Learn The Basics of Business Valuation in San Francisco

1So, you’ve gone and got yourself an idea that just might put money in the bank. You’ve done a lot of work to get things going and it’s time for you to get your company started. However, have you properly assessed the potential risks of starting up your company? Have you considered the many possibilities? Are you prepared for the inevitable damaging event that you can’t control? 44% of startup companies fail every year. Most of these closures are the result of unforeseen circumstances and minimal foresight. Just having a good idea won’t be enough for your business to make it. Without having good insight and a solid risk assessment, they are doomed to fail.


More Risk means More Profit

Whatever industry you join you’ll find there are some risks involved. It’s just the way things are, if you aren’t willing to take a risk then you’re never going to get a reward. Even some of the big companies, like Google or Amazon, face risks, even though they’re well established. The reason being that, aside from them being some of the biggest companies around, they’re defined by their ability and willingness to take risks for the sake of profits. People don’t tend to realize that they can predict most of these risks, not just to survive, but to thrive. You might even be able to turn the risk into another opportunity if you’re careful enough. The trick is to know which risk will be able to turn a profit worth taking, and which are just fool’s gold that’ll eat up your resources.

Risk management is key. Get in the mindset of comparing what can go potentially wrong, and what can be done to mitigate those risks in a cost-efficient way. However, it’s more than just sitting in a room and stating things that come to mind that might go wrong. There’s a proper framework to risk management that should always be on the mind. The equation is as such:

Likelihood of occurrence: High and Low.

Severity of consequences: Major and Minor.

  1. Risks that you shouldn’t worry about
  2. Risks that are mitigatable with simple changes in your behavior
  3. Risks where insurance is able to mitigate them
  4. Risks you’ll want to actively identify, watch, and mitigate as you’re able

Risk management becomes more manageable when it’s broken down into these simple steps.

Ignorable Risks

Not all risks require immediate attention. Sometimes a risk is so miniscule that it would actually be more irresponsible to address, as it could needlessly use up time, money and resources to handle. Yes they can be legitimate possibilities, however they may cause so little damage, or be so unlikely, that you should be concerned about them. Most of the time with these risks you’d be fine to just let them come and keep going on.

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Risks that may Become a Nuisance

These are the risks that have a high likelihood of happening, but result in relatively minor consequences; otherwise little things that can go wrong but can be dealt with simply by changing company behaviour.This could also be thought of as common sense tactics. One example of this might be that if you’re working during stormy weather, which could shut off your power at a random time and cause your computer to shut down, which would lose you all of your work from that day, then you simply need to regularly save and backup your work.

Insurable Risks

These types of risks are often high consequence but have a low chance of occurring. You’ll want to spread the cost of this unlikely loss over a group to ensure that no single individual is disastrously harmed. Insurance can save a startup’s life. Consider things like fire insurance, theft insurance, liability insurance, errors & omissions insurance, executive insurance.

What are the Ultimate Risks?

Your company might be completely and utterly murdered by these risks. They have a high chance of occurring and the consequences are dire. This quadrant is where entrepreneurs reside in all the time, because there are so many of these risks. The company cash flow will be affected directly be this risk quadrant, making it the most important. These risks include:

Market Related Risks

Some products simply don’t have a market for them. Too many startups die at the start because their product is too niche or simply unwanted. Remember, you’re not selling the product to yourself. You may like it, but that doesn’t mean others will want it. A great way to get around this is to take surveys regarding the product. Show a controlled group of people and see their reactions. There’s no guarantee one way or another, however it gives you a much better chance of understanding its potential market value.

Risks with Competition

Competition does some great stuff. Competition helps build brand names, reputations and even communities. What’s not so great is if your competition is constantly outdoing you. Your investors are going to get upset if a different company always does your ideas better. It’s absolutely vital that you know your opponent’s strengths and weaknesses alike. What sort of things can your competitors do against you? How might you respond when they eventually use their leverage? Weaknesses can become selling points if you and your advisors sit down and talk through all the possibilities.

Technology Risks

Technology has come a long way, and every day it’s becoming more and more sophisticated. There are still plenty of problems with it though, and you need to keep ahead of them. While often this’ll be related to the manufacturing and vendors involved in your business, security, in particular online security, is also a major concern. Is your company able to ensure that the customer’s private information is kept safe and secure? Can your manufacturers not only meet your demands, but also generate your product by your specifications? Are your products being distributed in an efficient and consistent manner by your vendors?

Risks with Finances

Everyone comes back to money, and you’re going to be walking a thin line between an investment and a cash dump. Startups that fail often didn’t have a good fallback plan for when a potential investor said “never mind” and left. It’s important to establish cash flow that isn’t completely dependent on outside financing. If an investor takes time to woo then you’re going to need to live long enough to see any results. Investors will want to see that your product is doing well.

It’s best to be prepared either to make it on your own, or how to best spend the money investors give you so your company can grow. You won’t escape financial risks, no matter what you do. The best thing you can do is to raise capital and do everything in your company’s power to generate a consistent revenue to cover your costs before the money source runs out. The market is always changing so you’re going to need to prepare for that, including things like a cost hike of raw materials or spike in interest rates. Take all the funding you possibly can and ensure it’s kept somewhere safe for when you need it.

People Risks

People in the company are probably the most unpredictable factor you’ll have. Your startup may grow to a point where the company has to make a change in direction. It’s pretty normal for these to be hard, conflict filled times for the company and its leadership. This time is critical, and if done wrong it might shatter the company. Often startups lack a clear idea of what the future may hold. Too often they get distracted by the product and the hear and now of it that they fail to think about what they’ll need 10 or 20 years from now. The company might get stuck in a rut if their product isn’t able to grow. All members will need to be on board with the plan if the company is to last.

Risks from a Legal Standpoint

Whatever you do, there will be a legal concern. America is heavy handed with business regulations for the sake of public safety and fair practice. You can be prepared by preparing a strong legal team. You’ll want to keep them in the loop for the best results, as they can help you prevent, or prepare for, customer suits, faulty products, or internal conflict. Using this legal team you can get ahead of any issues before they spiral out of control.

Risks Across the System

The entire market is going to be affected by these types of risks. The market is a constantly adapting and evolving entity, and if you’re not on top of the changes then it can spell disaster. When one aspect of the market changes, it can create a domino effect. The best example of this was the Great Recession in 2008, where increased interest rates on real estate caused a major economic downturn.

Be Reasonable

You can’t deny that a startup company is entering a world where there are constant risks, but by accepting this you’re more likely to survive. While it’s important to understand this, it’s equally important to understand that risk assessment shouldn’t be obsessed over. You can’t predict everything, no matter how much you prepare or how much your investors give. Your company will have problems and pains that you just can’t possibly know about ahead of time. This is why you absolutely need to be practical when making your assessments. Common sense, speed, and efficiency are all vital when it comes to planning for and handling all the potential problems you’re able to predict, and a broad stroke protocol for types of problems might be a good idea to develop. The worst thing you could do for your company is to be so afraid that you’re unwilling to take risks, after all, risks are what the world is built on.