Talking about the assessment of business risks for startups, it’s important to understand that any conclusions are based on open source statistics. The activity, risks and performance indicators of any enterprise are a commercial secret. The companies don’t publish such information in media. Frequently, the information in the public access has nothing to do with the real data at all.
Main startup business risks
Informational risk is the most important one when evaluating the activity of the enterprise. First, any company entering the market with the new products finds itself in the conditions of uncertainty. It means the forecasts of the future activity are largely based on assumptions. That is, the difference between the plan and the actual situation can be very substantial. However, if the company enters the market with the well-known products, then it’s possible to assess and measure the risks. Managers can compare the company’s risks with the market risks of the already existing business.
In general, the estimation is a quite subjective thing. Businessmen always look at their own startup business from a too optimistic point of view. They hope to sell more, have the average check bigger, spend less money on marketing and attract more customers. In fact, the estimates are based on press releases or forecasts of business journals, which often measure markets and tendencies to fit the orders of certain stakeholders.
Business risks for startups
There is a number of business risks that are specific for startups. They reveal themselves during the following three stages:
1. pre-investment stage;
2. investment stage;
3. implementation stage.
Risks of the pre-investment stage
Informational and marketing risks as well as unreliability of the investor are the main risks of the this stage.
Lack of consumer interest in a potential product is the most devastating startup risk. The risk of wrong choice of both consumers and the market segment is equally challenging.
Informational risks always refer to the assessment of the market and consumers. The market can only be estimated when the company starts its activity in a certain area. In this case, it becomes possible to count all competitors, observe their work and realize how many people they can serve.
Marketing risks are associated with the promotion of products on the market. No marketing company can clearly define the number of clients it can generate as well as the lead generation costs. This information is obtained during the test period.
Unreliability of the investor refers to his decision to invest. Investor will allocate certain funds, if he feels the project has good chances of succeeding. However, in the process of implementation he may change his decision to invest or invest only a part of the planned funds.
Risks of investment stage
These risks include the following ones: increased costs of project implementation, late completion of the project, errors in the technical documentation.
Almost every practicing businessman knows that if one wants to implement a business plan, it’s necessary to be prepared to invest two times more funds than was planned initially. In practice, the startup business encounters many situations it is not ready to cope with. So to solve these problems the companies need money.
Delays in the implementation of the project is another risk associated with the depreciation of both money and ideas in time. Delays of a few months may destroy the business plan completely.
Errors in technical documentation refer to the incompetence of employees who have no relevant experience. For businesses entering the market with a new product, this is a normal situation.
Risks of the implementation stage
Such risks usually comprise credit risk, liquidity risk, production risk, environmental risks and civil liability risk.
Credit risk occurs mainly due to the fact the company can’t attract credit resources. Liquidity risk relates to the non-fulfillment of financial tasks regarding sales as well as payments for materials and other obligations. Production risks refer to the inability to produce the planned volume due to the problems with equipment or personnel. Environmental risk may become the most substantial and problematic one when a company works with natural resources. Risks of civil liability usually arise when businesses deal with issues that can undermine the country’s security or produce socially important products.
Lack of a qualified team able to unite the efforts working on a single idea is another problem of startups.
Risks are the most devastating at the pre-investment stage. If at least one of the above mentioned situations comes into effect, there is a risk of failure. Each of the risks has a certain influence on the activity of the company. How to assess the impact of each of these risks? Read in this article.