By Dave Donovan
Considering that around half of all businesses no longer exist after five years, risk mitigation should be a crucial aspect of any new venture’s strategy. But which risks do you have to watch out for the most? Here are the ten most common risk factors that can kill a startup before it finds its footing.
When you start a new business, you can’t completely avoid the risk of losing all of the money you (and potentially others) have invested in it –but you can work to minimize this risk. It’s important to know exactly how much money your business needs to earn to break even and what your return needs to be in the first five years to ensure your investors are satisfied. A strong business plan will help you determine these things.
Odds are your business isn’t going to create an entirely new market, so in most cases, you’re going to be trying to enter a market that’s already home to established businesses. You need to strongly consider how many competitors you’ll be facing and who the biggest players are. How will your business be able to stand apart from the pack?
Do you have a clearly defined market in mind for your products or services, or do you plan on tossing your line into the ocean to see what bites? Knowing your market and exactly who you are targeting is crucial to streamlining your way to success. Ideally, to minimize market risk, your products or services should solve an immediate and pressing need in an under-served sector of a financially growing industry.
When entering your market, you have to have a solid and sensible strategy if you want to compete. But such things as inappropriate pricing, mistargeted marketing, and distribution inefficiencies can greatly increase your market-entry risks.
As a new business owner, you may not yet have the ability to properly gauge new-hire potential. This can lead to hiring employees with inadequate or unsuitable experience and skills, making it difficult to build the talent pool you need. To help minimize this risk, perform background checks on job candidates and verify their previous-experience claims by contacting their references.
Technology is crucial to the upstart small business because it helps protect assets while improving performance. But technology failures can threaten a business in a variety of ways, from preventing the company’s compliance with federal regulations to damaging the company’s reputation in its industry. Having the IT infrastructure to protect against data breaches, cyber-fraud, and network failure are essential for mitigating technology risk.
If your business sells luxury goods, then choosing to start the business during an economic recession can have a significant impact on your profitability. Before launching your business, you should make sure the business outlook of the market you plan to enter is as favorable as possible.
Does your business require any special equipment in order to operate? If it does, then do you have a plan of action ready in the event a key piece of equipment goes down? Failing to recognize your key operational risks can come back to hurt your business at the least opportune time.
Some places just aren’t made to house businesses. For instance, you don’t want to open up a glass factory on a fault line or a paper company in a floodplain. Knowing the environmental risks in your chosen location is a must if you want to minimize losses from potential natural disasters.
Many of the most attractive businesses to new entrepreneurs are those that are the most likely to fail. For instance, businesses in the food-service industry, the consulting field, retail, and the work-at-home fields traditionally have a very high failure rate. Choosing to start a business in one of these fields, or in another with a high attrition rate, will make your risk of failure that much higher. Unless you can confidently identify an advantage your company would have over others in a high-attrition-rate industry, consider entering a market with a lower failure rate.
Photo Credit: baandit.studio, Twenty20