If you know the enemy and know yourself, you need not fear the result of a hundred battles. – Sun Tzu
As a startup founder, your ultimate dream is to see your startup succeed. In your gut, you know several things can go awry, given Murphy’s law and what not. As seasoned business minds will tell you, a new business venture is fraught with risks. Risks are your enemy, and you must know them to counter them effectively.
In the current competitive business environment, business risks have become multifarious and command a system of their own. If you plan to make a smooth sailing of your startup journey, you need to couple that acute business instinct of yours with an exhaustive awareness of potential business risks.
The good news is you don’t have to look any further. Here is a complete guide to help you identify and manage the various business risks in your startup journey.
What is business risk management for startups
As a founder, your goal is to create a high-performing business. However, with high performance, business risks are inevitable. As the modern business environment evolves continuously, the risks are never entirely eliminated.
You can understand these risks, predict them, and develop a strategy to deal with them without adversely impacting your startup.
Let us look at the different types of risk your startup can encounter to understand this beast better.
What are the types of business risks faced by startups
Preventable risks
In a business risk management framework, preventable risks are those that you can eliminate. These risks usually arise from within your startup. Some examples of such risks include unethical practices of your employees, such as bribing government officials, production breakdown due to a poor-quality process line, negligent customer service, etc.
While you can decide to tolerate these risks to a certain extent, eliminating them in the long run is more profitable for your startup. To eliminate these risks, proactive prevention is the way to go. In proactive prevention, you establish robust monitoring and fault resolution protocols.
Strategy risks
When you invest in your startup, you essentially take on a strategy risk. The same goes for investing in your startup’s research and development or making significant hiring decisions. The adage “High risk equals high returns” is based on strategy risk.
You cannot and should not eliminate strategy risk. That would mean being static in a dynamic environment. Instead, it would help if you learned to predict such risks and establish failsafe protocols early on, allowing you to take higher strategy risks over time as your business grows.
External risks
External risks, such as political and economic issues, natural disasters, regime change, etc., come under external risk and are the most unpredictable.
Since you cannot anticipate these risks, you should work on minimising their impact on your startup if and when they occur. Keep in mind that you may take some financial hit from these risks. The good news is that with more experience, you can lower their impact on your business.
Why risk management is essential for startups
Protects startup’s reputation
If your startup has to grow into a profitable business, it must build and maintain its reputation in the market. Reputation ensures longevity. Effective risk management ensures a good reputation.
Imagine your startup puts out a product that can’t perform up to the expectations due to some issues with the production line. Imagine customers trying to reach your customer service but not getting any response. These preventable risks can damage your startup’s reputation and lower investors’ confidence.
Minimises loss
Your startup can also gain a lot financially through proper risk management. For example, faulty accounting can lead to substantial financial trouble with your startup’s taxes and earnings. You can avoid such unwanted losses by ensuring your employees follow proper accounting protocols.
Accelerates innovation and growth
You can employ a business risk management plan to foster innovation and growth in your startup by offering your employees more freedom within necessary constraints.
The best example of this is Netflix, which used to be a DVD rental company in the early 2000s. When faced with increasing market competition, Netflix introduced a video streaming service by going against the trend. And the rest, as they say, is history.
Streamlines decision making
If your startup is more prone to certain risks, you can prepare for those risks beforehand by developing hypothetical scenarios. The preparation will streamline your decision-making process in general and during risk occurrence.
How can startups manage business risks
Let’s look at some techniques you can adopt for a compelling business risk management framework.
Avoiding risk
You should avoid or eliminate preventable risks for the long-term benefit of your startup in terms of minimising losses and building reputation.
Transferring risk
You can transfer some unavoidable risks, such as external risks, by hiring an insurance carrier or a third-party company specialising in risk mitigation.
Preventing loss
When you encounter an unavoidable risk you cannot transfer, you should aim to reduce its impact on the functioning of your startup through preventive measures.
Retaining risk
If you decide that employing outside risk management sources makes less financial sense, you can retain and handle the risk within your company. For example, you can develop and deploy the software in-house instead of buying security software for your startup.
Concluding thoughts
A robust business risk management framework is the key to a long-term and sustainable startup journey. How well your startup matures into a high-performing business depends on how well your business risk control strategies are.
As a startup founder, funding is your paramount concern when beginning. Risks in the dynamic business environment can strain your finances if you fund your startup from your savings. Keep your savings for your future and consider business loans.
With Tata Capital’s flexible business loans and attractive business loan interest rates, you can focus on developing your business and planning calculated strategic risks for high gain without worry.
24 September 2024
5 mins read
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