The risk of not understanding risks
I discussed the contentious topic of Business Plans in the previous two deliveries. Everyone is entitled to her or his own opinion regarding Business Plans, but I stand by mine, as a planning tool, it has to form part of any prospective entrepreneur’s toolbox.
I am regularly in conversation with people who have great ideas for new ventures or the next great invention. The excitement and enthusiasm of these conversations are infectious and probably the part of entrepreneurship I like most – the birth of the idea! However, the sad truth is that 99% of these conversations amount to nothing. The ideas just stay ideas, and the main reason why the ideas are not realized? People are risk averse, the idea is great, but they are not willing to take the risks to make it happen. So, in this delivery, I want to dissect risk for entrepreneurs and how to deal with it.
Anybody who is interested in entrepreneurship and reads up on the topic will know that the statistics for start-up business success are horrendous. There are many reported figures on this topic, but for argument’s sake let us take it as 90% of start-up businesses fail within the first year of operation, and 50% fail within the first 5 years – which is not too far from the truth if you actually go and look it up. With these odds, it is a wonder that anybody is willing to take the plunge in the first place. So, it begs the question, why is the failure rate for start-up businesses so high, are the risks for starting a business just too many and too high?
So, let’s quickly dissect, what are the risks that start-up businesses face? There are obviously many, but the main ones according to www.entrepreneur.com are: Product risk, Market risk, Financial risk, Team risk and Execution risk. Due to space constraints, I want to address the first two with this delivery (Product risk and Market risk), in my view the most crucial ones, and they are very closely related as well.
Fortune reported the “top reason” that start-ups fail: “They make products no one wants.” A careful survey of failed start-ups determined that 42% of them identified the “lack of a market need for their product” as the single biggest reason for their failure. To relate this to my story of the enthusiastic idea birth, the prospective entrepreneur is usually so excited because he or she is of opinion that their product, service or invention is just absolutely awesome, but, does the market think so as well?
So, my point here is this, is the cause for the start-up failure the risk, or rather the fact that the prospective entrepreneur is not aware of the risk and how to handle it?
So, how do you mitigate the product and market risks? Don’t get caught up in the hype of your own excitement because you think you have a great product or service. Knowing your customer and why, how and where they buy related products is arguably the most important risk factor to assess before launching your product. Research this thoroughly. Identifying these routes to market, and whether you can build them effectively, in a timely fashion and within your budget, could easily determine the success of your business. If the market risk falls in your favour and you get into your market early enough, there’s no reason why your business can’t succeed. Decide what you are selling. It seems like an easy thing to determine especially for an entrepreneur. But the ability to explain what your product is, the problem(s) it solves, and why it’s worth investing in is much harder than it seems – and it must be an entrepreneur’s top priority when starting a business. If you can’t do that, you can’t expect people to pay attention, let alone part with their hard earned money.