RISK MANAGEMENT FOR STARTUPS
India is entering the new age of innovation and startups. Though this is a positive change the transition cannot be expected to be smooth. The transition is expected to bring up new challenges and risks. Startups could face uncertain events or conditions that could impact their objectives. Can the golden principles of project management help startups to face these challenges?
Out of the ten knowledge areas under project management the one area which could be extremely useful to startups would be Project Risk Management. By applying Project Risk management techniques startups could identify, assess, and prioritize risks. This would help them to better utilize their already scarce resources. This paper looks at how the various processes of Project Risk Management could be applied to the activities of a startup.
DEFINITION OF A STARTUP
There are varied definitions of startups by successful entrepreneurs. The most recognized definition has been given by the noted entrepreneur Steve Blank who says, “A startup is a temporary organization used to search for a repeatable and scalable business model.”
A startup would typically have the following characteristics:
- A new business which is less than 3 years in operations
- Working to build a new product or new service or new method of delivery
- Success is not guaranteed since it operates under extreme uncertainty
A small business is different from a startup in that it follows a pre-defined business model whereas a startup is looking to create a new business model around the new product, new service or new method of delivery.
If the startup is successful in its search for a new business model it graduates into an enterprise. If it is not successful it fails and dies.
A startup has similar characteristics to that of a project in that it is temporary, creates a new business model around the new product, new service or new method of delivery and the objectives can only be broadly defined at the beginning.
SUCCESS RATES OF STARTUPS
Startups are usually funded by the money pooled by the founders. Very few of them get external sources of funding (typically only 2-3%).
In the US, which is a mature market for startups, it has been seen that 80% of self- funded startups fail within a year of operation and 80% of externally funded startups fail within a decade of operations.
One big reason for this high rate of failure of startups is that they operate in a condition of extreme uncertainty and are exposed to a myriad type of risks.
The major categories of the risks faced by startups are:
- Market risks: Example: Insufficient demand in the market for the new product or service or method of delivery.
- Financial risks: Example: Inability to obtain external funding once the self-fund dries up.
- Regulatory risks: Example: Unfavorable government policies in the concerned industry.
- Competitive risks: Example: Too many players or a very dominant player in the market.
- People risks: Example: Conflict between founders or hiring the wrong set of employees.
- Operational Risks: Example: Inability to manufacture and deliver the product or service.
GUIDELINES FOR BETTER RISK MANAGEMENT
Based on my personal experiences I have listed below a few guidelines:
Self-assessment of Aspirations
Before quitting their secure jobs and starting on their own, the founders would do well to self-assess their aspirations and dreams. What are their passions and interests? They need to choose to associate with a business which suits their passion. A right choice of business will keep them motivated in the business long enough to be successful. The wrong choice will result in failure to deliver.
Self-assessment of Financial position
Some businesses require high initial investment. Founders need to self-assess how much money they can invest. They also need to keep money aside for personal/family expenses. An estimate needs to be done of how long their savings will last and their risk tolerance level i.e., what is the minimum level of savings they would like to maintain always. Buy-in of impacted family members is crucial. Also, lifestyle changes need to be planned as one cannot continue with same lifestyle in business as in job. This type of assessment would go a long way in establishing commitment levels and engaging with the startup for a longer period. This would mitigate the risk that one of the founders would quit midway making it difficult for the others to carry on.
Self-assessment of Skills
Business requires a different set of skills than employment. Founders would do well to self-assess the skill gaps between what is required in the business and what they possess. It would be good to develop some of those skills before starting the business. In that way they can get more done and much faster early in the business. Also possessing necessary skills will reduce dependency on hiring employees which can be deferred till it is necessary. That would mitigate the risk of hiring bad employees in a hurry.
Chemistry between founders
The founders need to assess their chemistry i.e., how well they work together, before proceeding further. A wrong assumption is that close friends are the ideal partners. What is important is the professional chemistry between the partners. If a person is not able to find a suitable partner there is the option of starting a company as a single founder. The risk of conflict between founders can be avoided in this way.
Creation of Plan
Establish a place to work from and write a plan. This is an important step to give a direction to the activities of the company. Initially the plan would introduce the founders and the high-level objectives of the company. The plan needs to be relooked every quarter and sections updated. For a service business, the plan would describe the location of business, the services on offer, the profile of the customers, the modes of delivery, and the marketing channels. Creating and maintaining a plan will help the founders keep a tab on the financial position and increases the positive risk of obtaining external funding later.
Collaboration over Competition
In an Industry where there are too many players it would always be better to get into a partnership/collaboration early on with few other established players. This way one can get a quicker foothold in the market. Partnerships must be carefully chosen, and intent of partners need to be properly gauged. There should be mutual benefit and trust between partners. Competition would be a negative risk whereas collaboration would be a positive risk.
If there is a very dominant player in the market develop a differentiation. For example, a service business can look at providing personalized value-based service that the bigger player cannot provide. Without a differentiation the company runs the risk of being considered just a copycat thereby stifling its growth.
Clarity in Government Regulations
Some Industries do not have clear government regulations and customers may even wrongly perceive such businesses as illegal. If positive value is seen in the business and the founders have the necessary skills to do that business, then they may still consider them. But they need to evaluate the impact of the unclear regulations on the business and on their personal reputation before moving ahead. There could be a positive risk here also in that the government could come out with favorable policies in the future.
Offer a range of products or services
A single product or service may have limited demand. Create a bouquet of related products or services to offer the customer. Customers would also be looking for a player who can provide all that they need together. This helps increase the sales conversion and reduces the risk of failure due to insufficient demand in the market. Sometimes there is a market for a product or service, but the company is just not having the ability to deliver. This is nothing but failure to exploit the opportunity. Enhance capabilities by procuring resources to deliver or sharing the opportunity with partners. If unable, then let go and look for other opportunities.
Keep an eye on profitability
The aim of the company should be to be able to sell the company’s product or service for more than it costs. This is where the scope for innovation arises. Look for Innovation in reducing the cost of components or assembling the product. Also consider providing a feature in the product nobody else is providing and be able to charge a premium for that. For a service business, look for a low-cost method of delivery. Trying to run a profitable business would mitigate the risk that the funds would dry up before obtaining external funding. Even if external funding has been obtained this step can be followed else the funding would be used to cover the losses rather than grow a profitable business.
Maintain a risk register. Identify both positive and negative risks across the major categories. Build a risk response and update at regular intervals. A service business can also maintain a Lead register. The Lead register can have the details of customer leads from different sources, conversion rates, cost of conversion, expected conversions over the next year etc. For a service business the risk register together with the lead register would enable the founders to get a good grip on the business.
Identify other startups/small businesses nearby and network with them. Consider taking a co-working space for small companies where one can meet like-minded people. Join networking groups like TIE. Attend conferences. Networking increases positive risks across all the major categories.
Projects and Startups share similarities. Both are temporary. Both operate under uncertainties. The principles of project risk management can thus also be applied to startups.
This article was first published by the same author in the Prakalp newsletter of PMI Mumbai chapter in June 2016
Venkat has over two decades of work experience across Chemical and IT industries. He has performed the roles of Business Analyst, Project Manager and Senior Project Manager. He has been providing Project Management training, mentoring, and coaching since 2010.
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