Entrepreneurship goes hand in hand with risk. Innovating, creating something out of nothing, and betting on an untested idea means risking failure and financial loss. However, with proper planning and wise decision-making, entrepreneurs can minimize the risks involved in starting a new venture.
No business is ever risk-free, but by understanding common risks, preparing for uncertainties, and following risk mitigation best practices, entrepreneurs can give themselves the best chance of success and survival. In this blog, we will discuss specific actions entrepreneurs can take…
What Business Risks Do New Entrepreneurs Face?
Starting your own business comes with a lot of challenges and risks. New entrepreneurs are likely taking the biggest risks of their lives by leaving the security of a steady income to venture out on their own. Here are some of the biggest business risks new entrepreneurs face:
This is arguably the biggest risk for new entrepreneurs. They risk investing capital into the business that may not generate an adequate return. This could mean losing life savings, taking on debt, or struggling to pay personal bills. Financial risk comes from any number of places: not enough customers, high operating costs, unforeseen expenses, or slower-than-expected growth. While raising additional funding can help mitigate some financial risk, it also introduces debt and equity obligations.
There is always a risk that the product or service the business offers is not quite what customers actually want or need. Even if there is an initial market need, competitors may emerge or customer preferences may change over time. Entrepreneurs risk investing considerable time and money in developing something the market ultimately does not embrace. Thorough market research, customer feedback loops, and product iteration can help reduce this risk.
Even if a business concept works at a small scale, that does not necessarily mean it can scale up successfully. New systems, processes, management structures, and culture may be required. Growing too quickly can also exhaust cash reserves and strain resources. Entrepreneurs risk building a business that cannot scale sustainably to meet growth demands. Testing assumptions at every stage, piloting new initiatives, and developing a scalable operating model can mitigate this risk.
No business succeeds without the right team. Entrepreneurs risk placing too much bet on themselves and key hires that do not work out. Even if the initial team functions well, growing the team successfully poses challenges. Issues like high employee turnover, counterproductive company culture, and leadership gaps frequently emerge. Developing a robust talent acquisition process, teambuilding exercises, and a strong compensation philosophy can lower team-related risks.
Established companies and new startups alike pose a constant threat. Entrepreneurs risk investing in an idea only for competitors to emerge with superior products, distribution channels, or pricing. Keeping a close eye on potential competitors, rapidly adapting to changes, and developing sustainable competitive advantages can lessen this risk.
Also Read: A Step-by-Step Guide to Starting a Business
Minimizing Risk in Business
Risk is an inevitable part of entrepreneurship and business. However, there are strategies you can employ to minimize risk and increase your chances of success.
Evaluate Business Ideas Carefully
The first step is evaluating your business idea. Ask yourself:
- Is there a market? Conduct market research to determine if there is demand for your product or service.
- Is it feasible? Ensure you have the skills, knowledge, resources, and team to execute the idea.
- Can you compete? Assess the competition to determine if you have a unique value proposition.
The more thorough your initial due diligence, the less risky your venture will be. Avoid chasing ideas that are not backed up by solid research.
Build the Right Team
Surround yourself with a team who complements your skills. Look for team members with:
- Experience. Hire people who have successfully executed similar roles before. Look beyond just technical skills to things like leadership and industry experience.
- Complementary skills. Assemble a team where each member covers areas that you’re lacking in. For example, if you lack finance skills, hire a CFO.
- The right mindset. Hire entrepreneurs and risk-takers who understand your vision and are comfortable with uncertainty.
A strong, capable team can mitigate a lot of business risks by sharing the workload and responsibilities.
Create Financial Reserves
Cash is king in business. Building a healthy financial reserve will give you a buffer to withstand:
- Unexpected costs. Things like taxes, shipping delays, and equipment failures inevitably come up. Cash reserves provide a cushion to absorb these.
- Slow startup periods. Many businesses lose money for the first few months or even years before turning profitable. Reserves provide runway during this critical time.
A good rule of thumb is to have 6-12 months of operating expenses in reserves. Build reserves by:
- Bootstrapping. Grow your business with little initial capital by using personal savings, credit cards, and loans from friends and family.
- Seeking investors. Angel investors and venture capitalists can provide funding for startup costs and building reserves.
The more financial runway you have, the less likely you’ll be forced to close down due to cash flow issues.
Start Small and Scale Slowly
Be cautious about scaling too quickly, which can overextend your resources. Scale your business in deliberate, manageable steps by:
- Launching with a minimum viable product. Test your initial offering with a small, focused set of features to get user feedback before expanding.
- Testing new markets slowly. Enter new regions or customer segments one at a time to avoid overextending your brand, team, and supply chain.
- Hiring incrementally. Add team members as needed based on proven revenue and demand rather than ambitious projections.
Slow, controlled growth allows you to adjust along the way based on real customer and market feedback, which minimizes the risk of catastrophic failure.
What is one key way for an entrepreneur to decrease risk?
One key way for an entrepreneur to minimize business risk is through testing assumptions and prototypes. Many businesses fail because the entrepreneurs jumped straight into a full launch without properly testing their ideas first.
Testing allows you to uncover hidden problems, refine your strategy, and optimize your business model before investing a lot of money and resources into a full launch. There are different levels of testing you can do:
- Survey potential customers. Ask people who fit your target market about the problem you’re aiming to solve and potential solutions. Get feedback on your business or product idea. This is a low-cost way to see if there is even an opportunity worth pursuing.
- Launch a landing page. Create a simple webpage with a brief description of your idea and collect email addresses. This allows you to gauge interest and build an initial customer list, all without spending much money.
- Build an MVP (minimum viable product). Release a basic version of your product or service with key features to gain feedback and see if people will actually use it. You’ll likely iterate and improve the MVP based on what you learn.
- Soft launch in a small test market. Test your full business model in a limited region to iron out kinks, optimize operations and gather data before a broader launch.
When testing assumptions and launching MVPs or prototypes, be prepared to pivot your idea based on what you learn. Things may not work out as planned. But making smaller, lower-risk adjustments earlier is far better than failing with a full launch.
While risk-taking is essential to entrepreneurship, new business owners should understand what specific risks they face and take proactive steps to mitigate unnecessary threats. All the best!