What is it that Kills a Startup?
No matter how long you wait, the inevitable will happen and a disastrous situation will occur. To beat the odds and come out with your chip up, you must take a disciplined approach and identify the risks at hand. Are you prepared?
A well-known statistic is that half of all startup companies are gone within the first five years of their existence, and on top of that there are other statistics which show can be even more brutal than that. A study formed in 1998 by Small Business Administration shows that only 44% of startup companies were still operating roughly four years later.
In the majority of years, more companies close due to a variety of issues or declare themselves as bankrupt as there are companies that have filed as starting up. Statistics show that in 2008 and 2009, the number of companies that filed for closure exceeds the number of startup companies those years due to the financial crisis of 2008.
While some companies are closed by choice, whether it be the owner retiring or whether it be the owner moving on to the next chapter of their life, others are battling with bankruptcy and find that it would be easier to shut down the company rather than try and sell it to potential future owners.
However, most closures, even the ones that don’t end in bankruptcy, are the result of an unseen situation. Although, the problems that cause these closures can easily be avoided if the company’s executives had looked more into their risk management.
Risk and Reward
When talking about risk, it simply means that when making a decision, you take an option that could have an outcome that isn’t in your best interest.
The negative aspects of unforeseen circumstances are a prime example of exactly what risk is. If you were able to predict what would happen in the future, then there would be no risks to take when it comes to business. If there are no risks, there are no uncertainties.
The proof that risk exists is everywhere. Home values plummeting more and more every day. The stock market prices taking hits every day. Frozen credit markets. The risk is all around you.
However, wherever there is risk there is an opportunity. Risk and reward are directly correlated. The bigger the risk is, the bigger the reward. Note that the few situations that have a high-risk margin sometimes have a very low reward, or even no reward, are silly risks that you shouldn’t consider taking.
As an entrepreneur, to you this means that if you want to have a shot at being successful, you sometimes have to take big risks. Being an entrepreneur takes hard work, and hard work is never risk-free. This is why more and more startup businesses are failing in their early stages.
While taking risks is an important part of being an entrepreneur, that doesn’t mean that you have to take every risk that you come across. Be smart and think about each risk, consider the outcomes, and decide on whether or not it would be worth it. Having a keen awareness and managing your risks correctly will help you gain the success you desire.
The Risk Management Framework
Risk management is thought the process of what you think could go wrong when you take a risk, and deciding whether or not the risk balances out with the reward. So that you are able to identify the risks you are considering taking and figure out the best way to mitigate them, you first need to consider a framework for classifying the different risks.
Each risk has two different angles. The likelihood of its occurrence, and the potential consequences of its severity. There are four parts of these dimensions, which will help you mitigate the risks.
- Quadrant A: Ignorable Risks
- Quadrant B: Nuisance Risks
- Quadrant C: Insurable Risks
- Quadrant D: The Company Killers
Once you have identified how severe each risk is and the likelihood of it, you should be able to answer whether or not the benefits of mitigating each risk outweighs the cost of taking the risk.
Identifying Company Killers & Mitigating Them
Some companies have to declare bankruptcy once their financial side takes a hit due to their current liabilities being more than their assets. Risk management focuses on identifying uncertainties and mitigating them, especially the reasoning behind company killers that are surrounding the cash flow of a company.
Even though there is uncertainty in most businesses, you are able to group most of the things that kill a company into the categories below.
- Market Risks
- Competitive Risks
- Technology & Operational Risks
- Financial Risks
- People Risks
- Legal & Regulatory Risks
- Systemic Risks
There are a variety of risks which are able to span between several of these categories, although impact each category differently.
Pragmatic Risk Management
When it comes to designing a pragmatic risk management plan, it shouldn’t be too hard of a task and in fact should be reasonably simple. There should be seven parts to your plan.
Risk Factor: This part should contain anything that you think may cause significant harm towards your business.
Type: Place the risk you are going to take into one of the categories above. If the risk lies within the company’s financial department, it will be a Financial Risk.
Likelihood: Take a few minutes to consider the chances of the specified risk actually happening. Using simple terms such as high, medium or low should be effective enough.
Consequences: If the risks fall into place, what are the consequences of such and how will they affect your company.
Mitigation Tactics: This part should list all of the things that you are able to do in order to reduce how likely the risk is as well as minimize the consequences of the risk if it happens to develop.
Mitigation Costs: Consider each mitigation tactic you have listed from above and think about the costs involved in implementing it.
Status: Once you have put together the sections above, you must decide on which tactics you are going to implement for your company. There’s no right or wrong, this is all on you. When taking action, if you take any, then you should take note of them in the status part of your risk management plan.
While putting together a risk management plan, you should have a meeting between your executive management team and gather input. Everyone makes mistakes, having input from a group of others helps minimize those mistakes. Similar to a business plan, having a risk management plan is a document that you should take a look at regularly depending on how the circumstances of your business develop.
Above all, it is important that you are regularly developing and working on a risk management plan, although try not to obsess over it. You can’t think of every possible outcome, it isn’t possible. It will hold you back and it will stop you from growing your company.
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