Most entrepreneurs are risk-takers by nature. Many risk all that they have when they decide to launch a business. For entrepreneurs, there is no secure monthly income, and spending time with family can be a challenge so their personal and professional lives can be on the line. Here are some of the risk drivers that every entrepreneur and every investor should evaluate and minimize before starting a business:
An entrepreneur will need funds to launch a business either in the form of loans from investors, their own savings, or funds from family. The founder will have to put their own "skin in the game." Any new business should have a financial plan within the overall business plan showing projections for income, how much cash will be required to break-even, and how big the return will be for investors in the first five-year timeframe. Failure to accurately plan could mean that the entrepreneur risks bankruptcy and investors will get nothing.
An impressive business plan will appeal to investors. However, we live in a dynamic and fast-paced world where strategies can become outdated quickly. Changes in the market or the business environment can mean that a chosen strategy is the wrong one, and a company might struggle to reach its benchmarks and KPIs.
New technologies are constantly emerging, particularly in the era of the Fourth Industrial Revolution. Some of these changes are characterized as "paradigm shifts" or "disruptive" technologies. To be competitive, a new company may have to invest heavily in new systems and processes, which could drastically affect the bottom line.
Many factors can affect the market for a product or service. The ups and downs of the economy and new market trends pose a risk to new businesses, and a certain product might be popular one year but not the next. For example, if the economy slumps, people are less inclined to buy luxury products or nonessentials. If a competitor launches a similar product at a lower price, the competitor might steal market share. Entrepreneurs should perform a market analysis that assesses market factors, the demand for a product or service, and customer behavior.
An entrepreneur should always be aware of its competitors. If there are no competitors at all, this could indicate that there is no demand for a product. If there are a few larger competitors, the market might be saturated, or, it could be difficult to compete. Additionally, entrepreneurs with new ideas and innovations should protect intellectual property by seeking patents to protect themselves from competitors.
A business's reputation is everything, and this can be particularly so when a new business is launched and customers have preconceived expectations. If a new company disappoints consumers in the initial stages, it may never gain traction. Social media plays a huge role in business reputation and word-of-mouth marketing. One tweet or negative from a disgruntled customer can mean huge losses in revenue. Reputational risk can be managed with a strategy that communicates product information and builds relationships with consumers and other stakeholders.
Environmental, Political, and Economic Risk
Some things cannot be controlled by a good business plan or the right insurance. Earthquakes, tornadoes, hurricanes, wars, and recessions are all risks that companies and new entrepreneurs may face. There may be a strong market for a product in an under-developed country, but these countries can be unstable and unsafe, or logistics, tax rates, or tariffs might make trade difficult depending on the political climate at any point in time. Also, some business sectors have historically high failure rates, and entrepreneurs in these sectors may find it difficult to find investors. These sectors include food service, retail, and consulting.
The U.S. Bureau of Labor Statistics found that of the small businesses that were started in 2014, 80% made it to their second year (2015), 70% made it to the third year (2016), 62% made it to the fourth year (2017), and 56% made it to the fifth year (2018). Entrepreneurs should expect to make some mistakes, some of which will be costly. However, with the right planning, funding and flexibility, businesses have a better chance of succeeding.