So, you’ve gone and got yourself an idea that just might put money in the bank. You’ve worked hard at it and now you’re finally ready to get the ball rolling and start up a company. However, have you properly assessed the potential risks of starting up your company? Have you thought through all the different possibilities? Are you prepared for the inevitable damaging event that you can’t control? Annually, around 44% of startup companies will fail. Most often this is because of a lack of foresight, and thusly unforeseen circumstances. Just having a good idea won’t be enough for your business to make it. If you don’t have good insight and some solid risk assessment then you might not make it.
The Bigger the Risk the Bigger the Profit
There are always risks, no matter what industry you get into. It’s just the way things are, if you aren’t willing to take a risk then you’re never going to get a reward. Even some of the big companies, like Google or Amazon, face risks, even though they’re well established. These companies aren’t just the top of their fields, but they understand that in order to grow and make money they’re going to have to take risks. People don’t tend to realize that they can predict most of these risks, not just to survive, but to thrive. In fact, you can even take those risks and turn them into opportunities with proper assessment. What you need to do is understand what risks will result in a reward worth your time and effort, and which ones aren’t going to give you the resources you spend back.
Risk management is key. You’ll need to teach yourself how to think about what could go wrong, and then how you can combat those issues and best minimize the damage. This involves more than merely sitting in a room and mentioning whatever problems pop into your head. You’ll want to keep in mind that there is a system and framework for you to follow when doing risk management. The equation is as such:
How likely is it to occur, from highest to lowest.
Severity of consequences: Major and Minor.
If you placed these categories onto a table, you can make a 4-quadrant graph, resulting in 4 categories:
- Risks that can safely ignored
- Risks that can be mitigated through simple changes in behavior
- Risks that are mitigatable with insurance
- Risks you should acknowledge, watch, and mitigate whenever able
Risk management becomes more manageable when it’s broken down into these simple steps.
Okay Risks to Ignore
Not every risk requires immediate management, if at all. You may find a risk that is so miniscule that if you address the problem it’d actually cost you more than it’d be worth. While these risks are still just that, risks, they may be so unlikely or could cause so little damage that they simply aren’t worth your time. In these cases, it’s often better to simply take the hit and move on.
Inconvenient Risks
These are the risks that have a high likelihood of happening, but result in relatively minor consequences; otherwise little things that can go wrong but can be dealt with simply by changing company behaviour.|These risks may have a high chance of happening, however they won’t do to much in the way of significant damage, or in other terms they’re often easy to handle with some quick changes in behavior.|These types of risks have a decent chance of occurring, but the damage they would do is relatively minor, and often they can be mitigated or altogether averted by making simple behavioral changes in the company.} Really, common sense is normally the best means of aversion. A real world example would be spilling a cup of coffee onto your laptop, where the solution being that you should always ensure that your laptop is constantly backed up to avoid losing any vital information and data.
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Insurable Risks
Risks with major consequences that are relatively unlikely to happen falls into the realm of insurance. In this case, insurance risks are handled typically by spreading the risk over a group so that, should it come to be, each member will take a small hit rather than one taking a major one. Insurance is a lifesaver for startups. Some insurances you might consider are executive, theft, liability, omissions and errors, and fire.
What are the Ultimate Risks?
These risks can and will completely destroy a company. They have major consequences and a high likelihood of occurring. There are so many of these types of risks that it’s impossible not to have some when you’re an entrepreneur. This makes this the most important of all of the quadrants as it directly affects the cash flow of the company. Possible risks are:
Market Risks
A product may not have a market. Many startups die at the starting line because their idea was either too niche or simply just not a product that people want. You’re not who you’re selling your product to. You might think your product is the best, but other people might not agree. One technique to avoid this is to perform a survey and get opinions on the product. Show a controlled group of people and see their reactions. You won’t have any sort of guarantee from this, but you’ll better understand how well your product may do on the market.
Competitive Risks
Competition can be great. Your community, reputation, and name can all be built up by competition. What’s not so great is if your competition is constantly outdoing you. If your products and services are being outdone by the competition at every turn then your investors are going to start having a problem with you. It’s absolutely vital that you know your opponent’s strengths and weaknesses alike. What would your competitors be able to use against you? How might you respond when they eventually use their leverage? Sometimes it’s even possible to turn a weakness into a selling point, but it can only be done if you sit with your advisors and identify all of these possibilities.
Risks in Technology
It’s amazing just where we’re at with technology, and it can be crazy to think of how fast it’s advancing. There are some big issues with it though, so you need to be aware of them and stay ahead. Often this relates to your vendors and manufacturers, however security is also an issue. Are you able to ensure a customer’s information is kept safe and private? Are your manufacturer’s able to meet your demands and specifications? Can your vendors efficiently and consistently distribute your products?
Risks with Finances
Money is the blood of a business, if it doesn’t flow then the business can’t move, but investing can be a dangerous dance along the edge of a cliff. Most startups failed because they didn’t have a solid fallback plan in the event that potential investors say no or pull out. It’s important to establish cash flow that isn’t completely dependent on outside financing. Some investors are hard to win over, so will your company even survive long enough for you to convince them to join? Is your product doing enough that your investors feel comfortable leaving their money in your hands?
It’s best to be prepared either to make it on your own, or how to best spend the money investors give you so your company can grow. You won’t escape financial risks, no matter what you do. You need to be prepared for your current cash flow to run out by ensuring your company has a steady, reliable, and high enough cashflow to sustain it. The market is always changing so you’re going to need to prepare for that, including things like a cost hike of raw materials or spike in interest rates. You may need a money reserve, so ensure you take whatever funding you’re able to and store it away.
Risks Caused by People
The most unpredictable factor is the people that make up the company. Your startup may grow to a point where the company has to make a change in direction. Often leadership will fall into some conflict over the best way for the company to go. The company could be destroyed if this doesn’t go well. What many startups lack is a clear vision for the future. Too often they get distracted by the product and the hear and now of it that they fail to think about what they’ll need 10 or 20 years from now. If the product isn’t able to grow then how can the company expand? Everyone needs to be on board with this if the company wants to survive in the long run.
Risks in Legal Problems
With anything, there are always legal concerns. America is heavy handed with business regulations for the sake of public safety and fair practice. Having a strong legal team will allow you to be ready for any of these situations. You may be at risk of lawsuits from a customer over a faulty product, or there may be internal problems and jurisdiction issues, and all of this can be prevented, or at least managed efficiently, if you keep that legal team aware of all the current happenings. With a strong and informed legal team backing you, you can address problems before they go down a path of no return.
Systemic Risks
These risks won’t just affect you, but the whole market. It can be disastrous if you aren’t aware of and on top of the changes that are always going on in the market. When one aspect of the market changes, it can create a domino effect. Think back to the recession in 2008, where the interest rates in real estate became so high that the market basically crashed.
Be Practical
At this point, it’s undeniable that startup companies live in a world of constant risk, and if we’ve learned anything, it’s that companies that accept this fact will more than likely survive the first 5 years of their growth. While it’s important to understand this, it’s equally important to understand that risk assessment shouldn’t be obsessed over. No matter how much you prepare, how much your investors give, or how secure your prospects are, there will always be unforeseen risks. It’s flat out impossible to know every possible problem that could appear for your company. This is why, above all else, it’s vital to be practical in your assessments. Common sense, speed, and efficiency are all vital when it comes to planning for and handling all the potential problems you’re able to predict, and a broad stroke protocol for types of problems might be a good idea to develop. The worst thing you could do for your company is to be so afraid that you’re unwilling to take risks, after all, risks are what the world is built on.
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