your startup, you can think of grand and disruptive ideas that really live in the space of Twitter and Netflix and Facebook. They’ve become a significant presence in the market space. They are extraordinary. And you know that the grandest ideas have high amounts of risk. Sure, if they work, they can make you millions. But the chances of making it are small.

So you might be tempted to lower your sights. You decide to build something a bit more down-to-earth and realistic. This is good. But then you think of products that target a small niche or small market. Maybe there is not much audience for it and your customer base is extremely small. You may only get a handful of customers per month if you do well. The rewards are small.

But then the logical fallacy can rear it’s ugly head. You think, “Since the rewards are small, then the risk must be low“. Wrong.

The rewards are terrible, but the risk is still incredibly high. First of all, you would end up spending valuable time building this software instead of being able to work on other things. Then, your potential customer base is tiny. Trying to earn back the time and money you spent is harder, not easier. And you might think that just by targeting the small audience but providing them with the perfect solution is a bang-bang deal. But it’s not. They might not like your solution at all, even if they are looking for a solution. They might not choose your product, even if you’re the only solution in the game. They’ve survived up to now just fine without you.

There is a tendency for low risk to have low reward, and high risk to have high reward, but you can’t measure risk by the size of the reward.

In fact, it may be far less risky to choose a tremendous, ground-breaking idea than it is to choose some so-called safe application that isn’t as exciting or interesting, but serves some kind of boring purpose.

Don’t measure risk just by looking at the size of the opportunity. Measure risk by all the attributes of risk. And you may accidentally stumble on a low risk, high reward idea – rather than waste all your time on a terrible low reward, high risk idea.

About Tim

has written 28 post in this blog.

Leave a Comment