The Risks and Opportunities in a Startup: Age 0-2 Years

Opinion

It’s a great time to start a tech company.  The economy is recovering. The business opportunities are immense. And thanks to the boom in seed investments and crowd-funding it’s easier than ever to raise money for the business. Meanwhile, cloud computing has leveled the playing field by minimizing upfront costs, while social media has made it possible to market products without spending billions of dollars.

But on the flip side, the competition is fierce. Customers have become choosier. And the market is changing more rapidly than ever. So how do you make it past these obstacles when you’re just starting out?

I believe that the best defense is to be aware of and prepared for the risks ahead so that you can proactively mitigate the ones that are critical, and turn the rest into opportunities. With that in mind, here are the three key risks that every company that is just starting out should be prepared to address:

Product Risks

So, you have a great idea for a product. But what matters is whether or not you can execute that idea, and turn it into a profitable, sustainable business venture. Many companies start off with an incredible vision, but can’t translate that into a successful product. Others create the product they envisioned, only to find that it doesn’t satisfy customers or solve a problem effectively.

So here are some questions to consider before you develop your product: Can you build what you set out to do within the established timelines? Do you have the funds, the technical know-how, the manpower, and tools to go about it? If you have the prototype or beta version, when will the final product come into shape? Will it work as intended? Have you thought about product distribution and customer support? More importantly, have you figured out how to monetize your product?

Yes, monetization is important. Take a cue from Evernote, whose products for note-taking and data capture are used by 100 million users worldwide. Evernote is built on a freemium model, offering a combination of both free and paid versions of its software. Its idea is that the longer a user is on Evernote, the more they’ll want to use it, and the higher they’ll be willing to pay. The business model has paid off well, and is definitely something that other startups can learn from.

Market Risks

In 1997, a startup called SixDegrees.com started one of the first and most promising social media networks. Yet it failed because the market wasn’t ready—Web technology hadn’t advanced enough, users weren’t convinced about the site, the 2001 recession was beginning to set in, and advertising revenue was difficult to come by.

Similarly, you might have a great offering, but does it have a market? Many startups obsess about creating the perfect product only to discover that people aren’t interested in buying it. The question to ask is, what problem are you trying to solve? Is there a genuine need for your product? Have you researched the market sufficiently?

My partner Gunjan Sinha was in Tokyo when the twin towers fell. He was thousands of miles away, but the fear created by 9/11 rippled out, prompting him and a few other Americans to move down the high-rise building where they were staying to the first floor. There they remained for a week, unable to return home. That was when Gunjan realized that the risk in the world had changed. Then the Sarbanes-Oxley Act came into effect, and people wanted a way to simplify compliance. So, by the time we launched MetricStream, the market was ripe for what we had to offer—a governance, risk, and compliance (GRC) solution.

But the market also continues to change. So it’s important to continue your research, identify evolving trends, and determine if the need for your product still exists. If the market moves on, will you evolve your product or diversify into new lines of business? These are important questions to ask.

Funding Risks

Where do you find sufficient capital to kick-start your business? The good news is that there are plenty of investors hungry to fund the next great idea. But there are plenty of other startups vying for their attention.

So here are a few things to think about: Do you have a well-defined business plan? Can you clearly communicate what you plan to sell and to whom? Have you identified a potential investor? Have you done the background research on them and their previous investments? How much funding will you be pitching for? Will it be enough to cover all your plans? What happens when your funding runs out? Do you plan to break even or make sufficient profits by then, or will you need further investment? Do you have a backup plan in case you can’t find an investor?

I believe that if you’ve effectively addressed the product and market risks that I talked about earlier, it becomes a lot easier to get funding. Start off by looking at sites like Gust which connect startups with investors across the world. You could also tap into the phenomenon that is crowdfunding through sites like Kickstarter. But even then, it’s important to define whom you want to reach out to and how.

The Pebble E-paper watch, one of the most funded projects on Kickstarter, succeeded largely because of its campaign—they put out a compelling video explaining why their product mattered. And they generated buzz by getting experts to talk about the product on their campaign page. Pebble was eventually able to raise over $10 million on Kickstarter alone.

Seize the Day

Trying to anticipate and mitigate every possible risk that could affect your new startup may not be practical. But you can and must zero in on the most critical risks, like the ones mentioned above, and then mitigate them through a combination of people, processes, controls, and technology. Remember that robust risk management can be a key competitive advantage.

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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