“IT KILLS STARTUPS”

Simply understood, avoiding all those outcomes that may affect your business to its detriment is called risk management. Such outcomes can take any form- unforeseen circumstances, negative consequences, disputes, non-compliance issues etc. Risk management is important for one simple reason- You cannot predict the future.  However, the entrepreneurs should also remember that greater the risk, greater the reward. Therefore, instead of avoiding risks altogether, the approach should be to manage the risk well.

'Risk Management' is the art and science of taking risks while keeping in mind ways to mitigate unnecessary risk and managing them, of which the important step is to classify the risks on the basis of severity and the likelihood of the occurrence. Once you have done it, ask yourself if the benefit of mitigating the risk is more than the cost of mitigating it. This cost-benefit analysis is very important since it will help you in making better risk management decisions. For instance, minor consequences that have low likelihood of occurring need not be mitigated.  Ignoring such issues helps in making efficient and effective decisions.  Following are the types of risks that a startup faces every day-

1. Market Risks and Competitive Risks
2. Technology Risks
3. Financial Risks
4. Human Resources Risks
5. Legal & Regulatory Risks

It is advisable that each entrepreneur creates a list of all the risks, both imminent and future that his business faces and classify them in above mentioned categories.

The next step should be to classify them on the basis of severity and likelihood of occurrence and list down the consequences of occurrence. You can choose to ignore risks that have low likelihood of occurrence and do not have severe consequences.

The next step should be to list down the mitigation tactics and cost of mitigation. Once you have collated this information, you should do a cost benefit analysis as explained above.  It is advisable to gather different perspectives in order to make an informed decision.

While making business forecasts, ensure that they are neither too optimistic nor too conservative. Manage and revise your forecasts regularly keeping in mind the ever changing market dynamics. This will also exemplify commitment on your end which will impress the investors too.

It is also encouraged that you outsource some part of the risk management to external entities. For instance- a lawyer is better equipped to handle a business' compliance requirements. Various e-commerce businesses enter into managed services agreement which gives them freedom from various server management related work.

You should also remember that it is not possible to anticipate all the risks in the business. Risk by nature are unpredictable. What is necessary is that you have a comprehensive risk management scheme or mitigation strategies. Strong and effective risk management gives businesses an extra edge and obvious competitive advantages.