How to Manage Certain Risks in the Early Stage of Startups
When people talk about startups, their conversation tends to head in one direction – to the infamous failure rate that seems to be plastered in just about every tech blog and magazine. According to statistics, 90% of startups fail.
Despite the odds, plenty of people still try to go for it. For many, being their boss and creating something of their own from the ground up is exciting, unique, and exhilarating.
And if they are the lucky ones, it could just be their best decision. Data from the US Census Bureau shows that an average of 4.4 million businesses are started every year. And even in the pandemic-stricken year of 2020, VC (venture capital) firms gave more money to startups than ever before.
While the word risk often has negative connotations, sometimes the best outcomes can come from taking risks. When it comes to gambling, for example, betting money can be risky, which is why many people either don’t do it, or they play it safe if they do.
High roller players – those who wager a lot of money – take a risk, and while it often may not pay off, it can occasionally lead them to win big. According to this source, high roller players will often be treated differently by casinos as a result of their risk-taking and high-wagering behaviour, and they can end up benefiting from it greatly.
And while the odds may not exactly be in your favour, taking the risk of starting your own business doesn’t have to be a reckless gamble. All startups have to take risks, but what is important is managing and calculating these risks in the right way. While risks exist at every phase of growth, the early risks are the ones most talked about because they are the ones that can sink a startup before it has even taken off.
One of the first, and often biggest, risks that entrepreneurs encounter is having unclear product or service goals. While having a great idea is fantastic, turning this great idea into a viable product or service can be difficult. Startups need to know what their product is, what problem it solves and how they can sell it to people. Knowing these things is key to avoiding a flawed business model and failure before the get-go.
Statistics show that over a third of startups fail because there was no market need for their product or service. To mitigate the risk of being in this 35%, expansive market research needs to be performed, as it helps determine who your potential customers are and how and why they would want to buy what you are selling.
On top of researching the existence of the market demand, startups need to research a viable route to reach the market, how to build this route, how much it will cost, and how much time it will take.
Another important element of this market research is finding out about your competition. An already oversaturated market is going to be harder to infiltrate compared to one that is perhaps a niche, where there is a gap in need of filling.
No matter how good the idea is, breaking into an already overcrowded market where businesses dominate is going to be hard.
While this doesn’t necessarily mean you need to change your idea, to try to avoid failure, startups need to make sure they are offering something different and better than the competition is offering.
Another of the biggest risks in the early stages of startups is cash flow. Many startups get their seed funding from family, friends or business loans, but often this funding doesn’t leave much room to maneuver financially.
As a result, entrepreneurs need to be diligent and precise about where and what to spend the money on. Having a clear financial forecast is crucial to manage the risk of running out of money.
If possible, an accountant can be very helpful to keep the startup on track and to take care of the bookkeeping, especially for those who may not have the strongest background in finances.
Startups that are VC funded can also run into difficulties of not having enough capital. Budgeting and careful financial planning is essential, especially when it comes to pitching to the startup investors and securing another round of funding to support the growth of the business.
Burnout can also lead to the failure of early-stage startups. Typically, startups begin their life with a small team – sometimes this can be just one or two people – and they need to wear several different hats. This can lead to the team becoming overworked and overextended.
The founders are the ones who tend to experience this burnout the most, as they are the ones deeply invested in the vision and mission of the startup.
To avoid this risk of burnout, finding time to disconnect and take a break from the job is essential, in the hope that feeling refreshed and tackling the business with a new perspective will benefit the business.