10 Start-Up Risks to Evaluate Before Launching a New Business
Launching a new company, large or small, is a risky business.
Of course, you cannot eliminate all risks. However, if you understand what factors may adversely affect your new enterprise, you can take steps to mitigate those risks.
A risk analysis is one of the first tasks in preparing for a start-up.
Indeed, that early review of the potential risks might suggest that your idea is not as viable as you first thought.
On the other hand, a risk analysis can also help you plan to overcome potential obstacles to success.
Here are ten risk factors to consider before committing yourself to a new business venture. Keep reading until the end for a bonus risk to consider.
1. Demand Risk
There is always the possibility of overestimating the demand for the product or service you intend to sell.
You need to conduct thorough market research and consider if your projected sales volumes are sustainable.
It would also be advisable to run a few what-if scenarios to determine a significantly lower demand’s financial impact.
2. Competitive Risk
Researching competitors is another crucial pre-launch exercise because entering an already crowded market represents a higher risk.
It is advisable not to restrict your research to direct competition. Consider the indirect competition, too.
For example, you might have the only Italian restaurant in town. Nevertheless, Mexican, Chinese, and burger restaurants are also competition.
3. Economic Risk
It would also be wise to consider the political and economic outlook in the region you intend to launch your business.
For example, would there still be demand for your luxury products in a recession? Would people still frequent your hospitality business during a pandemic?
Forecasting the political and economic climate can be challenging.
Nevertheless, if you know that troubled times lie ahead, you will be better prepared, or you could delay the launch of your start-up altogether.
4. Management Risk
Consider if you and your team have the skills to launch and manage the business.
Additionally, ask yourself if you have an adequate understanding of the market you are about to enter?
If you do not possess the relevant knowledge and skills, you might consider hiring people to fill the skills gap.
Alternatively, you could plan to use external resources, such as professional services companies or freelancers.
5. Operational Risk
You might initially be able to cope with the operational aspects of the business.
But have you considered how you will manage when the business grows?
It would be advisable to consider the cost of scaling operational processes when the business expands, as some companies require significant investment in support and administrative functions to operate.
6. Supply Chain Risk
If your new business is heavily reliant on third-party vendors, interruptions to the supply chain could pose a significant risk.
It would be best to have a contingency plan in place should a critical vendor cease trading or other events disrupt supplies.
Remember, your supply chain includes raw materials, logistics, and sub-contracted services.
7. Regulatory Risk
There might be a danger that legislation could increase costs or even prohibit businesses in some sectors.
For example, new building regulations might increase the costs for a building company. A significant increase in tariffs could make an exported product uncompetitive.
In the worst-case scenario, laws could prohibit a product.
Therefore, it is advisable to consider the impact of any potential future legislative changes applicable to your sector.
8. Economic Life Risk
Have you considered if your product or service has a limited economic life?
Could technological advances supersede your products?
Could changes in the social or political climates render your products obsolete?
For example, now would not be the best time to invest in an innovative design for a V8 petrol engine.
You can mitigate the risk of product obsoletion by developing alternative products. In the case of the V8 engine, the alternative might be an innovative electric motor.
9. Disaster Risk
All businesses would be well-advised to have a disaster recovery plan. However, some companies are more at risk than others.
Therefore, it would be advisable to identify the potential environmental hazards, such as hurricanes, earthquakes, and floods.
Also, consider a disaster recovery plan for fire or civil unrest.
You can then evaluate the likelihood of such events, plan for them, and assess the costs of protecting against and recovering from them.
10. Funding Risk
The most common cause of business failures is a lack of cash.
That statement is, of course, an oversimplification, but ultimately it is true.
So, ensure that your forecasts are realistic and you have sufficient working capital to fund the launch and the first twelve months of trading.
Additionally, carry out what-if analyses to ascertain the impact on the cash flow of the risks you identify in your risk analysis.
BONUS: Opportunity Risk
The above risk factors are entirely business-focused. However, an entrepreneur would be well-advised to also consider the opportunity cost of the venture they are about to launch.
Is this business the best use of your limited time and resources?
Or is there another business idea you have that would be more profitable?
Some of the above risks may not apply to your start-up. And there may be other risks to your new venture not mentioned above.
But the crucial point to take away from the article is the importance of carrying out a risk assessment before launching a new business.
Use the above as a checklist to get you started.
Then brainstorm other potential factors that could adversely affect your plan.
Thinking about all the things that could go wrong may feel like a negative process, but evaluating risks, assessing their impact, and planning to avoid or mitigate them will help ensure the success of your new venture.