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 taken the time to consider all the possibilities? Are you prepared for the inevitable damaging event that you can’t control? 44% of startup companies fail every year. Most often this is because of a lack of foresight, and thusly unforeseen circumstances. Your business isn’t going to live on a good idea alone. 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 how things go, if you don’t try then you’ll never succeed. Even some of the big companies, like Google or Amazon, face risks, even though they’re well established. The reason being that, aside from them being some of the biggest companies around, they’re defined by their ability and willingness to take risks for the sake of profits. 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 should train yourself to think of the possible problems and how you can combat them in an efficient way. This isn’t merely sitting down in some room, only mentioning the problems that you happen to think about. There’s steps and a system to the most efficient risk management. The steps start with:
How likely is it to occur, from highest to lowest.
The severity of the possible consequences, from major to minor.
- Risks that you shouldn’t worry about
- Risks you can mitigate by changing behavior
- Risks that are mitigatable with insurance
- Risks you’ll want to actively identify, watch, and mitigate as you’re able
When we break it down this way, risk management becomes a lot more simple to handle.
Okay Risks to Ignore
Not all risks require immediate attention. Some risks may even be so small that you’d waste more time and resources trying to deal with it. 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. Most of the time with these risks you’d be fine to just let them come and keep going 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.} This could also be thought of as common sense tactics. 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.
Insurable Risks
These types of risks are often high consequence but have a low chance of occurring. Insurance is the practice of spreading the cost of an improbable loss across a group to ensure that the cost of a disaster doesn’t affect an individual. Startups can be killed without insurance. You’ll want to think about things like liability, theft, fire, executive, and errors & omissions insurance.
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Ultimate Risks
These risks can and will completely destroy a company. They have major consequences and a high likelihood of occurring. This quadrant is where entrepreneurs reside in all the time, because there are so many of these risks. The company cash flow will be affected directly be this risk quadrant, making it the most important. Some of these sort of risks include:
Market Risks
A product may not have a market. Too many startups die at the start because their product is too niche or simply unwanted. You’re not who you’re selling your product to. You may like it, but that doesn’t mean others will want it. One technique to avoid this is to perform a survey and get opinions on the product. Expose it to a control group and take in the results. This doesn’t always mean that a product will be a hit or miss, but it will give you a better gauge of how well it might do in the market.
Risks with Competition
Competition does some great stuff. Competition helps build brand names, reputations and even communities. What isn’t good is constantly being outplayed by the competition. Your investors are going to get upset if a different company always does your ideas better. It’s absolutely vital that you know your opponent’s strengths and weaknesses alike. What can your competitors uses against you? How can you respond when something like that eventually happens? If you take the time to sit down and speak with your advisors then you might be able to turn some of those weaknesses to your advantage.
Technology that Could be a Risk
Technology has come a long way, and every day it’s becoming more and more sophisticated. There are some big issues with it though, so you need to be aware of them and stay ahead. While often this’ll be related to the manufacturing and vendors involved in your business, security, in particular online security, is also a major concern. Are you able to ensure a customer’s information is kept safe and private? Can your manufacturers not only meet your demands, but also generate your product by your specifications? Are vendors able to distribute your products consistently and efficiently?
Financial Risks
It all comes back to money, and it’s a fragile dance between proper investment and reckless abandon. If an investor decides they no longer want to invest in a startup, but it doesn’t have a solid fallback plan, then it has a good chance of failing. It’s important to establish cash flow that isn’t completely dependent on outside financing. If an investor takes time to woo then you’re going to need to live long enough to see any results. Is your product doing enough that your investors feel comfortable leaving their money in your hands?
The best way to go about this is to have two plans: one focusing on the growth of the company if you happen to get a good investor to back your company, and another focused entirely on trekking it all alone. No matter what there is going to be a financial risk. The best thing you can do is to raise capital and do everything in your company’s power to generate a consistent revenue to cover your costs before the money source runs out. 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. Take funding whenever it’s available and keep it in the reserves for as long as you need.
People Risks
The most unpredictable factor is the people that make up the company. Eventually, a startup will grow and come to a place where the direction of a company may need to shift. In these cases, it’s not uncommon for a board to have conflicting ideas about where the company should go. The company could be destroyed if this doesn’t go well. Startups can often be extremely nearsighted. They see the initial demand and get so hung up on the product that they ignore important questions: where will the company be in 5 years? 10 years? 15? If the product has no room to grow, how does the company plan on expanding? All members will need to be on board with the plan if the company is to last.
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. You can be prepared by preparing a strong legal team. 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. Using this legal team you can get ahead of any issues before they spiral out of control.
Risks with the System
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. A single piece could change the whole game. An example would be how the high interest rates in real estate back in 2008 cause the whole market to eventually crash, causing a major recession.
Be Reasonable
You can’t deny that a startup company is entering a world where there are constant risks, but by accepting this you’re more likely to survive. It’s also important to realize that you don’t need to be overly obsessed with risk assessment. It doesn’t matter how detailed your plan or big your backers are, there will be things that you just cannot predict. The reality is that it’s impossible to anticipate everything that can possibly go wrong with 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 possible action to take is none at all, because no risk means no reward.
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