Risk Management For Startups – The Definitive Guide
- 8 min read
Anticipating for the future is not always easy for startups. While the future can be bright, it can be rife with risks. Despite these uncertainties, business leaders need to have their businesses thrive.
As long as you, as a business leader, can exercise some level of control over such uncertainty, the chances are that your business will flourish. That’s why risk management should be an essential part of running your business.
Ideally, understanding how risk management improves business processes is vital.
Here is the pivotal role that risk management plays in the sustainability of startups and how to approach it.
Why Risk Management Matters
- Protecting the Interest of Stakeholders
All stakeholders, employees, customers, and investors rely on the viability of your business in one way or another. If your business were to fail, employees would be left jobless.
In some cases, they may have to either accept some pay cuts or move on to other jobs.
As for investors, they have put their hard-earned funds into the business. They typically desire to have the business excel so that they can receive back a reasonable profit.
Lastly, customers want to be sure about your continued support as a business. They want to rely on your services for a long time.
Also, since they trust you with their personal data, it would be in their best interest to keep this data safe.
Ideally, risk management helps protect from all uncertainties that can go against the interest of stakeholders. It ensures that you can have control over how the business fair against these uncertainties.
- Better Utilization of Resources
Of all types of businesses, startups tend to work with scarce resources. Low funds and time and a small workforce typically define startups. At the same time, they require a lot of effort to sustain, let alone grow into a formidable business.
With scarcity being at a high, it makes sense to use resources in the best way possible. For instance, if resources will be wasted in ventures that pose a massive threat to the business, it is best to avoid such moves.
It also applies to how businesses deal with risks. Since there are various ways to deal with specific risks, all with different outcomes, risk management can help choose the option with the best outcome. In turn, scarce resources can be put into good use, and the business can thrive.
- Protect the Reputation of the Business
A good reputation is an invaluable resource for any business.
For startups, ensuring that your business is seen in a good light in the eyes of the public can be essential to its growth. If you have an excellent reputation, you can easily attract investors, customers, and employees as well.
It also becomes easier to forge relationships with other businesses as well as vendors.
Sadly, when risks come to life, they can ruin your reputation. For instance, in case you go through a cyber-attack, the chances are that customers will shy away from doing business with you.
Investors might also be wary of investing in your business, and potential employees might be skeptical of joining your workforce.
Risk management helps you to proactively and reactively get ahead of risks. You can, hence, have some control over their outcomes. It also helps you dictate the kind of image your business put out there into the public.
The Risk Management Process
Risk management is a rather meticulous process. It requires you to fully understand your risk landscape and work your way up towards improving your posture. Here are the steps to follow for risk management:
- Risk Identification
In this part of the process, you need to create a list of risks that can affect your business. It will include both trivial and high severity risks:
- Financial risks
- Legal risks
- Political risks
- Talent risks
- Environmental risks
There are a lot of ways of identifying the different risks your business faces. The simplest method would be to brainstorm with your team.
You could also approach experts in your industry, conduct market research, read through the history of other businesses, attend industry workshops, or even conduct competitive analysis.
- Risk Assessment
Not all risks are created equal. While some risks can have a considerable impact on the sustainability of your business, others might barely have any effect. Ideally, you need to know what weight a risk holds.
For instance, you need to identify whether the risk of ignoring software updates can have a significant impact on the productivity of your business or not.
The trick is to put every risk you listed earlier under the microscope to help you understand its nature. All this will come in handy when choosing the kind of risk treatment options for the various risks.
You could always use a risk assessment matrix to help you with this process.
A risk assessment matrix is a tool that helps rank risks based on their impact and likelihood. You should quantify the risks when assessing their impact and probability of happening.
Once you come up with a specific figure, you will then need to multiply the impact of the risk at hand with its probability before ranking it on the risk assessment matrix.
Ranking risks helps with their prioritization. It becomes easy to understand what risk poses the greatest dangers to the business as well as divide resources among risks.
- Risk Treatment
Once you know the kind of risks you are dealing with, the next step would be to look for ways to control them. The treatment option you choose should at least minimize the impact and likelihood of the threat at hand.
There are four ways to treat risks; accept it, reject it, transfer it, or mitigate it.
For risks that might be too trivial to have an impact on how the business moves forward, accepting them might be the best option. You can allow such risks to remain untreated.
For instance, the risk that a reputable vendor might close shop might be too trivial for you to worry about.
If a risk seems too great for your business to handle, then you should consider rejecting it. It includes letting go of anything that might increase the chances of the risk occurring.
For instance, you might want to start a business in Europe, but the cost of compliance with GDPR might be too high for your business. It would be wiser to reject the risk by postponing the venture to a time when you are best suited to comply with the regulation.
In case a risk might be too intensive to deal with in-house, it might be best to transfer it to other able individuals or businesses. For instance, log monitoring can be an essential part of proactively protecting your business against cyber-attacks.
However, if your business cannot build your own log monitoring tool in-house due to financial constraints, you can always rely on other solutions from established vendors. It takes the weight off your shoulders.
For any risk that can be handled in-houses, all the necessary controls should be put into place to help with its mitigation. It is the best treatment option for business risks for which the business has the time, resources, and skilled labor to deal with.
A great example would be the risk of workplace injuries. You should look for ways to reduce, if not eliminate, the chances of such injuries happening.
- Risk Monitoring and Making Adjustments
Risk management isn’t a rigid process. Since risk landscapes evolve, the risk treatment options you choose also need to adapt. While today’s risk might be trivial, it might evolve into a great risk tomorrow. In some cases, the tolerance your business has for a specific risk might change with time.
For instance, if regulation changes and the new rules make a previous risk more impactful, you will need to look at the risk from a different angle.
In other cases, risk actors might work towards bringing down your business further than you might have thought. Hackers, for instance, are always working overtime to look for loopholes in the security posture of startups.
Once they do, they are swift enough to act upon such loopholes before you can have a chance to make the necessary adjustments.
Ideally, your business needs to continuously review your previously chosen risk treatment options to determine whether they are still viable enough or not. In case of any changes worth adjusting, be sure to take the necessary steps.
Also, be sure to monitor your business for new risks that might arise as it grows. Holding regular risk management meetings might be essential to finding and dealing with these loopholes.
Delegate Risk Management Roles
Without assigning specific risk management roles to particular individuals in your business, the chances are that your entire plan will fail.
When such issues appear, it is common for people to point fingers. As a business leader, you need to build your risk management around a culture of accountability.
You should identify the different risks as well as the people with the best skills needed to handle these risks. These people will be in charge of implementing risk control measures, creating reports, determining vulnerable points, and identifying the overall risk costs.
It will make it easier to also make adjustments in the future as you already have the workforce to help with implementation.
Communication Is Key
In the world of cybersecurity, 90% of data breaches arise from human error, an issue that can be reduced through ample communication. All hands should be on deck when battling specific risks.
Otherwise, it might only take the poor judgment of a single employee or even executive leader to wreak havoc in the startup.
Business leaders should work overtime to communicate the severity of the risk to both employees and c-suite leaders. They need to understand what the business stands to lose and the best way to prevent the company from becoming the biggest loser.
Communication also helps when it comes to responding to risks that actually come to life. It ensures that everyone knows the role they should play in preventing the business from the risk that can break it.
Business Intelligence Is Your Friend
Before business intelligence and big data analysis were in vogue, business leaders had to fly blind.
They had almost to guess the best solutions for dealing with the risks their businesses faced, even though they had data that could point them in the right direction. The continued implementation of big data analysis methods has changed this narrative.
Nowadays, startups can comb through business data to identify patterns that can help inform risk management decisions. Through the different business intelligence solutions, you can determine ideal risk treatment options, the available gaps, and the effectiveness of the chosen options.
These tools can also be pivotal in simplifying the risk management process, especially when it comes to reporting and responding to incidents.
Top Leadership Is a Vital Part of Risk Management
C-suite leaders have a vital role to play in risk management. First, they set the tone for the business. Once they understand the risk landscape, they can help communicate the way the company will move forward. They also have enough power to guide people accordingly.
Second, these leaders hold power when it comes to releasing resources for risk mitigation. Without these resources, it might be tough to deal with the different risks adequately. As such, it is essential to ensure the buy-in of such leaders into your risk management plan.
Risk managers should work overtime to convince c-suite leaders why prioritizing specific risks over others is vital.
They should also try to align risk management with the long-term and short term business goals, as this is a language that most of these leaders understand. By selling them on the need for specific risk treatment options, dealing with risk becomes a walk in the park.
Risks are a necessary evil for startups. However, this doesn’t mean that they have to cripple your business. Focusing on risk management will give you the power to look at risks from a whole new perspective.
You can be both reactive and proactive at dealing with risks to make your startup sustainable. Consider incorporating risk management into your key business decisions to improve the success rate of your business.