VC investment in any startup requires taking strategic risks. Every investor evaluates and understands the type of risk and what level of risk they are willing to underwrite and at what price. I personally break risk down into three categories: possibility, probability, and uncertainty.

Possibility, probability and uncertainty are applied differently to each company. Different investors will be comfortable taking different types of risk. As an investor, I look to build a portfolio that includes different risk profiles in the investment. Most importantly, I try to apply the right risk framework to every company, so I’m not evaluating a self-driving car company the same way I do a storage company.

I recently shared my thoughts around the different types of risk that VCs take into account when investing. As a founder, it’s important to understand these risks and evaluate what level of risk your company has, which will better prepare you to pitch VCs and find the right investment partner.

Possibility

The first risk is possibility. Every investor evaluates whether (or not) the company’s vision and product has the possibility of becoming the next market disruptor. As a founder, look for a partner that believes that your business could be a real category defining opportunity.

In 2010, Airbnb’s idea of strangers renting someone’s sofa was pitched to Greylock. At the time, the idea seemed inconceivable, who would allow strangers into their home? But my partner Reid Hoffman saw the possibility that consumer behavior would adapt, believed in the founder’s vision and fought for the investment. Today, Airbnb offers access to millions of places to stay in more than 191 countries.

Probability

The second risk is probability, or quantifiable risk. VCs weigh the probability of founders beating out the competition by building the best tech, acquiring users, and hiring the right team.

Typically, enterprise investments center on quantifiable risk because these startups are going after known markets and problems, but with new solutions. My recent investment in Blend exemplifies this. The founders saw an opportunity to transform the consumer lending industry, a market known for its legacy technology and inefficient processes. Today, Blend has partnered with many of the country’s largest lenders including Wells Fargo and US Bank.

Uncertainty

The third risk is uncertainties, or unquantifiable risk. Uncertainties are things that haven’t been done in the past, such as expanding in a new market, or involving a consumer behavior change. Investors are in uncharted waters. Many consumer companies have high uncertainty risk. Can you go from replacing taxis to redefining the future of transportation? Is ephemeral messaging an enduring trend? With probabilities, I can make an educated guess on market size and growth. Uncertainty, on the other hand, is almost impossible to assign a number to.

Possibility and uncertainty are related, but different. Possibility is an investor believing a company and vision can be big. Uncertainty is believing in the company and vision, but having no idea what the outcome will be. Because of this, uncertainty is the highest risk to underwrite. But if a startup can unlock a new market or change consumer behavior, the return on investment could be huge.

Partnership

As a founder, look for the right partner who believes in the possibility of your idea, weighs the probability of your company and understands the uncertainty involved in investing. I appreciate any of your feedback as my thinking around risk assessment becomes more refined. I can be reached at the information below.