“Man cannot discover new oceans unless he has the courage to lose sight of the shore.” Andre Gide, French writer, humanist and moralist, 1947 Nobel prize for literature
I’m led by comment of my dear MBA colleague Enda Moran to write a little bit more about hedging against financial risks in startups. I decided to go a little bit further, so I will also mention other startup risks and ways an entrepreneur can avoid or at least diminish the effect of these risks.
Market risks
As you enter and try to conquer part of the market, you will realize by the time that volatility and change of market and industry conditions affect your business. We have witnessed the recent global economic crisis; but it’s not the first one – almost every 5-15 years there is some kind of recession in economy – sometimes it’s on a smaller scale (country or industry level), but sometimes it has worldwide effect and it takes a long time to get out of it.
Mitigation:
- keep pace with the industry you’re in – those who are ready to adopt new knowledge and new ways of competing on the market are more resistant to market changes. Not only that new knowledge and techniques are giving you competitive advantage, but if you are ready to accept something new, you will probably be more ready to accept new market conditions as well, so read more about your industry, visit thematic fairs and learn from people who know more. Be ready to learn!
- keep contacts within industry and wider – even though books and magazines can be full of needed knowledge, hands-on experience is priceless. respect those who are in the industry longer than you are and try to connect with them – by connecting with them I don’t mean social networking with them, what I mean is a beer or a coffee with these industry insiders will give you helpful ideas. The main idea about being entrepreneur is – if you don’t know something, find someone who does!
- track legislature that influences the market – I’ve seen many startups struggling in the beginning by not meeting basic legal obligations from their industries (technical requirements, tax regulations, safety regulations, etc.). Every industry is legally regulated in a specific way, so before you start with your business, learn more and find an expert on legal field to help you understand if you can meet these requirements. Later on you will realize that these regulations are not something you once fulfilled and you’re done – they change and develop constantly, so find a way to track these changes. Not keeping an eye on regulation changes, you may end up paying penalties for something you even didn’t know it exists
- keep an eye on competitors - I know these might sound like common sense, but don’t be ignorant on competitors’ moves – it could be nothing too important, but it could signal you a big change on the market, or even give you a better idea – after all, Japan built their economy on improving competitors’ solutions.
Internal risks
Risk of hurting your startup by not setting up the stage in your company correctly might hurt your business. Wrong company culture, too complex processes, unclear and non-transparent definition of team obligations and wrong incentive systems are healthy business killers.
Mitigation:
- avoid process complexity – this is not an easy one but I find it should be one of the most important issues in your business. A process is a way you handle some recurring task in your company and it should be based on common sense – try not to copy some other company, you should be able to find the way that works for you. If you have a small company with few employees, instead of having paper reports on who should do what and what is a plan of each of you for coming days, you might decide to have a casual meeting each morning and make morning action plans, divide the work and get started …as long it works for you efficiently, you’ll be fine 
- exact information flow and customer relationship – it is an imperative for your startup to keep and use valuable information about your products, sales, customers and market, so they could be smartly used to improve your business strategy, products and services. The use of technologies like CRM and ERP can help you on that. Just be careful that technology and the way you keep track of information suits your company.
- quality supply chain – in my opinion, this is something you build through the time. It will probably take years to find quality partners on all fields you need, but keep in mind that your goal should be to work with reliable partners that complement your business. That way it will be much easier to plan and to achieve plans and promises.
- surround yourself with quality people – you might opt for cheap solutions by not employing skilled workers, but instead employing someone who knows something but not much. This may work on some positions, but on key positions in your company, you should employ quality people that know how to do the job and how to improve your business. I know that many startups struggle with financial resources for such people, but there are other ways to compensate for work, so be innovative and find a way to offer them something good other than direct cash.
- fulfill your promises – you and your business will be judged by how good you fulfill your promises. Building a good relationship with your customers and your partners is essential for growing your startup. It’s much better to honestly say on time that your capacity is 100% full and that you don’t have enough resources to meet some customer request than to miss the deadline. Even if you lose your customer to your competitor, you won’t get a bad feedback for being honest, but you will get it if you miss the deadline.
Financial risks
Using your savings, borrowing from your parents or friends or getting a loan are the most frequent ways entrepreneurs start their own business. I know it sucks …some of you think – this is all I’ve got, it’s make it or brake it …so what if it doesn’t go well??? …but hey, don’t lose your faith – if you want to start your own business and you are persistent, you will make it. It’s true that there is bigger statistical chance of your first time being unsuccessful than successful, second time as well …but the beauty of mathematical thinking is – the more times you try the bigger chance is you will make it But how can you reduce the risks of losing the invested money or let’s say it this way – how can you minimize the cost of those failed attempts?
Mitigation:
- start a limited liability company – it’s much easier because financially there is separation between owner and a company and in case something goes wrong with a company you can be sure that your personal belongings are safe …but be sure you do that emotionally as well – passion to make a good product or service you believe in is one thing, while being emotional and identifying yourself with that product or service is another
- do not promise something that you can’t achieve or fulfill – by promise I mostly mean by servicing loans and servicing customers. If you get a loan, in a way you promised you will have enough money to service your debt, so before you take that loan be aware that it’s a responsibility that shouldn’t be a burden you can’t take, so try to borrow money only if you intend to use it for purpose of investment
- be humble – personal life should be in accordance with the situation in the company. Starting up your company demands changing personal financial habits – becoming a CEO of a company doesn’t mean you should live like a king …try to reduce your financial appetites and realize that starting your company should be your financial focus …if you get to the point where your business generates enough cash, feel free to live like a king
- importance of quality accountant – lot of entrepreneurs think that accounting and bookkeeping services are necessary evil. Wrong! …they are really important as they give you an insight of your companies’ financial situation – your accountant should be your right hand in leading your business. If someone wakes you up in the middle of the night, you should be able to know how much cash you have on your account, how big are your loans, how big are your receivables and what are your obligations. Knowing these data, you will be at ease to decide on some financially demanding issues for your company. To be bale to communicate with your accountant and to understand the benefits of some accounting practices, you should learn how to read financial statements – trust me it’s not that hard as you might think it is!
- track your liquidity and solvency – to be liquid you have to take care that you always have enough cash on your account. Keeping liquidity in your company demands planning. Plan your expenses and revenues and be sure that when some obligation is due that you are able to pay it. While solvency is important as it shows ability of your company to service it’s debt. As I said previously, for the beginning, avoid loans that don’t have a purpose to help your generate cash in near future.
- try to have some private emergency fund – even though in business schools they learn us to make the most out of our money, I’m not full in line with that. My opinion is that you should always have some emergency fund that is safe. When your company starts to grow try to put on a side some amount of earned cash (get it out of the company and put it in the bank). It will help you in cases you need to overcome some demanding financial period (you can always loan it back to your company in case the company needs it), and in case something goes wrong with your business, these reserves will help you start again.
- cut your costs – very important to use capital in direction where it’s most needed, so this one is quite logical but important – track your expenditures and be aware where the money goes the most and try to find better, efficient and less costly ways to do the same job
- be aware of needed cash to break-even – before you start, you should understand how demanding is your business in terms of needed capital. Sometimes it make take time to break even, so be realistic when you plan.
- be aware of fixed costs – it’s easy to handle costs that are incurred only in case you sell your product or service as I assume you will have some profit margin and that revenues will overcome that costs, but be aware of your fixed costs (office, utilities, etc.) – they are out there even if you sell nothing, so cutting costs in the beginning is mostly focused on cutting fixed costs.
- focus on revenues – many ideas come to our business angel network and many entrepreneurs contact me directly, and I see a lot of great ideas, but quite a lot of these ideas don’t have a clear cash generating source. It’s great to have a cool idea, but in case you are not sure how to generate cash out of it, what’s the point? …I’m fine if you intend to run your idea on altruistic basis, but if you want to live from your business, I recommend you to clearly define who will pay for your product or service – meaning you should be sure you are solving someones problem and that they are ready to pay for that solution.
- recognize on time if your business is not doing good – do not get to emotionally attached to your idea as you could become “blind” to see that something is wrong with it. It might be a tiny reason your business is not doing good, but it might also be hard to spot it. The more you separate yourself from your company emotionally (but leave the passion to work), the more objective you become and more capable you become to realize your own mistakes. In case you realize that your business is not going good and that it can’t be improved do not be ashamed to shut it down. After all, as said – with each time you try, you increase your chances to succeed!
Trust in yourself – if something goes wrong, and if you make a mistake, it doesn’t mean you are incapable of running your own business. The legend says that Thomas Alva Edison invented a light bulb after failing 1000 times. And when he was asked by a reporter on how was it to fail 1000 times, he said: “I never failed, I just invented 1000 ways how to not make a light bulb”.
So I encourage you to “cross that START line” as my friend Enda Moran said in his comment on one of my recent posts.
