Risk Analysis for Startups: Factors to Consider & How to Execute

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Risk analysis for startups is more important than you might think. A whopping 90% of startups fail, but it’s mostly for all of the same reasons: poor products, a lack of funding or some sort of other dissolution down the chain of command. Running your own risk analysis can mitigate this sort of disaster.

Your business's risk management strategy should include doing your market research and constantly reevaluating the business environment you are in and competition you are amongst. SWOT analysis, Porter's Five Forces Model and other evaluation techniques can help you identify business risks, as well as your competitive advantage. Many risks identified by these techniques will fall into the same categories of pitfalls as countless businesses that came before you.

The key to successful risk management strategy is letting other people's failures guide you. These obstacles are known startup killers, but once you can identify their causes, you can intercept issues before they become a problem. When analyzing your business and its risks, consider these common issues.

People Don't Need Your Product

Any risk analysis for startups should begin with one question: Does anyone need what you’re offering? The top reason startups fail isn’t cash flow problems or a lack of investors. Those are just symptoms of the larger problem: a lack of need for your product. A whopping 42% of failed small business owners claimed this was their biggest hurdle.

Running some market research is one of the best ways to avoid the tragedy of investing in a product that no one wants. First, you should get a grasp on the competition. If there’s a lot of competition in your space, you’ll need something unique to make your business stand out. If there isn’t a ton of competition, you need to evaluate why. For example, you probably wouldn’t want to sell scuba equipment in the middle of Kansas.

You're Not Rolling With the Punches

The world isn’t stagnant. Things fall out of favor every day as we discover brand-new ways to do things, and new competition can absolutely crush a once-lucrative endeavor. According to a survey in Fortune, 19% of startups fail because they’re outcompeted.

The mark of a truly successful company is the ability to roll with the punches (i.e., adapt to market trends and changes). A failure to adapt is death. For example, the music industry as a whole still hasn’t recovered from the massive losses sparked by the advent of Napster in the 1990s, but Spotify somehow succeeded by legally filling the brand-new space that Napster created.

Most risk analysis for startups ignores the fundamental idea that technology or culture may one day evolve beyond what you’re offering, so your business plan needs to evolve as your company grows, or you’ll be left behind. Always have a backup plan just in case your particular product isn’t hitting. Don’t be afraid to change the business model if there might be a more lucrative path forward.

Poor Financial Management

Startups come with huge financial risks, but one of the main problems always seems to be running out of cash, whether there’s a lack of potential investors, a poor business model or a new product launch that doesn’t hit. If you look at it closely, some of the biggest tech companies in the world aren’t profitable and rely largely on investor funding. For example, even Uber, a car service nearly every smartphone-owning human has downloaded, somehow managed to lose $5 billion in the second quarter after its IPO.

If Uber isn’t profitable, how are you expected to be profitable? Don't be discouraged because the truth is that you can secure your success by limiting spending at every turn. One of the biggest mistakes a startup can make is improperly managing its finances and spending like crazy because it finally has cash. Don’t let a sudden influx of money from a single round of funding or a particularly good product launch cloud your financial vision.

You Have a Flawed Business Plan

According to a survey in Forbes, 78% of startups fail because they've either lost focus, lacked a business model, had pricing and cost issues, lacked financing or investor interest, had legal challenges and/or had a poor marketing plan. What do all of these things have in common? Your business should have already mapped this out before it became a problem.

These issues can be avoided or at least lessened by having a flawless business plan. It's pretty hard to find investors without one. Plus, it ensures that you remain on track with growth, profitability, spending and vision.

You Are Underinsured

Startups are run by humans, which means that things happen. There’s a multitude of risk factors including regulatory risks, operational risks, financial risks and even the risk of natural disasters and faulty or dangerous products. Just look at Gawker, which went bankrupt following a $140 million lawsuit all because it posted one unsavory video online. One mistake or accident can ruin your livelihood, which is why risk analysis for startups exists in the first place.

A whopping 75% of businesses are underinsured, and 44% of small businesses don’t have insurance at all, but you can mitigate your risk by picking up the proper plan. It’s important to know what type of insurance claims businesses are most likely to make so you can be ahead of the fold. According to a 2016 Insureon survey, the most frequent incidents were:

  • Client complaint or contract disputes. This made up the majority of all incidents, which is why businesses take out professional liability insurance plans.

  • Employee injury, which is why workers' compensation is a requirement for businesses with employees.

  • Burglary or theft, which also includes employee theft.

  • Fire, storm damage or cracked pipes

You Hired the Wrong Team

According to a survey in Fortune, the third most-common reason that startups fail is because they haven’t hired the right team members. Other common reasons include poor marketing, ignoring customers, lack of passion, disharmony between the team and investors and losing focus, but this all relates back to the first point: The wrong team members will destroy your startup’s chances of succeeding.

Hiring reliable talent should be your priority from the start, but it’s not as easy as it sounds. You want to collect a group of diverse people who have varying skills that will fill in every gap. Of course, a competitive salary makes it easier to find talent, but finding diverse talent means you may have to think outside of the box and expand your search beyond your inner circle. Everyone wants to hire his best friend, but all things considered, it may not be the best fit.

You've Cut Corners With Marketing

In the age of social media, it’s easy to throw up a Facebook page and call it a day. Startups, usually pressed for cash, often think they can cut corners by limiting their marketing budget, but is it to a detriment? According to a survey in Fortune, 14% of startups fail because of poor marketing.

At the heart of it, people won't buy your product if they don’t know it exists, but marketing is also responsible for your company’s public perception. Think of all the public apologies you’ve probably read in recent years (including the infamous Kendall Jenner-Pepsi Co. fiasco of 2017). A good marketing plan will make consumers trust that their money is well-spent on your product.

To make the most out of your marketing plan, don’t forget that marketing includes more than just social media and traditional ads. It’s everything down to the timeline of a new product launch (a reported 13% of startups are killed by a mistimed product launch) and your interactions with customers (14% of startups are reported to have failed because they ignored their customers).

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About the Author

Mariel Loveland is a small business owner, content strategist and writer from New Jersey. Throughout her career, she's worked with numerous startups creating content to help small business owners bridge the gap between technology and sales. Her work has been featured in publications like Business Insider and Vice.