Marc Andreessen explains the “Onion Theory of Risk”

I think the single biggest thing entrepreneurs are missing, both on fundraising and how they run their companies, is the relationship between risk and cash. So the relationship between risk and raising cash and then the relationship with risk and spending cash. So I've always been a fan of something that Andy Radcliffe taught me years ago, which he calls it the Onion theory of risk, which basically is you can think about a startup like on day one as having every conceivable kind of risk and you can basically just make a list of the risks. And so you've got founding team risk. Are the founders going to be able to work together? Do you have the right founders? You're going to have product risk. Can you build a product? You'll have technical risk, which is maybe you need a machine learning breakthrough or something to make it work. Are you going to be able to do that? You'll have launch risk. Will the launch go well? You'll have market acceptance risk, you'll have revenue risk. A big risk you get into in a lot of businesses that have a sales force is can you actually sell the product for enough money to actually pay for the cost of sale? So you have a cost of sale risk. If you're a consumer product, you'll have viral growth risk. Well, you get the thing of viral growth. A startup at the very beginning is basically just this long list of risks. Then the way that I always think about running a startup is also the way I think about raising money, which is it's a process of peeling away layers of risk as you go. You raise seed money in order to peel away the first two or three risks. The founding team risk, the product risk, maybe the initial launch risk. You raise the A round to peel away the next level of product risk. Maybe you peel away some recruiting risk because you get your full engineering team built. Maybe you peel away some customer risk because you get your first 5 beta customers. Basically the way to think about it is you're peeling away risk as you go. You're peeling away risk by achieving milestones. And then as you achieve milestones, you're both making progress in your business and you're justifying raising more capital. And so you come in and you pitch somebody like us and you say you're raising a B round. The best way to do that with us is you say, ok, I raised a seed round, I achieved these milestones, I eliminated these risks. I raised the A round, I achieved these milestones, I eliminated these risks. I now I'm going to raise a B round. Here are my milestones, here are my risks. And then by the time I go to raise a seed round, here's the state that I'll be in. And then you calibrate the amount of money that you raise and spend to the risks that you're pulling out of the business. And I go through all this. In a sense, this sounds kind of obvious, but I go through all this because it's a systematic way to think about how the money gets raised and deployed as compared to so much of what's happening, especially these days, which is just, oh, my God, let me go raise as much money as I can, let me go build the fancy offices, let me go hire as many people as I can and just kind of hope for the best.