Minimizing Risk in your Startup

from Startup Pros 5/13 enhanced by Peter/CXO Wiz4biz

You have probably heard plenty of times that being an entrepreneur is a risky business, and investors talk all the time about reducing the risk. Yet everyone seems to have their own view of key risk drivers for startups, and as an VC, I’m no exception. I don’t agree, for example, that the first priority is to avoid startups with a high attrition rate, like trendy restaurants and entertainment. Here is my own priority list of key risk drivers that every entrepreneur and every investor should evaluate and minimize in starting a business:

1. Team Experience & Depth. Here I’m talking about both the experience & track record of the Founders in starting a business, as well as their experience & knowledge of the business domain. Like most professionals, when I get a business plan, I flip first to the Founder’s section to see if it is a balanced team who has been there and done that.

2. Market & Opportunity. There is always less risk with a well-defined problem in a large & growing market. All the people in China is a large and growing market, but all the people with cancer is much more well defined. It’s hard to make money in a shrinking market, or with a solution that is “nice to have” versus “painfully needed”.

3. Competitive risk. Think seriously about the number & clout of your competitors. Having none is a red flag (which may mean – no market). But having more than a couple of large ones may mean this is a crowded space. Even in an open space, you need intellectual property, to keep potential competitors from over-running you.

4. Financial risk. Very few businesses can be started without money. You as the Founder will be expected to put your own “skin in the game.” The Business Plan should be realistic about how much cash will be required to break-even, and how big the return will be, for investors in the first five-year timeframe.

5. Market Entry strategy. The selection of an in-appropriate pricing, marketing, or distribution strategy is a large potential risk. For example, many new social websites proclaim that they will offer a free service, and live on ad revenues (not likely in the first year without a huge marketing investment).

6. Political & Economic risk. Sometimes founders are just in the wrong place at the wrong time. Recessions are a tough time to sell luxury goods. Under-developed countries may have a strong need for your product, but are often unstable & dangerous. Four more specifics include tax rates, tariffs, expropriation of assets, & repatriation of profits.

7. Technology. New technologies, especially those characterized as “paradigm shifts” or “disruptive” may have long & costly acceptance cycles, or may run into unpredictable performance or manufacturing problems. Medical technologies have costly legal testing requirements, approval processes, & insurance validation.

8. Businesses with high Attrition rates. Certain business sectors have historical high failure rates and are routinely avoided by investors & many Founders. These include food service, retail, consulting, work at home, & tele-marketing. On the Internet, I would add new social networking sites, and new match-making sites.

9. Operational risk. Some businesses require huge support or administrative infra-structures. For example, vehicle fuel improvements require service stations and maintenance shops nationwide, before they are viable. Even small operations can have breakdowns of specialized equipment & complex support processes.

10. Environmental risk. A nuclear reactor built on an earthquake fault line is a huge risk. Evaluate your business and location for sensitivity to floods, hurricanes, & catastrophic pollution problems.

Conclusion: The biggest risk of all is starting a company, any company, for the wrong reasons. If your startup is clean on both of these lists, you will most likely build a successful business, get the funding you need, & have fun at the same time. What more could a up-and-coming Entrepreneur want?

Comments: Are there any Risks you’d like to add?