Risk management – is at the core of running any business, be it a startup or a well established venture. Uncertainty about various aspects of the business is the root cause of any risk. For eg: what will the customer preferences in the future be, will the venture’s technology work, what would the economy be like in the coming years, what the competitors strategy would be in the future, and so on and so forth.
Being aware, able to identify, and having a strategy to mitigate them – this is what is needed for an entrepreneur to overcome these risks and run the business steadily.
Read our article on “Why Do Startups Fail? We Got 6 Top Reasons for This.”
Risk and Reward
So what is a risk? Simply stated, risk is a situation which exposes the business to unfavorable circumstances and creates outcomes that affect the business operations. Unforeseen circumstances and their negative consequences are the very essence of risk. From skills shortage to plummeting economy to rising costs to decline in the demand for your product/service – Risk is everywhere.
However, the flip side of risk is opportunity. There is a direct relationship between risk and reward: the greater the potential upside, the greater the risks involved. For startup entrepreneurs, this means that if you wish to have a chance at success, you have to take significant risks. Entrepreneurship is neither easy nor risk-free.
While risk is an integral part of entrepreneurship, it doesn’t have to get the better of you. Great entrepreneurs have time and again proved that to achieve success is through keen awareness and management of risks.
Framework – Risk Management
Identifying and classifying risks – First step to risk management. Every risk has two dimensions – the probability of occurrence, and the severity of the potential consequences.
An entrepreneur has to identify risks that confront the venture and make an assessment of their importance to his or her specific situation. Few of the risky parameters can be:
Product/Service Market Fit – There is no guarantee that customers will like your products or services enough to purchase them.
Funding Risk – Getting investment for your venture and not sure if will make sufficient profits to be able to pay this back.
Skill Drought & Uncertainty – Every business needs skilled employees to handle specific tasks, an entrepreneur cannot manage them all. WIth this comes uncertainty – of not knowing them, if they will understand your startup’s mission and vision and if they would be performing well in their job role.
Pricing Dilemma – Not knowing the right price for your product and service can be a reason for your product to fail in the future. For eg: if you launch at a lower price and then adjust the price to a higher value to get profits may alienate customers. Same applies for when you launch at a higher price and then reduce it. Customers might assume a decrease in quality.
Logistics and Geography – Entrepreneurs launching the product/service in an already crowded market or launching it in a geography where the demand is scarce can be a potential risk. Even the political environment of a geography and the regulations can make or break a startup. Startup entrepreneurs have to identify these risks and take steps to mitigate them.
Let’s outline the type of risks faced by most startups and look at some well defined strategies for mitigating them.
Skills or Talent Risk
Two major risks are associated with talent management in a startup – (1) hiring the wrong team members and (2) the risk of losing good team members. The impact of these risks to the business are big for startups as the dependency is on a small core team.
How to Manage This Risk? – If you are not sure of hiring guidelines and human resources management, it is better to consult venture studios who have a talent source and outsource the talent to you as and when needed. As you grow, you can hire talent with consultation and assistance from these venture studios.
Explore the skills outsource and recruitment services on The Venture Studio.
Financial Risk
Running out of funds is often the end point in the life of any business. Managing funds and using it the right way is what many startups fail in. For eg: spending more on infrastructure and less on marketing can be a reason to run out of funds and risk business failure.
How to Manage This Risk? – Startup founders often find it difficult to raise money when they need it most. One way to minimize your financial risk and give yourself a long runway is to take funding when it is available and keep it in reserve for a rainy day; this is the strategy that most “hot” startups take.
Establish a prudent cash management approach and work on a proper budgeting policy to mitigate the financial risks.
Product – Market Orientation
Product idea validation and product/market fit – Entrepreneurs usually confuse between these two. So, idea validation is when you analyze and find that prospective buyers are willing to pay for your product.
Check out our article How to Validate a Startup Idea? to learn more. Product/market fit is the ultimate kind of idea validation.
How to Handle This Risk? – The only way to manage this risk is to ensure that customers want your product/service and, ideally, can’t live without it. Also, make sure the market is large enough to sustain your growth. Namely, you need to verify if there are enough potential customers and enough of them are going to buy the product.
Political Risk
Countries with political uncertainty, weak judicial systems, high rate of corruption, stifling bureaucracy, or high taxes can make it very difficult for entrepreneurs to launch and grow a startup. Entrepreneurs in such geographies end up spending the majority of their time dealing with inefficient activities that do not create genuine value for their business.
How to Handle This Risk? – To minimize the chances of falling prey to such bureaucracy, founders should consider setting up in a business-friendly jurisdiction that offers political stability, a rule of law, IP protection, no corruption, and low taxes.
Risks are inevitable. To be successful, startup entrepreneurs must learn to accept those risks that are unavoidable and mitigate those that can be managed. Identifying the risks in advance and being prepared to manage them efficiently is the mantra for a successful business venture.
The best safeguards against risk are having a skills resource, operating in a business-friendly government, knowing your product market fit and having proper marketing channels to create brand awareness, and prudent financial management.
