The most critical opportunity to perform a risk analysis is at the development of a business plan. Investors do not expect business plans without risk, but entrepreneurs often fail to include a solid risk analysis into their business plans. Business plans need to anticipate risk in order to build flexibility to react by creating alternatives. In this post, I would like to discuss how risks need to be analyzed in aiming new business ventures.
Traditional ERM approaches are not tailored for startups (or proposals, or new projects) (1), however, risk is the source of their competitive advances. The skills of the entrepreneurs to strategically manage risk determine the success of their endeavor. Potential losses need to be assessed in other to prioritize the venture vulnerabilities.
There are particular decision-making needs involving a business idea. Then, risk categories for startups could be different than those for well-established companies. Most relevant risk categories for startups may include:
Product development risk can be defined as the likelihood to successfully transform a prototype or a business idea into a marketable product. This risk can be mitigated by extensive I+D and customer research.
Market risk can be defined as the likelihood to reach a smaller target than expected (for a given period). This risk can be mitigated by indentifying secondary niches or segments (for instance, a market for by-products) and performing a reliable competitive analysis. Having a good strategy to reach early adopters could mitigate this risk too (for instance, by discounts for first purchases).
Managerial risk can be defined as the likelihood to loss key members or to not attract the right employees. The managerial ability to adjust and strive is affected by this risk. As managerial incompetence increases costs, Cost controlling can be very effective to treat this risk.
Cash generation risk can be defined as the chance to become unable to get liquid moneys. Balanced scorecards and projected cash flows can play a key role in monitoring this risk. In order to mitigate it, budget assumptions should be validated, potential funding should be available, and capital requirements should be adequately calculated.
There are also several tools to identify risk and create strategies. For instance, Monte Carlo simulation can be an effective method to indentify the variables with the highest impact in profitability. Some of these tools are included in by the traditional ERM systems.
A compressive risk analysis adds the reality check to business ideas.
(1) For instance, there are not references to startups in ISO 31.000