Risk Management for Startups 101: A Useful Guide

Are you ready to take risks? If not, you should get the hell out of business. This article deals with risk management for startups. And, since you’re here, you’re ready to take risks and want to know what kind of risks you’ll face and how you can cost-effectively mitigate those risks.

Taking risks does not mean launching a startup blindly and expecting profitable results. Meticulous planning and hard work are vital skills when putting up with risks in business.

Setbacks arise due to the uncertainties encountered in various aspects of your business. Will my consumer’s priority change in the future? Is my firm’s technology adequate?

An entrepreneur must be careful of the risks to prioritize them accordingly. But that does not mean you should over-focus on risks in the initial stages of your business, rather as your business progresses you must tailor yourself and become observant of risks.

You can’t run a business without taking risks. The brave may not live forever – but the cautious do not live at all.

Richard Branson, English Business magnate

Since risks are inevitable in a business, you might as well learn how to prevent or curtail risks in your business. For that, you must be informed of risk management for startups.

Now, what’s risk management? Risk management is a method of spotting potential risks in advance to prevent or curtail future risks.

Managing risks is very different from managing strategy. Risk management focuses on the negative – threats and failures rather than opportunities and successes.

Robert A. Kaplan, Senior Fellow, and Marvin Bower Professor of Leadership Development, Emeritus at the Harvard Business School, co-developer of both activity-based costing (ABC) and the Balanced Scorecard (BSC)

Risk management for startups: What kind of risks?

Some of the risks that startups face are operational risks, financial risks, talent risks, reputational risks, strategic risks, political risks, and legal risks. While risks are unavoidable in a startup, learning how to manage risks is vital, don’t you agree?

You’re here reading this article, of course, you agree. Let’s look at how risk management for startups work.

Risk management for startups: How to assess and mitigate future risks?

Assessing risks

Risks can be minor or major. Some come with minor consequences while some are major. Some have a low chance of occurrence and aren’t worth spending time, money, and energy worrying about it.

Although positive risks, if properly handled, open up new opportunities for your company, negative risks are unwanted and can cause major drawbacks if not handled with care and caution.

Research, research and research

Research is formalized curiosity. It is poking and prying with a purpose.

Zora Neale Hurston, American author

Knowledge is the best resource. Before launching a new business, conduct research. Study the market, target audience, and the potential risks you might face in the market. It enables you to analyze the potential risks and take precautionary measures to prevent or curtail such risks in the future.

Research on everything that surrounds your market. Your target audience, your product, your competitors, the ongoing trends in the markets, everything from A-Z.

Learn how you can improve your product from that of your competitors. How can you increase the demand for your product in the market? Are people willing to buy your product?

Financial risk management for startups

Financial risks occur when there are changes in stock prices, fluctuations in exchange rates, high tax demands, shifts in stock prices, and difficulties with cash flow handling.

To avoid such risks, establish a system for tracking your cash flows. Set money aside in case of unforeseen circumstances.

No matter what business you’re in, business is business, and financing and money are critical. I would have made a lot fewer mistakes if I had more schooling in that area.

Daymond John, CEO of FUBU

Suck at numbers and data? Your business is bound to fail. But, don’t worry, you can learn it through a consultant or even by reading. You don’t need a Ph.D. in finance to understand your balance sheet.

Understanding your cash flow statement is essential to analyze the capital and to plan and allocate it to the areas that need it the most.

Data analytics is also a fundamental aspect of risk management for startups. Management Information System (MIS) helps to track your operational efficiency, incomes, human resources, overhead costs, and more.

Build a strong MIS and get a good grip on potential risks.

Running out of cash?

The endpoint in the lifecycle of any business is when they run out of cash.

For instance, when customers refuse to pay your invoices or a sudden increase in the rates of raw materials or supplies can lead to the point where you run out of enough cash.

To minimize such financial risks, take funding when it’s available and reserve it. Organize a prudent cash management approach, A/R collection policy, and proper budgeting.

Talent risk management for startups

Talent management deserves as much focus as financial capital management in corporations.

Jack Welch, American business executive

Nothing we do is more significant than hiring and improving people. You don’t go betting on strategies, you bet on people. Employing the right team is vital in risk management for startups.

The risks faced when hiring: (a) Are you hiring the wrong person? (b) Will you lose your good team members?

During the initial stages of your business, you’re dependent on your small core team and can face risks by hiring the wrong team.

To mitigate or avoid such risks, conduct multiple interviews with core team members. Give them practice assignments as part of the recruitment process. Keep the successful candidates for a trial period and analyze them.

Sometimes candidates with a good attitude can lack skills, provide them with proper training, and cultivate them.

You must motivate your team from time to time and also invest in training and mentoring them to make them indispensable.

To avoid the risk of your key members leaving your company, provide them with adequate financial compensation and add clauses to their contract to prevent them from joining other companies.

Hiring unskilled co-founders is one of the many risks faced by startups. To avoid such risks, choose someone you already know as the co-founder, someone with skills complementary to yours.

Sometimes disagreements can occur between the co-founders over money or direction of the business, to avoid such risks make them sign a written founders’ agreement, which will help to minimize disputes about ownership and responsibility.

Know your team, hear them out, respect their perspectives, provide them with job security and help them progress under you.

Legal risk management for startups

Keeping track of the changing laws and regulations that govern the business operating in your industry is crucial in risk management for startups.

Failing to comply with the rules and regulations, gives way to lawsuits that reduce the attractiveness of investments and increases operational costs. It’s important to avoid criminal proceedings and hefty fines to maintain a positive image.

Getting on the wrong side of government regulations can lead to hefty fines and even prosecution.

Always ensure that your company has the necessary business licenses, employment laws, corporate governance, and tax compliance.

Operational risk management for startups

What if your company loses data and other legal liabilities?

A company is at risk if it loses data and other legal liabilities due to inadequate or failed internal processes, fraud, or human errors in processing transactions.

For instance, one of your employees wrote the wrong amount on a check, paying out Rs. 500,000 instead of Rs. 50,000 from your account. To avoid such errors, a more secure payment system could be established, or a second member of staff could authorize it. In this tech-savvy world, using an electronic system that flags unusual amounts for review could also be established.

To mitigate such risks, establish standardized operating procedures, add control steps at appropriate points, invest in professionals liability insurance to protect the company and individuals against claims made by clients for inadequate work or negligent actions.

In this tech-savvy world, cyber crimes are on the increase. Create awareness among your employees on creating safe passwords, the protection of your company data, and how they can safely use the web.

Political risk management for startups

Some countries or places have political tensions, weak judicial systems, high rates of corruption, and a stifling bureaucracy. Launching a business in such an environment leads to spending the majority of your time with inefficient activities that do not build genuine value for your business.

The best alternative is to set up your business in a business-friendly jurisdiction where there is political stability, a rule of law, has IP protection, no corruption, and low taxes.

Lack of diversification risk management for startups

A lot of small business startups face the risk of concentrating or relying on a single or a small set of factors for any aspect of their business.

When you’re financially dependent on one or two large clients, and if they fall apart or if the key clients run into difficulties, your business is at risk.

For example, if you get revenue from a single large client and you extend it for 80 days credit to that client. And if they’re unable to pay you for so and so reason. You’re at a loss.

If only a single marketing channel brings most of your customers, and the channel fails, you always have to have a plan B.

For example, When Google’s search engine algorithm changed, many websites saw a dramatic decrease in their search results. To avoid or mitigate such risks, rely on diversified marketing channels.

Strategic risk management for startups

In this ever-changing technologically advanced world, there is a high chance of your competitors inventing a product that is a threat to your company. You must therefore be vigilant and adaptive to the changing environment.

During the changes in our environment, we must adapt and change our company’s strategies into something beneficial that will increase our profit according to the changing environment.

For instance, during the Covid – 19 pandemic, when many startups and businesses saw a decline in their profits, Pharmeasy, India’s largest healthcare delivery platform provided safe and contactless delivery of medicines across India.

There are high chances of your competitors’ innovation becoming a threat to your core business model. For example, Kodak had a dominant position in the film photography market. But when one of its engineers invented the digital camera in 1975, it became a threat to the core model and failed to develop further.

Meanwhile, in Xerox, the development of laser printing was a strategic risk to Xerox’s position. But it adapted to the new technology and changed its business model to become successful.

Another of the strategic risks a company can face is to keep other competitors from stealing your innovation.

To avoid such risks, invest in copyrights, trademarks and patents.

For a successful startup, study your market, do research, hire the right team, launch your startup in a business-friendly government, diversify your marketing channels and manage your finances properly.

Hope this article on risk management for startups helped you in some way or the other. For more such articles, subscribe!

Also read: 7 Signs You Should Change Your Startup Idea into Something Promising