Five Risks for Startups to Manage and Three to Avoid

Building your startup is about taking a series of calculated risks while minimizing others. Certainly, all risks are not equal and many risks can be mitigated or calculated to improve growth or provide a competitive edge, while others, like skipping quality checks or not purchasing insurance are recipes for disaster. The challenge facing any startup is to avoid “bad” risks, while engaging in, but managing “smart” risks. Learning from the experience of others, is always a good idea. We detail below, the five risks you should manage and three you should avoid, while growing your startup, as stated by Mike Cagney, CEO and Co-founder of soFi and Jay Ebben, Associate Professor of Entrepreneurship.

With any new business venture there’s the risk of “uncertainty surrounding the business” and the risk due to “what’s at stake if the business fails.” Both of these risks are unavoidable, but there are ways that these risks can be managed.

 

  1. Risk of Uncertainty Surrounding the Business:

    Everyone has heard the statistic, “more than half of new businesses fail during the first year.” While the Small Business Association (SBA) more accurately reports that “only 30% fail during the first two years,” no business is guaranteed success. Much of the uncertainty surrounding the start of each new venture, can be eliminated by analyzing three things: the market, the operational model, and the financial model. Market risk includes whether the market is large enough to support the business, whether the market is thriving, what trends exist in that particular industry, how competition is structured and how distribution works. You can reduce your margin of error by understanding the nature of the market and customer buying behaviors. Operational risk involves whether the business can set up internally to deliver goods and services to customers effectively. For product-related companies, this will include manufacturing and assembly of goods. Operational risk will also include logistical issues with delivery and returns and effective use of service staff. Remember that your ability to execute internally and keep costs under control will be essential to business success. Financial model risk refers to the risk that the business won’t work due to the numbers. Any business should generate financial projections to know when they will breakeven and what will drive the business financially. This will highlight critical factors for success and provide tools for managing the business. The financial model paints the picture of all aspects of the business and that the business cannot be successful if it is not economically viable.

  2. Risk Due to What is at Stake:

    Consider both, opportunity risk and financial risk, and be certain that the upside of the business is worth the risk in both areas. Opportunity risk comes from the fact that if the business fails, you could have been doing something else with your time and money. There is not a lot you can do about this risk except to weigh the merits of all opportunities you have before making a decision on starting a particular venture. More important, is financial risk — the tangible value that you and your investors lose when the business fails. One of the most significant strategies you can take to manage this risk is turning as many fixed costs to variable costs as possible. For instance, rather than investing money in a sales force and manufacturing facility, consider hiring sales representatives and outsourcing production. In addition to keeping initial investments lower, turning fixed costs to variable will also lower your breakeven point and reduce the likelihood of failure due to lower-than-anticipated sales. This will help to deal with some of the uncertainty about sales levels early on.

  3. Rapid growth outweighing founder ability:

    Founders of many failed startups can’t handle the challenges that come with rapid growth. According to Cagney, “If you grow a business fast, there is a danger of outstripping the founding team’s capabilities.” The experience level and track record of the founders and their experience and knowledge of the business domain, are indicators of how successfully they’ll adjust to growth. Founders who run winning startups adapt well to changing needs. Successful startup founders get weak people out of the company and hire strong ones that have the ability to handle the next growth stage; they invest in products that customers are buying; and they monitor the competition to discover new strategies.

  4. Competitive risk/Copycats:

    You must always monitor the competition. If there aren’t competitors in your arena, it could be a red flag that there’s no market for your business; while tons of competition, means you’re entering a crowded space. If your startup incurs rapid growth, you may attract competitors who imitate the best features of your business. Make sure you invest in patents to keep potential competitors from overrunning you and always look for ways to gain a competitive advantage over competition.

  5. Misallocation of Equity: 

    Startups often fail because they allocate all their equity to their co-founders at the birth of the business. Handing over too much capital to someone who could potentially leave the business, results in a lack of equity for key hires and investors later in the startup’s lifecycle, which could severely hinder growth. Cagney recommends, “allocating 10 percent among each of three co-founders initially, and leaving the other 70 percent unallocated.”

Startups should expect and plan for the five risks detailed above, however there are three risks that entrepreneurs should try to avoid all together: skipping quality checks skimping on safety measures, and not purchasing business insurance.

Avoid taking these three risks

  1. Skipping Quality Checks:

    No matter what product or service your startup provides, it’s important to build periodic quality checks and inspections into your business model. The quality of your product or service is what differentiates you from competitors and it’s what your reputation is built upon. Quality control is essential for building a successful business that delivers products that meet or exceeds customer’s expectations.

  2. Skimping on Safety:

    Some startups may consider safety training a costly disruption that is of little benefit. However, year after year, employees across all different industries, are injured at work or fall ill due to situations that could have been avoided through basic safety training. Above all else, the safety of your staff and of your product, are essential to running a successful business. Create a culture of safety by meeting and exceeding regulations for a safe work environment and invest in health and safety training for your staff. Compared to the costs of lost productivity, potential lawsuits, and medical expenses that can result from workplace injuries, safety training empowers your workforce to be maximally productive.

  3. Not Purchasing Business Insurance:

    For businesses at seed stage that are struggling to get their business off the ground, business insurance may seem an unnecessary expense. However, an agency such as McSweeney & Ricci, who has expertise insuring businesses of all sizes, can create an insurance program that identifies the risks your business faces, and grows with your business at an affordable price. Some investors may require certain types of insurance coverage and many customers in the B to B space will require proof of insurance. As your business grows, your risks increase, and having the right coverage in place will give you the peace of mind to focus on the growth of your business.

Growing a Startup is challenging, but success can be achieved by both managing risk and avoiding others all together. While key risk drivers for startups vary across industries, all startup founders should invest time identifying the risks with the highest likelihood of negative impact and how best to manage them. The risks incurred by skimping on safety, quality control measures and insurance, should be avoided all together. The Startup Business Insurance specialists at McSweeney & Ricci will your business manage risk, and will put together a business insurance program with coverage suited to your business’ unique needs, no matter what growth stage you are in. Email or call us at 1-844-501-1360 for additional information on insurance for your Startup Business.

 

Sources:

  1. 10 Key Risk Factors to Minimize for Startup Success by Martin Zwilling 04/21/3
  2. 10 calculated risks that lead to startup success by Martin Zwilling
  3. 14 Startup Risks Entrepreneurs Should Consider Before Launching Their Startup 05/28/18 on www.fundingsage.com
  4. The 3 Biggest Startup Risks and How to Manage Them. Peter S. Cohan & Associates interviewing Mike Cagney-CEO and Co-founder of SoFi-via www.inc.com
  5. Why Is Insurance for Startups Important? –www.foundershield.com/startup-insurance
  6. 6 Reasons You should invest in health and safety training for your staff by Toby Nwazor on www.huffingtonpost.com

 

 

 

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