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A Risk Assessment Guide for Sailing Startups

business.com editorial staff
business.com editorial staff

According to the U.S. Bureau of Labor Statistics, 20% of businesses fail in the first year. Understanding the risks involved can help your startup sail past the rough waters.

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  • 42% of startups fail because there wasn't a market for the product or service.
  • Understanding the risks your business faces is the first step to risk assessment.
  • Consider risks related to human error or malfeasance, including financial, operational, technical, etc.

On the bone-chilling fateful night of April 14, 1912, the RMS Titanic began its fateful descent to the bottom of the North Atlantic Ocean only four days into its inaugural passage. The sinking took all but three hours and resulted in the death of 1,500 people, remaining the most infamous maritime startup failure in history.

The ship's catastrophic downfall resulted from poor planning and failing to heed to the cautionary orders of the Coast Guard. Unfortunately, the crew didn't perform a risk assessment before setting sail, nor did they have an evacuation plan.

Startups are extremely vulnerable to many types of risks, from the insurable to the not-so insurable. Resembling the Titanic fiasco, many startups are subject to a quick and short-lived tenure.

What are the major risks a startup company faces?

Startups face many risks. According to the U.S. Bureau of Labor Statistics, 20% of businesses fail in the first year. Understanding the risks involved can help your startup sail past the rough waters.

The biggest risks faced by startups are

  • No market
  • Lack of capital
  • A poorly assembled team

Market risk

No matter how well designed your product is, if consumers aren't interested in it, it won't sell. In fact, according to CB Insights, 42% of startups fail because there wasn't a market for the product or service.

Before you launch a business, have a very clear idea of what problem you are solving and who your target market is. If the market isn't there, you are doomed. Successful businesses release the right product to the right audience at the right time.

Competitive risk

In addition to the risk of their not being a market for your product, there is the risk that the market is saturated with competition. Innovation can help reduce this risk. However, if the market is overly saturated it is difficult to gain the customer base to grow your business.

Capital risk

Your business needs money to grow and thrive. The initial funding will come from investors. They may be friends, family or angel investors. You may raise funds with a Kickstarter campaign. No matter how you raise your capital, you have to have enough to keep your business moving until it becomes profitable.

No one can foresee all the potential expenses a business will face. However, you can create a budget and financial goals. These will help keep you on the right track and allow you to know if your business is moving in the right direction. These steps will also inspire confidence in your investors.

Employee risk

Your startup team is absolutely crucial to the survival and success of your business. Collaboration often creates the best ideas, and founding members of the team have a strong stake in its success for many reasons.

Checks and balances can help keep one person from making costly mistakes. Having a diverse team with different expertise will help you innovate and stay ahead of the competition. Consider choosing both new entrepreneurs with a passion for the business and experienced members who have been through the challenges before.

Security risk

Data security risk is an important consideration. For a startup company, a data breach could be the kiss of death. Customers losing faith in the company, negative publicity, and financial liability could kill your startup before it gets off the ground.

Many new businesses use cloud computing. However, a report from Skybox Security, a computer security company, reveals that vulnerabilities in cloud containers have increased 240% over the last two years.

The Federal Trade Commission recommends limiting personal data to what your business needs and holding on to it only as long as needed. They also note that data should be secured throughout its lifecycle, and access should be restricted to only those employees who need the information.

How do you run a risk analysis for your business?

A risk analysis begins by identifying potential risks. You'll need to include risks related to human error or malfeasance – financial, operational, technical, etc.

Once you've listed all the risks, you'll need to assign each one a number ranging from one to 10. One indicates very unlikely and 10 is very likely.

Next, you will need to assign a monetary value to each risk. If the risk comes to pass, how much would it cost the business to correct the problem?

Next, multiply the likelihood of the risks by the costs of the risk. This is the risk value.

To complete the analysis, you will need to make a risk management plan. To create this plan, decide what you will do in the event the risk happens.

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