The Top 5 Risks Confronting Startups

8/23/12Follow @metricstream

You might have a great idea for a startup. You may be passionate, driven, and ready to go. But how ready are you to manage your risks?

Many startups fail because of ineffective risk management. So how do you avoid a similar fate? It all depends on how well you understand and manage your risks.

As the CEO of a company that helps organizations across the world build stronger and more integrated risk management processes, I’ve seen many startups misunderstand and underestimate their risks. Here are a few of the most critical ones:

Risk 1: The Wrong Leaders

Your startup might have sufficient capital, a great team, and optimal market conditions. But does any of that matter if you don’t have the right leaders?

Many leaders lack the relevant expertise and experience. Or they may be poor decision makers. Whatever their traits, nothing sinks a new business faster than poor management.

Compare the examples of promising startups that failed after numerous leadership battles, with Apple—once a startup like any other—whose unprecedented success was largely due to the man at the helm: Steve Jobs.

Great leaders make great businesses. They are passionate about and committed to the startup. They create a work climate that buzzes with creativity and productivity. More importantly, they are good strategists who ably transform visions into reality, deal effectively with change, and steer the business in the right direction.

As the founder of your startup, you may be keen on leading your business. But what if you’re not the right person for the job? Find out by talking to seasoned CEOs. Understand the skills and experience required. Realize your own limitations—being a technical genius doesn’t mean that you will be a good manager. Talk to advisors you trust, who will tell you if you lack key leadership traits. You can either recruit a senior leader to partner with who has those traits, or find the right CEO that can bring to your startup all the leadership strengths needed.

Risk 2: An Inadequate Vision

Elon Musk founded SpaceX in 2002 to shoot for the stars, with the vision of making space travel more accessible and cost-efficient than other space launch companies or agencies such as NASA. His vision didn’t end there. Elon’s long-term personal goal is to make life multi-planetary to ensure the survival of the human race.

The moral of the story? Have a unique vision. Don’t try to be the next Google, the next Facebook, or even the next SpaceX. Be the next “you.” That may not always mean creating a brand new product or service. Sometimes, it could mean doing something different with existing products or services.

The key is to understand the market, predict future needs, and be ready to evolve. Crystallize your vision by defining who you are, what you stand for, and what you expect from your startup. More importantly, ask yourself why you’re doing what you’re doing. Says Simon Sinek, leadership expert and motivational writer, in his inspirational TED talk, “People don’t buy what you do; they buy why you do it .”

Risk 3: Insufficient Investor Support

Being a bootstrapped startup has its advantages. But sometimes, investor support is essential. Without it, you may not have the flexibility to experiment with your product or service. And you’ll miss out on the essential advice, networking, and credibility that investors provide.

Of course, it’s tough to win over investors. But then again, Andy Bechtolsheim famously cut a $100,000 check to Google’s founders even before the company’s name was chosen.

The trick is to make sure you have a convincing business case with a well-researched plan and prototype. Also make sure to clearly define how much money is needed not just to start the business, but to stay in business. Insufficient operating funds have ruined many a startup before they have even had a fair chance to succeed.

Risk 4: A Lack of Competitive Advantages

As a startup, you’re a small fish in a big ocean. If you want to be noticed, you have to stand out—not just in your offering, but also in your business model and brand positioning.

Zipcar didn’t try to capture the existing car rental market at airports. They sought to create a new market by focusing on young and trendy “zipsters” and not on corporate honchos. Cars were conveniently located, and access to them was automated through a cool mobile app.

You’d hardly expect any of this from a car rental company. But today, Zipcar is the world’s largest car sharing service precisely because it strives to be different from the rest.

You too need to demonstrate at least one single competitive advantage that is central to your business – something that is sustainable and also difficult to copy because, make no mistake, people will try to copy it.

One of Google’s biggest competitive advantages is its search algorithm. Yours might be your intellectual property. Or it could be your existing customer base, especially if you plan to launch a new product or service. It could even be your business team—Steve Jobs and Steve Wozniak were two of Apple’s most prized assets. Whatever your advantage, make sure that it is truly “competitive.”

Risk 5: Impatience and a Short-Term View

Any entrepreneur will tell you that persistence and optimism are critical for starting a business. When Sir Richard Branson launched Virgin Atlantic Airlines in 1984, his critics said it would never last. But it did, despite both the soaring fuel prices of the ’90s and the 9/11 terrorist attacks that nearly drove airlines out of business.

What makes Branson so successful is his never-say-die attitude. Too often, startups give up on good ideas too soon. The road to success is long and littered with failures and “no’s.” As Biz Stone, cofounder of Twitter famously said, “Timing, perseverance, and ten years of trying will eventually make you look like an overnight success.”

So stick it out for the long run. Market your uniqueness. Get investors on your side. Have a strong vision. And select the right leaders. That way, instead of succumbing to risk, you’ll thrive on risk.

Shellye Archambeau is CEO of MetricStream, a Palo Alto, CA-based company offering governance, risk, compliance, and quality management solutions to enterprises in the pharmaceutical, medical device, high tech manufacturing, energy, financial services, healthcare, manufacturing, food and beverage, and automotive industries. Follow @metricstream

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