Starting a business is an exciting journey for any entrepreneur. You get to invest in your dream and work for yourself rather than for others. Unfortunately, over 50% of startups fail. Poor risk planning is one of the top reasons why these companies don't make it past the 4-year mark.
Many entrepreneurs don't take enough time to understand their business risk environment, which is why the startup may come across specific situations that end up crippling its operations on a daily basis.
There are many risks that startups face. These include data security risks, marketplace risks, investment risks, and competitive risks. So how can your business navigate the treacherous waters and become viable over a long period? Risk management is the answer.
Understanding How Risk Management Works For Startups
When many entrepreneurs hear about risk management, they think that it only applies to large and established corporations. The truth is that risk management process is even more critical for startups. Indeed, the impact of potential risks can be crippling for any business that's in the early stages of developing. You may have limited resources to respond to emergent risks, or limited capabilities to restore operations after a threat occurs. This is why startups should understand and implement a risk management plan as part of their core operational framework.
Risk management definition stands for the process of identifying, analyzing, and mitigating risks that may face your business. Risk assessment refers to the process of evaluating the impact a specific type of risk could have on your company's operations. Therefore, risk assessment is an in-depth analysis of each type of risk, while risk management is the overarching process of identifying and responding to your business's risk environment.
Your company should implement both approaches to mitigate the effect of threats. When you understand the risks that you face - and their potential impact - you can develop a plan for managing such risks daily.
Putting Risk Management to Work in Your Business
The fundamental principle of risk management is analyzing the two dimensions of each type of risk: likelihood and severity. A risk management framework will compare these two dimensions and arrange them into quadrants. These quadrants are essentially a visual representation of probability versus occurrence, and they're arranged in the following manner:
Quadrant A: Risks That Can Be Ignored
As a startup, you may have limited resources when it comes to risk management. This is why dedicating your risk response plan in the right way is critical. Any threats that have a minimal likelihood of occurrence (and won't cause much harm to the business) can be ignored.
Quadrant B: Nuisance Risks
Nuisance risks are those that are likely to occur, but they cause minimal damage to the business. Such threats are more of an inconvenience to deal with rather than a danger to your operations. Some examples include workers calling off when a project is almost due, or small equipment failure (such as printers and scanners).
Quadrant C: Insurable Risks
Risks that could cause significant damage (but are less likely to happen) can be covered by insurance. Therefore, such risks are called insurable risks. You pay regular premiums in exchange for coverage against the damage that such threats might cause. Insurance can cover you from property damages, employee liability, financial loss, and customer lawsuits.
Quadrant D: Company Killers
Company killers are the types of risk that have a high likelihood to occur- and can cause significant consequences after they happen. These threats have the potential to cripple your operation. For example, lack of market, a competitive environment, a data breach, and running out of capital are all potential company killers. These risks also have a high likelihood of occurrence in startups, and they should be addressed both individually and as a whole.
While each risk has its potential impact, the combined effect of all risk factors should also be considered.
Remaining Compliant Can Help You Avoid Common Risks
There are governance and compliance guidelines that can help your risk mitigation strategies. Staying compliant with these frameworks is an excellent way of meeting government regulations while also avoiding threats that could potentially cripple your operations. For example, PCI compliance allows startups that handle credit card payments to avoid the risk of data breaches. PCI outlines how credit card information should be collected, processed, and stored. HIPAA regulations apply to any healthcare-based companies that handle patient data.
You may also explore NIST, CISQ, and other related compliance models to implement as part of your risk management program. By killing two birds with one stone, you'll be able to avoid common risks while building confidence in your customers.
Risk management for startups is a critical aspect of your operations. Therefore, you should prioritize the identification, evaluation, and analysis of all relevant risks to ensure that your business doesn't fall victim to company killers. This is also the most effective way of achieving long-term viability.