Only 44 percent of small businesses survive more than four years. Overhead constraints, recession, encroaching competition – for many, the strain is simply too much. But one of the biggest reasons that so many startups fail is jaw-droppingly simple: poor risk management.
The success of each new venture depends heavily upon circumnavigating a wide array of risks. Some of those risks are specific to certain industries, whilst others are bound to impact virtually every sector under the sun. Either way, a little foresight and proactivity should be enough to formulate a strategy to mitigate those risks.
To help get you started, here are three of the greatest challenges that almost every startup is bound to face early on:
Every startup is founded with dreams of success – but for many, finding that success can be a real shock to the system. When a new business starts to grow rapidly, there is always an imminent danger that the workload will outstrip the founding team’s capabilities and knowledge base. Tech startups are particularly prone to developing these knowledge gaps, because the founders tend to be fiercely intelligent programmers with minimal management skills. A lack of strategic ability will ultimately relegate even the most brilliant startup founders to the unemployment line.
The way to mitigate this risk is by ensuring the founding team of a firm is able to adapt to the company’s evolving needs. Business owners must always be on the lookout to bring in strong candidates that will be able to navigate the company’s next big growth stage – even if that means taking a back seat in certain elements of company activities.
Any company that’s got a great idea is bound to attract competition. Copycats are always waiting in the shadows watching out to see what’s working for other companies – ready to jump in with near-identical products and services at a moment’s notice. In order to survive the initial onslaught of competitors, a successful business owner must build a set of defences early on.
That could mean placing heavy emphasis on brand development and marketing in order to establish customer loyalty – or it could mean reallocating resources to create new, innovative products. So long as managers are being proactive rather than reactive in taking on emerging competition, there are plenty of creative ways to stand out from the crowd.
One mistake startup founders make is to hand out all their equity to fellow workers from the outset of trading. It makes sense for a manager to want to give every member of the founding team an equal piece of the pie, but it can create big problems later in life. By giving out too much equity to someone that ends up leaving the company early on, the owner subsequently loses the ability to properly compensate investors and vital new hires.
Growth inevitably slows – and sometimes it slows to the point of no return. In order to mitigate that risk, it’s worth leaving the bulk of equity unallocated from the outset. Look for other methods of early compensation, and allocate equity based on increasing value later in the company’s lifecycle.
Every startup has got its own hurdles – but by addressing the most common roadblocks early on, founders can exponentially increase their company’s chances of surviving that dreaded four-year hump. It’s just a matter of planning ahead, being flexible and staying proactive.
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