In some cases, the risks can actually be too great to justify moving forward, and a new approach might need to be contemplated instead. In most cases, however, entrepreneurs can often develop strategies that either eliminate or mitigate individual areas of foreseeable risk to increase the chances of realizing success.
Moreover, successfully reducing risks can offer compounded benefits through reduced financing costs, including the interest rates of debt and the amount of equity that must be given up to find investors.
The planning stage offers the best opportunity for new businesses to develop strategies for reducing overall risks and increasing the probability of success.
1. Interview Industry Experts
Qualified expertise is critical for reducing risks because many roadblocks are difficult to foresee in the absence of experience.
Experts can often point out the most relevant risks and offer ideas to help overcome them. Entrepreneurs should rely on experts experienced in a wide range of disciplines to discover solutions that are unintuitive to individuals outside a particular area of specialty.
Individuals involved in relevant technologies, business management, law, and other fields should all be consulted. Investors can also be an important source of expertise to businesses that are primarily seeking to reduce risks for the purpose of successfully raising capital.
Consulting with experts can help keep a plan on course, or adjust and establish a new course as needed for success, while identifying risks that might otherwise lead to astronomical costs later down the road.
2. Reduce Fixed Overhead Costs
Startups can almost never justify investing in the infrastructure required for fulfilling large orders from the beginning. Even with careful plans, entrepreneurs have no way of projecting precise levels of demand with high certainty.
Startups should, therefore, minimize initial overhead costs due to the high degree of uncertainty about whether these costs can be recovered through operating revenue. However, startups can usually eliminate the vast majority of initial overhead costs by developing creative fulfillment strategies during the planning stage.
Strategic partnerships and a flexible network of suppliers is essential for minimizing the commitment associated with fixed overhead when fulfilling customer orders during the initial stages.
3. Focus on Relationship Building
New entrepreneurs often underestimate the importance of a network of strong relationships in determining the success of a new startup venture.
A “network” offers both authoritative information and the availability of partners that can increase the feasibility of accomplishing any responsibility. Entrepreneurs facing a difficult challenge can often talk to qualified individuals with whom they have relationships to develop an appropriate strategy that would be difficult to develop alone.
Discussing challenges with individuals in a network can also lead to the uncovering of opportunities for partnerships that might yield mutual benefits.
Most importantly, networks reduce risks because they increase the chances that a startup will be able to overcome unforeseen challenges. Entrepreneurs seeking success with a new startup, therefore, should focus on networking both before launching their new business and throughout the implementation stage.
4. Take Advantage of Trial Orders
Many suppliers are willing to offer trial orders to potential long-term customers either for free or at a reduced cost. Startup businesses can often take advantage of trial orders to fulfill initial demand while attempting to test a business concept.
Furthermore, suppliers are often very receptive to entrepreneurs looking to test the market with a new product or service, so they are often willing to form a partnership that can offer long-term advantages. For example, a supplier might be willing to cover the full costs of initial orders in exchange for a higher long-term price if the venture becomes successful.
Entrepreneurs, therefore, should carefully consider opportunities for minimizing risk by using trial orders to their advantage through creative approaches.
5. Know When to Outsource
Outsourcing responsibilities to qualified experts is an important responsibility for all businesses, and startups are no exception.
Although certain tasks can be completed in-house, the reality is that paying a professional to do the task will usually yield better results at a lower cost. However, many entrepreneurs are afraid to outsource to experts because they fear spending scarce startup capital. The reality is that tasks completed by unqualified individuals are a tremendous liability to new startups because they threaten key accounts and potentially lead to bad decisions with disastrous long-term consequences.
Specialized tasks involving law, accounting, and technology should be outsourced to qualified experts to minimize the risk of defective products or costly mistakes.
6. Find the First Paying Customer Before Investing
Finding the first customer is the greatest challenge that new businesses must overcome. Since demand is difficult to predict, entrepreneurs should attempt to test the markets by finding at least one paying customer before committing to a course of action.
In some cases, the first customer can also further reduce risks by providing significant funds upfront to help finance the costs of getting started. An entrepreneur’s network can be helpful for finding initial customers who are willing to incur the risks associated with being the first customer of an unproven business.
7. Work with Competitors
Working with competitors can help to reduce risks in ways that many new entrepreneurs often find difficult to understand. Competitors can be excellent suppliers when first getting started because they are often able to produce similar products at very low costs.
Other responsibilities associated with a new business, such as marketing and finding qualified talent, can also be found in many instances by partnering with a competitor. Entrepreneurs could even consider merging with an existing competitor to combine expertise and compete more effectively against larger firms.
Entrepreneurs who are willing to partner with competitors can get better results while also minimizing upfront capital requirements.
Managing the Risk Environment
Risk management is the most important responsibility of startups because new entrepreneurs have tremendous freedom to change future courses of action.
Most risks can be mitigated by developing a strategy to navigate around foreseeable challenges, and established firms rarely have this advantage. Therefore, entrepreneurs who plan ahead for potential risks with a sound strategy can start with a competitive advantage in the real marketplace.
Effective risk management can also make a startup more attractive to a wide range of stakeholders, including investors, partners, and even employees. Developing a strategy for managing foreseeable and unforeseeable risks, therefore, should be the main concern of new entrepreneurs.
Which of these risks are the most glaring to you? What should you do about it to reduce it?