Every successful startup came from just an idea.
Once that idea has had a chance to germinate, you start to talk it over with friends and family. Maybe at first it just seems like a fun pastime, talking about your “future business” and all the money you’d make. However, like all truly great ideas backed by the determined, you have found that your idea has the potential to become something game-changing.
If you think you are ready to move from the idea phase into seriously planning out and implementing your new venture, there are some things you should know before you start investing money into your project.
According to Statistic Brain, 71 percent of businesses fail by year 10. While you are working on your startup plan, you will want to think like the successful 29 percent of businesses. But how can you be sure you’ve covered all your bases? Below are compiled five of the largest businesses risks that startups run. While this list is not exhaustive — we can’t predict every misstep you may face — these five risks are some of the major ones you should be aware of before you begin your startup.
And if you’re in that 29 percent, I’m sure you’ve already considered these though…right?
1 | Market Risk
The market is an inherently risky place, and you have to prove that your idea is the best idea.
However, it is not just a matter of testing the market of family and friends. Testing your product on potential customers, focus groups and select beta testers will give you stronger feedback on the reception of your product.
Commodities are a fairly safe bet even though they have their own risks. Things like a new strand of coffee beans could hit the market and enjoy popularity; however, a few setbacks in distribution could destroy all of your work.
For some products, you won’t have a way to know how real customers will react until you begin to sell. Things will go wrong and you’ll have to adapt. Some customers will receive damaged products which are your sign to rework your shipping process. Other customers’ products will break after limited use; that’s your cue to see if there is a trend and if you need to evaluate what raw materials are being used to produce your product.
If you are flexible and responsive to your market’s feedback, you can use problems that could sink your business and turn them into models for improvement.
2 | Systemic Risk
What is the market like overall – not just your corner of it? For instance, your product might be a luxury item but if the economy is looking at a downturn, you could quickly lose a chunk of your target market.
You can’t mitigate all systemic risks, but there are ways to cut down on bad timing ruining your business. Create a map with your product at the center. From there, think through the various industries that could be potentially connected to your product.
Let Me Explain: Say you are working on a line of luxury eyeglass wear. Aside from obviously checking how your competition is fairing, start looking at other close connections. Is there a rise of consumers opting for laser eye surgery? On the marketing side, were you going to use any media influencers to try and corner a certain demographic? Companies that used influencers who were primarily on Vine are now scrambling to find new product representation since their recent collapse. Now they’re having to shell out more money on an advertising budget that’s eating into their other margins. So research as much as possible to minimize your own systemic risk.
3 | Financial Risk
Once you’re sure the market both large and niche are in order, consider your business’ finances. Most startups eventually run out of money, even the ones backed by venture capital.
One way to be sure you won’t find yourself at a nonplus point is to have a plan B for financing. If you are a new entrepreneur with no history of success, it is highly unlikely you will be able to get the funding you need to successfully launch and maintain production of your product. Should you get turned down, plan B is to bootstrap your business.
This means you will need a separate, or very reduced, plan for production and distribution. If you try to follow your original plan that called for capital funded production, distribution, etc, you will quickly find your pockets empty.
Bootstrapping isn’t a lesser way to run your startup as there are several successful startups who have bootstrapped their business, like Mailchimp. You want to be careful when you bootstrap and not gamble all your tangible assets like your home. The best method would be to have a pool of liquid capital that you can work with and will not leave you homeless if your startup fails.
Successful bootstrapping doesn’t mean you will scrape by forever. By creating a track record of success, investors are more likely to give you capital to expand your business, which can move you back to plan A and your original plans for expansion.
4 | Operational Risk
Depending on what your company’s product is, you will face different difficulties when it comes to your operational risks.
Carrying on from the previous example of luxury eyeglass wear, consider these aspects of operational risks. It is unlikely that you will be able to produce your product through one manufacturer completely, as it will take not only the fabrication of the glasses but the prescription lenses as well. Do you outsource or acquire an operation that handles the entire fabrication process? What steps do you implement to ensure quality control?
You have to also consider how will distribution work. Can you answer the following questions:
- Who will you ship with and what is a standard package?
- What refund guarantees will you allow for clients who receive a damaged product?
- Are you ready to absorb the costs of the returned damaged product?
Digital products don’t negate operational risks. So even if you don’t have to produce and ship a product there are still a number of “production” related problems to consider.
Say your product is an activity tracking app. How many developers do you need to maintain the app? Are the servers being utilized by the app able to compensate for spikes in traffic? Who monitors the app for inevitable crashes?
Digital product requires continuous innovation to maintain traffic and paying customers. So as one part of your product moves from research into development, you will need to immediately begin researching the next phase of your product.
5 | People Risk
It can be an uncomfortable question, but you need to ask yourself – who can you really trust? Startup teams are usually close, tight-knit teams. However, this can be a negative thing when someone is under performing and you have to correct them. These overly close ties may make you unable to get the appropriate distance to achieve results.
Say you are considering launching your venture with your best friend. He or she may have been the best wingman you could have asked for, but look critically at overall performance. Does this person have a tendency to leave projects unfinished? Or is this person overly sensitive to criticism?
These concerns have to be balanced against hiring complete strangers to be part of your venture. A great mantra when selecting new team members for your startup is to get the right people aboard the “bus” and remember they can be moved to different seats as you figure out where their strengths lie.
That Being Said…
Jeff Bezos started an online bookstore in his garage in 1994 which in 23 years has turned into an impressive online retailer – you may have heard of them, Amazon. Steve Jobs and Steve Wozniak, in their 20’s, started Apple Computers by selling their first 50 computers to a small, local retailer. They’re now the most valuable tech company in the world. Once upon a time Larry Page and Sergey Brin tried to dump their time- consuming startup for $1 million, but nobody wanted to buy Google from them. Now they pretty much own the internet. Hewlett-Packard started with an initial investment of $538. With the right first-buyer (Walt Disney), they sold their first eight oscillators and their business started the booming growth of Silicon Valley.
It’s not just tech companies that started off in a dump of a garage. Maglite, Lotus cars, Harley Davidson, and Mattel – You know what they all have in common? They didn’t get their start from a wealthy relative or an impressive resume. They started from nothing, working from the ground up to build their dreams (and their fortunes). Ironing out the wrinkles as they went, they found success with a few bucks to their names and a good team to work with. If it can be done, YOU can do it. Just be sure to cover your bases, learn from the wisdom of others and innovate your brains out.
From Park City Utah, Jackson Cooper shares his expertise in Finance Investment, Real Estate, and Legal Asset Protection through writing & outreach as a contributing author to websites such as inman.com, investorguide.com, rabidofficemonkey.com, businesswolf.org. Jackson Cooper is involved in the outreach team at Jensen and Company. Look to Jensen and Company, true leaders in the Park City real estate industry for your dream home. Check out the incredible high life homes for sale in Park City today! Connect with Jackson – Twitter – LinkedIn