The two extreme risk of starting a totally new business

Risk is defined as the difference between the expected return and the actual return. There are two kinds of risk, one is upside risk and another is downside risk.

Starting a new business with an innovative idea has two risks. One is that the business will take off smoothly and grow at a phenomenal speed. The second risk is that the business will suffer a total loss and return on investment is negative.

Good business

Starting a new business that operates on a new idea that is commercially viable is good because you have no competitors. You will enjoy 100% market share and grow without hindrance from rivals. Customers have no choice but to buy your products because there is no substitute. There are two reasons why competitors have not yet step in to compete with you. Firstly, competitors have not yet figure out your business model and how things works in your new business model and secondly they want to take some time to observe your profitability before they actually take steps to imitate your business model just to be safe.

Bad Business

Customers do not know you or trust you to buy your products. Because you are new, you basically have to do your own advertisement/marketing from scratches. Companies that start their business on an existing industry may benefit from previous advertisement that incumbent firms already make. The advertisement may focuses on the particular firm’s brand but in the consumer’s mind, the service/product feature and benefit are well understood.

Take for example, an entrepreneur starting a fast-food restaurant in year 2010. By this time, McDonald and other fast food chain are well known and consumers know what to expect from fast-food restaurant (basically they are convenient, relatively cheap and unhealthy). If you went into as a new player in the fast-food industry, you will have compete with the giant incumbent firms but you will also benefitted from their previous advertisement, the public already knows your product/service before you start your business! On the other hand, if you were to introduce fast-food business in the 15^th Century, you will have to spend money to market your product, if you don’t succeed in convincing the people the benefit of your product, then you will not be able to attract any customers at all. Hence, your business will fail.