Risk management 101 for startups: How your business can avoid “catastrophic” dangers

By Daniel Wirjoprawiro The best startup founders have a deep understanding of the risks facing their business – they maximise their chances of success by mitigating or eliminating bad risks and deliberately taking smart risks. Risk management should be top of mind for founders, especially material risks that pose a threat to the existence and survival of their business or could potentially deliver a significant upside. While there are universal risks that are well documented, such as burn rates and product market fit, there are many risks that are unique to particular businesses and the context in which they operate. Founders need to comprehensively and regularly identify and assess risks to their business and develop and implement plans to manage them. Most risks will require some level of management because there is a reasonable or high probability of them occurring and if they were to occur would have a detrimental impact on the future of the business.

FORM STRATEGIC PARTNERSHIPS

Founders should be creative in their mitigation strategies and consider dimensions such as relationships, incentives, controls and structures. Strategic partnerships can be a particularly effective mitigation strategy, allowing early-stage startups to grow quickly and share risks. A strategic partnership to drive customer acquisition is an example of a strategy that will mitigate risk and boost growth. Instead of burning capital on ineffective marketing that may not yield results, a payment is made to the strategic partner upon acquiring customers.

KNOW YOUR CUSTOMERS INTIMATELY

One of the most common risks for early-stage startups is building the wrong product or service. A rigorous customer development process will mitigate this risk. In a B2B startup, founders can develop strong relationships inside target companies to understand their specific needs. In a B2C startup, founders can interact with customers to develop a deep understanding of their needs. In a regulated industry, founders can engage with key regulatory decision makers to ensure their product or service is compliant. Whatever the context, it’s critical founders establish feedback channels to mitigate the risk of building the wrong thing.

PICK YOUR BATTLES

Some risks will have a low probability of occurring and if they did actually occur would have little impact on the business. Risk management plans should still capture these risks and founders may decide not to invest time in mitigating them. That may be the right decision so long as the decision is made consciously. In isolation, some risks may seem improbable or unlikely to have a significant impact on the business, but when considered in combination with other risks they could be more serious, even catastrophic. Risk management plans should consider the compounding impact of risks. Where reputational damage is a probable result from a risk occurring, the impact can be significant, difficult to repair, and even trigger a domino effect. Founders should not underestimate these risks and carefully consider the correlation of risks. Some risks have the potential to create enterprise value. They are cost effective, cannot be mitigated, transferred or avoided, and could potentially deliver significant upside that takes the business to the next level and materially changes the value of the business. Founders should comprehensively explore these risks too, and manage them deliberately and carefully to realise the opportunity they create.

CONSIDER YOUR INVESTORS’ POINT OF VIEW

The industry may be called venture capital but good investors will ask rigorous questions to identify and understand risks and how they can be mitigated, ensuring their capital will be used efficiently and create the greatest value. Founders can raise capital quickly if they are able to manage risks well and articulate and demonstrate this capability to investors. Source: StartupSmart