The risk of not understanding risks – Part II
I am on the topic of entrepreneurial risk. Previously I made the case that the statistics on failure of start-up business are terrible and it begs the question, why is the failure rate for start-up businesses so high? More specific, are the risks for starting a business just too many and too high? This lead to my conclusion that the cause for the start-up failure are not the risks per se, but rather the fact that the prospective entrepreneur is not aware of the risks and how to handle it.
The major risks for entrepreneurs were identified as: Product risk, Market risk, Financial risk, Team risk and Execution risk. In the previous delivery I addressed Product- and Market Risk and in this delivery I want to discuss the remaining three.
So let me kick off with the risk most entrepreneurs probably think is the biggest risk when starting a business – Financial risk. There are two ways of looking at financial risk. The one is the risk of the entrepreneur losing a lot of his or her own funds, and the other one is where the business runs out of cash – usually the end of the road for any business. Concerning the first viewpoint, depending on how you’re funding your start-up business and how much revenue you have access to early on, your financial risk could be enormous. You might have invested your personal capital into the business, or you might have sacrificed a steady income from a more reliable long-term career path to start the business.
For the second viewpoint, when you start a business, your business revenue will likely be inconsistent, leaving you with unpredictable income and occasional shortages. Considering viewpoint one and two, if too much of your own capital is tied up in the business, the risk of failure is very real, and could leave you with limited options for recovery. So, do what you can to limit your financial liability. Seek outside funding, and if possible, find a supplemental source of income so you aren’t wholly dependent on entrepreneurial returns.
When you first start a business, you won’t have a full team of employees working for you. Instead, you’ll probably have a small, tight-knit group of people working tirelessly together in an effort to get things up and running.
You’ll have to put an overwhelming amount of trust in them and this makes Team risk at the same time, the most crucial and least predictable element of any business.
The right combination of experience, contacts, and temperament among your starting team can vastly increase a venture’s odds of success. So the risk here is that failure to recruit, motivate, and retain the right people can have devastating effects on your business.
Businesses fall apart when people develop major rifts – for whatever reason. Mitigate this risk by establishing a clear vision and culture from the beginning that the entire team can rally behind, and you must manage strong egos, and mediate personality clashes and disagreements effectively.
Lastly, it’s one thing to say you’re going into the business of making and selling “product X”. It’s quite another thing to master the actual mechanics of making and selling “product X”. Execution risk addresses questions like: Can you manufacture your product or deliver your intended service? Will your product/service work as intended? Can you find reliable vendors? Can you optimise the logistics of product distribution? Can you create an effective product support infrastructure? Do you have a backup plan to keep your business running when an accident destroys some key equipment in your business? When it comes to managing execution risk, it’s all about careful planning and watchful management. Most important, learn from other people’s mistakes, entrepreneurs do not always have the luxury of making their own mistakes.