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

By Daniel Wirjoprawiro

mountaineer-640x332The 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

About Ritchie Cruz

Ritchie has 20+ years experience in Public Practice, being trained as a Chartered Accountant in one of the largest 2nd Tier accounting firms in Australia. Experience also includes working in management positions in Medium to Large ASX Listed Companies. Recent experience includes working as a Group Financial Controller in medium size business going through the ASX listing process. Ritchie can offer big company management and reporting experience, to small & medium businesses.

Ritchie has a passion for small business start ups, helping clients grow from humble beginnings. See our small business start up page to see how your business can benefit.

Testimonials

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    Cosmetic and Implant Dentistry

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    Restaurant Owner

    Ritchie Cruz is my Accountant. We have a solid 10 year relationship.

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    Director
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    Cruz & Co offer a great professional and friendly service. Ritchie gave me confidence running the business knowing that he was readily available for…

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    Business Tax – Electrical Contractors

    Ritchie is awesome. He is very professional and responsive and he is always there to help you. He even replies during weekend. He needs some…

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    Director, Technical Design Company

    This is a new business startup and Cruz&Co. have provided great help, guidance and reassurance from the beginning.

    Ritchie has provided us with excellent service and…

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    Director, Travel Company Operations

    Ritchie Cruz and Co are accommodating and have excellent service.

    Cruz & Co have impressed me the most is due to their efficient service.  They are…

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    Business Tax – Travel Industry

    Cruz & Co was introduced to me this year and it was the best decision for my sole trader and personal taxation affairs. Ritchie the…

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    Director, Import and Distribution Company

    Ritchie Cruz provides and high level of accounting expertise and goes above and beyond in answering any queries we have.

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  • Home
  • About
    • Meet the Team
    • Our Clients
    • Testimonials
  • Services
    • Tax Consultant and Compliance Services
    • Small Business and Sole Trader Accountant
    • Outsourced Accounting Solutions
    • Business Structure
    • Outsourced CFO
    • Working Visa Refunds
  • Resources
    • Tax Refund Process
    • Client Assistant Schedule forms
    • Downloadables
    • Helpful Links
    • Rental Property Cashflow calculator
    • SMSF Tax Refund Process
  • Contact Us
  • Blog