You think you’ve come up with a money making idea. You’ve done a lot of work to get things going and it’s time for you to get your company started. But wait, have you taken the risks into consideration for your startup? Have you thought through all the different possibilities? Are you prepared for the inevitable damaging event that you can’t control? Each year about 44% of startups end up failing. 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. Those without good insight and a grounded risk assessment are going to fall apart.
Bigger Risk = Bigger Profit
Whatever industry you join you’ll find there are some risks involved. 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 giant corporations like Amazon and Google face risks, despite being 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. Thing is, these risks are pretty predictable, and you can not only plan to survive, but to prosper. If you assess things right then you might even be able to turn your risks into a new opportunity. The trick is to know which risk will be able to turn a profit worth taking, and which are just fool’s gold that’ll eat up your resources.
The key is risk management. Get in the mindset of comparing what can go potentially wrong, and what can be done to mitigate those risks in a cost-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 equation is as such:
The likelihood of it happening, from high to low.
The severity of the possible consequences, from major to minor.
- Risks you can ignore without worry
- 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
By breaking it down into something so simple it’s a lot easier to perform risk management.
Okay Risks to Ignore
You don’t have to deal with every risk right this instant. 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. This doesn’t necessarily mean that the risks aren’t legitimate, but if they aren’t likely to happen and lead to minor consequences, then it’s not worth worrying about. You’ll be better off taking the hit and moving forward in many of these cases.
Risks that may Become a Nuisance
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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Risk You can Insure for
Risks with major consequences that are relatively unlikely to happen falls into the realm of insurance. 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. Insurance can save a startup’s life. Consider things like fire insurance, theft insurance, liability insurance, errors & omissions insurance, executive insurance.
Your company might be completely and utterly murdered by these risks. 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. This makes this the most important of all of the quadrants as it directly affects the cash flow of the company. These risks include:
Market Related Risks
Sometimes there’s simply no market for a product. Too many startups die at the start because their product is too niche or simply unwanted. Remember, you’re not selling the product to yourself. You might think your product is the best, but other people might not agree. A great way to get around this is to take surveys regarding 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. Your community, reputation, and name can all be built up by competition. The problem comes when your competition outdoes you at every turn. Your investors are going to get upset if a different company always does your ideas better. You need to be aware of your competition’s weaknesses as well as their strengths. What sort of things can your competitors do 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.
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. This leans more into the realm of vendors and manufacturing, but it also involves other aspects like online security. Are you able to ensure a customer’s information is kept safe and private? Are your products being manufactured to both your quality standards and quantity needs? Are vendors able to distribute your products consistently and efficiently?
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 well enough to bring peace of mind to potential investors?
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. You may need a money reserve, so ensure you take whatever funding you’re able to and store it away.
Risks Created by People
One of the most unpredictable parts of your company is the people inside it. Your startup may grow to a point where the company has to make a change in direction. In these cases, it’s not uncommon for a board to have conflicting ideas about where the company should go. This is a critical time, because these decisions can easily break the company entirely. Often startups lack a clear idea of what the future may hold. 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? A long term plan requires all parties to be consistent and on board.
Risks from a Legal Standpoint
Whatever you do, there will be a legal concern. 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’ll want to keep them in the loop for the best results, as they can help you prevent, or prepare for, customer suits, faulty products, or internal conflict. Using this legal team you can get ahead of any issues before they spiral out of control.
Risks with the System
These are risks that affect the entirety of the market, not just any one business in particular. The market is a constantly adapting and evolving entity, and if you’re not on top of the changes then it can spell disaster. When one aspect of the market changes, it can create a domino effect. 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.
Think Before You Act
Your best bet at having your company live to see another day is to recognize the fact that there are going to constantly be risks for it. It’s also important to realize that you don’t need to be overly obsessed with risk assessment. No matter how much you prepare, how much your investors give, or how secure your prospects are, there will always be unforeseen risks. Your company will have problems and pains that you just can’t possibly know about ahead of time. This is why you absolutely need to be practical when making your assessments. Engage with common sense to mitigate the obvious risks in a cost effective manner and develop a mentality of quick and effective response protocol for unanticipated developments. The worst possible action to take is none at all, because no risk means no reward.