daily articles for founders

Startup risks

Reading this article earlier today spurred me to write down my thoughts about startup risk.

One of the questions in the TSB grants application is about risk. In that question, TSB (a UK government funding body aimed at technologically risky projects) like to see a variety of risks covering the business's key risk areas.

In my opinion, it's largely a filler question. You can't win or lose the application based on this one only. Part of this is because every business has multiple risks in many areas. Having written quite a number of applications over the last year, I have developed the skill of coming up with a wide variety of risks to list, describe, rate and mitigate, for almost any technological business. It's not very hard, because almost every new business is full of risks, and technology businesses doubly so.

In short, it's become a personal habit (if it wasn't already), given a proposed business, to be able to identify the most interesting and relevant risks and how they can be mitigated.

However, inexperienced founders seem to take one of two views.

The first one is to believe that their business isn't risky. They have the great idea and put together a team that can build it (those were the difficult part). The rest is just execution. If you push them, these types of founders might agree that there are some risks in execution (after all, building products and shipping them to customers is not so easy), but they feel that everything else is fairly well understood. Don't laugh at them - you were probably one of them some time ago, maybe you still are. I was in this category for my first two startups.

The second type is aware that there are risks, but lumps them all together as one big "startups are hard" risk. They embrace the risk and see it as a badge of honour that they're doing something immensely risky and which is clearly impossible to make less risky because that's the way startups are, and if you can't take it you're clearly not cut out for this great work, so go back to your day job. I'm being slightly mean here, but that's the general idea.

Both are touchingly naive, of course, and equally wrong.

The experienced view

I am lucky to have a number of friends who are entrepreneurs, as well as a variety of clients, some very experienced and some less so. I am also lucky to be an entrepreneur myself, which gives me direct insight into the progression of my own thinking about risk.

The more experienced an entrepreneur is (and, related to that, the better they are at executing), the more sensitive they seem to be to risk. They are neither naive about risks, nor seeking to embrace risk.

In fact, successful entrepreneurs seem to be keenly aware of risks of all kinds. They abhor them and do their damnedest to mitigate them in every way possible. They will take calculated risks (that's part of doing business) but not before figuring out how to make that risk as unlikely and as painless as possible.

An important competence that is developed through experience is the ability to prioritise risks, to figure out which ones are the big ones. If any startup basically has hundreds of risks, then there's no way you can address all of them. Everything that humans do contains some degree of risk, but some of the risks might kill you, others might kill your business, and others you won't even notice. Some are very likely to occur, and some much less so. The point of risk mitigation is to make sure that there are no risks which are both very high impact and very likely, and to reduce whatever big impact risks you must take down to their minimum likelihood.

This is the insight that people try to convey when you meet them at a networking event and pitch your business, and they respond with something like "Oh, you want to make sure to think about X". Their spidey sense (built, perhaps, over years or decades of experience) is tingling and telling them "uh oh, there's a big risk there worth paying attention to".

The usual response to such a suggestion, unfortunately, is to brush it off and try to appear in control. It's a shame: it seems like a missed learning opportunity. When people tell me this, my reaction these days is to ask them "really? why do you think that?" Who knows, I might learn something important.

Risk mitigation for startups

Most properly organised corporate projects have some kind of risk management system in place. This often takes the place of a simple risk log which is reviewed regularly, with risks (and their likelihoods, impacts and mitigations) updated to reflect the evolving reality.

I used to think that this was overkill for startups, and I still think so. Such logs have a tendency to grow in size until they are effectively useless. Everyone wants to add their brick to the wall, and soon the team is drowning in risks and, if people have any sense, they start ignoring the risk log.

However, there is a much more natural method of risk management which I (and other entrepreneurs I know) use, which is to assess and reduce risk at the point where it has most impact and is most relevant: when making decisions and deals.

Everyone thinks they do this, but most people don't. Try this process for the next few important decisions and deals that you make:

  1. Scribble down the potential downsides of this decision
  2. Come up with one to three ways that each of these downsides can be reduced in impact or likelihood
  3. If there is a counterparty, try to convince them to adopt one of these changes (you can even tell them it's to reduce your risk, they'll usually understand). If this is a decision you're making by yourself, implement those changes and reduce your risk (if the reduction is worth the effort)!

The point of this process is not to stop making decisions because they're risky. I once heard a would-be entrepreneur declare "I don't make any decisions with an up-front cost and a risky outcome". That's taking risk-aversion way too far. You have to take risks sometimes. The point, however, is to keep those risks as low as possible.

Spend 10-15 minutes evaluating the risks before making an important decision or entering an important deal. It's very much worth your time.

More from the library:
How to find startup ideas that make money
How to hire a programmer
Idea reach and the cofounder myth
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