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12 Types of Business Risks and How to Manage Them

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90% of startups fail .

Thanks to the explosion of the digital economy, business founders have plenty of opportunities that they can tap into to build a winning business.

Unfortunately, there is a myriad of challenges your new business has to navigate through. These risks are inevitable, and they are a part of life in the business world.

However, without the right plan, strategy, and instruments, your business might be drowned by these challenges.

Therefore, we have created this guide to show you how can your business utilize risk management to succeed in 2022.

There are many types of startup and business risks that entrepreneurs can expect to encounter in 2022. Most of these threats are prevalent in the infancy stages of a business.

To know what you’ll be up against, here is a breakdown of the 12 most common threats.

12 Business Risks to Plan For

1) economic risks.

Failure to acquire adequate funding for your business can damage the chances of your business succeeding.

Before a new business starts making profits, it needs to be kept afloat with money. Bills will pile up, suppliers will need payments, and your employees will be expecting their salaries.

To avoid running into financial problems sooner or later, you need to acquire enough funds to shore up your business until it can support itself.

On the side, world and business country's economic situation can change either positively or negatively, leading to a boom in purchases and opportunities or to a reduction in sales and growth.

If your business is up and running, a great way to limit the effect of negative economic changes is to maintain steady cash flow and operate under the lean business method.

Here's an article from a founder explaining how he set up a lean budget on his $400k/year online business.

2) Market Risks

Misjudging market demand is one of the primary reasons businesses fail .

To avoid falling into this trap, conduct detailed research to understand whether you will find a ready market for what you want to sell at the price you have set.

Ensure your business has a unique selling point, and make sure what you offer brings value to the buyers.

To know whether your product will suit the market, do a survey, or get opinions from friends and potential customers.

Building a Minimum Viable Product of that business idea you've had is the recommendations made by most entrepreneurs.

This site, for example, was built in just 3 weeks and launched into the market to see if there was any interest in the type of content we offered.

The site was ugly, had little content and lacked many features. Yet, +7,700 users visited it within the first week, which made us realize we should keep working on this.

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3) Competitive Risks

Competition is a major business killer that you should be wary of.

Before you even start planning, ask yourself whether you are venturing into an oversaturated market.

Are there gaps in the market that you can exploit and make good money?

If you have an idea that can give you an edge, register it. This will prevent others from copying your product, re-innovating it, and locking you out of what you started.

Competitive risks are also those actions made by competitors that prevent a business from earning more revenue or having higher margins.

4) Execution Risks

Having an idea, a business plan, and an eager market isn’t enough to make your startup successful.

Most new companies put a lot of effort into the initial preparation and forget that the execution phase is equally important.

First, test whether you can develop your products within budget and on time. Also, check whether your product will function as intended and whether it’s possible to distribute it without taking losses.

5) Strategic Risks

Business strategies can lead to the growth or decline of a company.

Every strategy involves some risk, as time & resources are generally involved to put them into practice.

Strategic risk in the chance that an implemented strategy, therefore, results in losses.

If, for example, the Marketing Department of a company implements a content marketing strategy and a lot of months, time & money later the business doesn't see any ROI, this becomes a strategic risk.

6) Compliance Risks

Compliance risks are those losses and penalties that a business suffers for not complying with countries' and states' regulations & laws.

There are some industries that are highly-regulated so the compliance risks of businesses within them are super high.

For example, in May 2018, the EU Commission implemented the General Data Protection Regulation (GDPR), a law in privacy and data protection in the EU, which affected millions of websites.

Those websites that weren't adapted to comply with this new rule, were fined.

7) Operational Risks

Operational risks arise when the day-to-day running of a company fail to perform.

When processes fail or are insufficient, businesses lose customers and revenue and their reputation gets ruined.

One example can be customer service processes. Customers are becoming every day less willing to wait for support (not to mention, receive bad quality one).

If a business customer service team fails or delays to solve customer's issues, these might find their solution in the business competitors.

8) Reputational Risks

Reputational risks arise when a business acts in an immoral and discourteous way.

This led to customer complaints and distrust towards the business, which means for the company a big loss of sales and revenue.

With the rise of social networks, reputational risks have become one of the main concerns for businesses.

Virality is super easy among Twitter so a simple unhappy customer can lead to a huge bad press movement for the company.

A recent example is the Away issue with their toxic work environment, as a former employee reported in The Verge .

The issue brought lots of critics within social networks which eventually led the CEO, Steph Korey, to step aside from the startup ( she seems to be back, anyway 🤷‍♂️! ).

9) Country Risks

When a business invests in a new country, there is a high probability it won't work.

A product that is successful in one market won't necessarily be in another one, especially when people within them are so different in cultures, climates, tastes backgrounds, etc.

Country risk is the existing failure probability businesses investing in new countries have to deal with.

Changes in exchange rates, unstable economic situations and moving politics are three factors that make these country risks be even more delicate.

10) Quality Risks

When a business develops a product or service that fails to meet customers' needs and quality expectations, the chance these customers will ever buy again is low.

In this way, the business loses future sales and revenue. Not to mention that some customers will ask for refunds, increasing business costs, as well as publicly criticize the company's products, leading to bad reputation (and a viral cycle that means even less $$ for the business).

11) Human Risk

Hiring has its benefits but also its risks.

Employees themselves involve a huge risk for a business, as they become to represent the company through how they work, mistakes committed, the public says and interactions with customers & suppliers,

A way to deal with human risk is to train employees and keep a motivated workforce. Yet, the risk will continue to exist.

12) Technology Risk

Security attacks, power outrage, discontinued hardware, and software, among other technology issues, are the events that form part of the technology risk.

These issues can lead to a loss of money, time and data, which has many connections with the previously mentioned risks.

Back-ups, antivirus, control processes, and data breach plans are some of the ways to deal with this risk.

How Businesses Can Use Risk Management To Grow Business

To mitigate any future threats, you need to prepare a comprehensive risk management plan.

This plan should detail the strategy you will use to deal with the specific challenges your business will encounter. Here’s what to do.

1) Identify Risks

Every business encounters a different set of challenges.

Before mapping the risks, analyze your business and note down its key components such as critical resources, important services or products, and top talent.

2) Record Risks

Once risks have been identified, you need to assess and document the threats that can affect each component.

Identify any warning signs or triggers of that recorded risk, also.

3) Anticipate

The best way to beat a threat is to detect and prepare for it in advance.

Once you know your business can be affected by a certain scenario, develop steps that you will take to stop the risk or to blunt its effects.

4) Prioritize Risks

Not all types of business risk have the same effect. Some can bring your startup to its knees, while others will only cause minimal effects.

To keep your business alive, start by putting in place measures that protect the vital functions from the most severe and most probable risks.

5) Have a Backup Plan

For every risk scenario, have at least two plans for countering the threat before it arrives.

The strategy you put in place should be in line with the current technology and trends.

Ensure your communicate these measures with all your team members.

6) Assign Responsibilities

When communicating measures with the team, assign responsibilities for each member in case any of the recorded risks affect the business.

These members should also be responsible for controlling the risks every certain time and maintaining records about them.

What is a Business Risk?

The term "business risk" refers to the exposure businesses have to factors that can prevent them from achieving their set financial goals.

This exposure can come from a variety of situations, but they can be classified into two:

• Internal factors: The risk comes from sources within the company, and they tend to be related to human, technological, physical or operational factors, among others.
• External factors: The risk comes from regulations/changes affecting the whole country/economy.

Any of these factors led to the business being unable to return investors and stakeholders the adequate amounts.

What Is Risk Management?

Risk management is a practice where an entrepreneur looks for potential risks that their business may face, analyzes them, and takes action to counter them.

The steps you take can eliminate the threat, control it, or limit the effects.

A risk is any scenario that harms your business. Risks can emanate from a wide variety of sources such as financial problems, management errors, lawsuits, data loss, cyber-attacks, natural calamities, and theft.

The risk landscape changes constantly, therefore you need to know the latest threats.

By setting up a risk management plan, your business can save money and time, which in some cases can be the determinant to keep your startup in business.

Not to mention, on the side, that risk management plans tend to make managers feel more confident to carry out business decisions, especially the risky ones, which can put their startups in a huge competitive advantage.

Wrapping Up

Becoming your own boss is one of the most rewarding things you can do.

However, launching a business is not a walk in the park; risks and challenges lurk around every corner.

If you are planning to establish a new business come 2022, make sure you secure its future by creating a broad risk management plan.

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Most Common Startup Risks and How to Manage Them

Starting a new business is an ambitious yet risky endeavor. It's no secret that only one out of ten startups ultimately succeeds. So, why is that the case? Let's delve into the common pitfalls and risks many startups encounter and explore the secrets to effective startup risk management, helping a select few to navigate and mitigate these challenges.

The Fundamentals of Startup Risk Management 

When a bunch of people run into the same problem for a while, they naturally start figuring out a general plan or algorithm to tackle it. With the whole startup scene of past and new companies, it's pretty evident that different people have faced similar hurdles and their fair share of startup failures . Thus, we can take a look at these experiences and how entrepreneurs have already learned from them, starting with what exactly a startup risk is.

Startup Business Risks: Definition, Factors, and Examples

In simple terms, a startup risk is the chance or threat of something going wrong — be it liability, loss, damage, or any other not-so-great outcome. These issues can stem from factors inside and outside the company, and they might be things you saw coming, or that totally blindsided you.

One of the most popular factors is market dynamics , as it happened to Juicero in 2016. They set out to shake up the juicing scene with a fancy machine and exclusive pouches, promising a hassle-free home juicing experience. Yet, after hitting the market in 2016, people questioned the necessity of a pricey Wi-Fi juicer and the inconvenient pouch subscription model. Faced with criticism, Juicero closed shop in 2017 and underscored the importance of conducting thorough market research and meeting real consumer needs rather than just chasing tech trends.

A bit earlier, back in 2010, WeWork burst onto the scene with a mission to shake up the whole office space through flexible co-working setups. They were on fire, expanding globally and dreaming big about becoming the top dog in the industry. But their aggressive business growth strategy led to some serious financial hiccups — losses, sky-high operational costs, and some side-eye from the governance. This wild ride made WeWork hit the brakes and reevaluate its whole deal — the business model's market potential and financial strategies .

These are just some factors that startups need to keep on their radar when crafting strategic plans. The good news is that by drawing from past experiences, businesses have come up with various methods to spot, assess, and cut down on the risk factors most pertinent to their specific type of operation.

What Is Startup Risk Management, and Why Is It Important?

Briefly, risk management in business is a systematic approach that involves spotting, evaluating, and addressing potential uncertainties or threats that could throw a wrench into the success of the business . The goal here is to shrink the chances of these issues negatively affecting the startup's objectives and increase the likelihood of hitting its goals.

Starting a startup is inherently risky, though, with a myriad of potential pitfalls. That's why every entrepreneur should be at home with the common challenges, prepared to cope with them head-on, and adept at resolving issues efficiently to advance their company's chances of success.

To help you with this, we'll further break down the most typical startup risks and provide a step-by-step plan to build your business risk management framework.

10 Types of Risks Startups Face

We mentioned only two of the most popular startup risk factors previously, and obviously, there are more to keep in mind when working on your startup risk management plan.

1. Market Risk

Simply, market risk for startups is the possibility that nobody is going to use your product, even if it's great. This can happen because:

• No one needs it: people don't have the problem your product solves, or they have other solutions. Sadly, lack of product-market fit kills off too many startups.
• The market is too small: not enough people want it (to make the startup profitable), or only a few can afford it, which also pinpoints the importance of spending time on hypothesis validation prior to investing time and resources into building the product.
• Competition is strong: similar products already exist, making yours harder to sell.
• Market changes: drastic market shifts leave your product outdated or irrelevant.

In essence, you need to figure out how to manage business risk and not build something nobody wants. One of the smart ways to do that is to go through proof-of-concept to ensure your ideas are worth it. You're looking for a key, not for a hammer or a chainsaw.

2. MVP or Product Quality Risk

When most teams have proof of concept, they often move on to building a product. One huge risk is investing in a huge and costly development project without testing the waters well enough. You might end up with wasted cash for nothing.

A safer path is making a minimum viable product (MVP) . And all though the name implies enrolling the bare minimum, one of the biggest risks startups face in this respect is not delivering enough for potential customers to discover its value. If the solution is sloppy, glitchy, and overall mediocre, how are people supposed to love it and wait for it to evolve? This is, indeed, a risk, as teams have to find the perfect middle ground where the feature set isn't too extensive (here, also meaning expensive to develop) and yet is good enough to be called "viable".

As the product gradually evolves and more money is poured into its development, it is also fundamental to continuously improve the offering's quality . Instead of blindly rolling out dozens of new features, it might as well be more logical to make a minimum lovable product that'll stick with the users for good.  

3. Team Risk

The right people in the right place at the right time can do fascinating things. To amplify your team's potential, be aware of the key team risks :

• picking the wrong employees (e.g., failing when hiring developers for a startup );
• hiring excessively or out of your startup budget );
• not being able to build a strong startup culture ;
• having radical friction in the team (e.g., people not getting along);
• having not enough people to cope with the workload;
• employee burnout;
• losing key people.

Basically, you need a mix of skills to achieve a strong and effective startup team structure , such as tech experts, marketers, or salespeople — depending on the nature of your business. Picking people who can't work together or don't have the right skills can cause trouble.

Besides, even great players can fight. Unclear roles , different goals, discordance in OKRs and KPIs of different departments, or just clashing personalities can make things messy. Clear communication and shared goals are key here.

Next, working too hard without time off can lead to exhaustion and unhappiness. The best strategy is encouraging breaks , healthy habits, and open communication about workload. Make work-life balance not only a line in the job posting but one of the primary values.

Anyway, life happens. Someone might get a better offer or need to move. Having a backup plan and treating everyone well helps reduce this risk. However, don't try to do too much on your own. Make sure you have enough people to handle all the tasks and scale your startup team as your company grows.

4. Financial Risk

To make something new, you have to use resources. Money is one of your (usually, limited) assets. Use it wisely, as startup fundraising doesn't come easy. Make a backup plan for the following cases:

• Money gauge: running out of cash is mission-critical. Plan expenses, secure capital during various startup funding stages , and have a "survival reserve" for the unknown.
• Prioritizing essentials: fancy office toys are tempting, but prioritize essential spending. Remember, every unnecessary expense is a potential engine sputter.
• Equity: make sure to distribute startup equity wisely, as giving too much away can leave you with nothing in the long run.
• Debt: borrowing can boost your business or MVP launch , but too much debt becomes a heavy anchor. Borrow wisely and have a clear repayment plan.
• Unexpected costs: some things, such as legal fees or tech glitches, can strike at the most inconvenient time. Have an emergency fund to weather the storm.

Don't become another cautionary tale, though. Solve the puzzle efficiently by using hints wisely and managing your time strategically.

5. Legal Risk

The legal landscape can be riddled with landmines. To avoid getting lost and paying big fines, team up with a legal pro who knows the ropes. They'll help you stay on the right path and keep your startup squeaky clean. First and foremost, you'll likely need to handle these legal matters :

• incorporate the startup properly;
• trademark your catchy names;
• copyright your innovative content;
• patent your groundbreaking inventions;
• ensure your agreements and contracts are flawless.

That said, make sure everyone knows who's boss with well-defined ownership agreements , and lock things down with airtight confidentiality pacts . Vague and weak agreements just set you up for fights later. Instead, use solid, pre-made contracts written by lawyers. Then, tweak them for your specific deal and make sure everyone understands the clear terms.

Leaks and rule-breaking can be brutal, too, so legal tech can play a crucial role in keeping your information security strong . Use top-notch tools, follow the data privacy rules for your area, and always get a clear "go-ahead" from people before using their data.

On the employee side, playing fast and loose with their rights or leaving contracts as clear as mud can turn ugly fast. Stick to the employment laws in your area, write contracts that everyone understands, and treat your people with respect.

When disagreements with partners, investors, or customers pop up (they will), have a plan to settle things smoothly. Include "peacemaker clauses" like mediation or arbitration in your agreements . It's way cheaper and faster than lawyers and courtrooms, and everyone can keep their cool.

One of the best ways to mitigate legal startup risks is to be upfront about what you're doing , be honest about any tricky spots, and always keep your numbers clean. This transparency builds trust with your existing stakeholders and when you're pitching to investors , not to mention that it saves you from legal headaches down the line. 

Sure, there might be shortcuts that look tempting, but trust us, busting down the window in the business world usually ends badly. Play by the rules, even if they seem weird at first, and you'll have a much smoother journey. 

6. Technical Risk

Just like raising a child, nurturing your startup's technology requires careful preparation before it enters the competitive "adult" world. Don't underestimate the importance of selecting an optimal startup technology stack from the outset. Prioritize scalability, security, and future-proof technology choices to avoid costly rewrites down the line.

Another hiccup is the need for complex integrations between internal systems, third-party APIs, or external platforms that often cause delays and headaches. Thoroughly plan and test integrations to ensure seamless functionality and avoid compatibility issues.

Next, security goes beyond agreements of data use. Data breaches and cyberattacks are ever-present threats. So, you need robust security measures built into your tech, regular penetration testing, and constant updates on emerging vulnerabilities. This can help you avoid the bulk of cyber attacks like identity theft , ransomware, phishing and more. You wouldn't want to get sued for a data leak of your customers' personal details, huh?

The right tech stack will also anticipate some performance issues like latency, bugs, or downtime that can damage user experience and reputation. Additionally, rigorous QA testing , code optimization, and monitoring performance metrics will ensure a perfect user experience.

Beware, though, that relying on specific hardware, software, or service providers can create extra vulnerabilities. Diversify your technology stack and avoid single points of failure to ensure operational resilience.

Plus, if you plan to get external funds or sell the company, a well-coded product that can pass a technical due diligence check-up has a higher chance of getting a good offer. And, even better, it is worth taking the time to think such tech matters through early on, say, during the discovery stage. With foresight, careful planning, and technological adaptability, your venture can overcome any obstacle and emerge victorious.

7. Inefficient Sales or Marketing Risk

This part is tightly connected with the market risk we discussed previously. However, the sales and marketing processes have their own well-known difficulties to tackle. For example, crafting a generic or unclear value proposition leaves potential customers confused and unengaged. A strong startup marketing strategy coupled with best practices like conducting in-depth customer research to understand their pain points and desires and then tailoring your messaging to resonate with their specific needs can make a difference.

Moving on to distribution and strong startup branding , choosing the wrong marketing channels for your target audience wastes resources and delivers mediocre results. Analyze your ideal customer's online and offline behavior , then invest in targeted channels like social media platforms, industry publications, or search engine optimization that match their preferences.

At the sales stage, not qualifying leads effectively causes wasted effort and resources. Establish clear criteria for identifying high-potential leads based on budget, decision-making authority, and industry fit. Incorporate VoIP phone service to enhance communication with qualified leads, facilitating a streamlined qualification process. Training your sales team to qualify leads meticulously before pursuing them will be of much help.

In the data-driven today, flying blind without tracking and analyzing data makes it impossible to optimize your campaigns. So, startup data analytics can't be ignored. Implement analytics tools ( such as ahrefs , Google Analytics, Mixpanel or Amplitude ) to monitor website traffic, lead generation sources, and conversion rates. Use daily, weekly, monthly, and other insights to refine your approach and maximize return on investment.

On the customer care side, treating all leads the same results in missed opportunities. Monitor product performance metrics and utilize marketing automation tools to personalize communication based on individual interests and behaviors . One effective way to enhance customer communication and ensure prompt responses is by implementing an auto SMS forward system. Create targeted content and nurture leads with what just clicks.

Finally, once again, ignoring your competitors sets you up for failure right away. Analyze their strengths and weaknesses, identify their messaging and targeting strategies, and differentiate your offering by highlighting unique value propositions and competitive advantages.

‍ The main customer-centric rule: don't make your target audience work that hard to find your amazing offering. Inform everyone who might be interested, guide them through your product's potential, and empower them to solve their problems in a way that's clear and engaging. 

8. Pivot Risk

At times, you'll have no choice but to make a business pivot. In many cases, that means you'll need to steer your startup's product or offering in a completely different direction to keep it afloat. Remember how many companies had to quickly "change boots" when COVID-19 and all the lockdowns hit?

In some scenarios, this implies changing your sales strategy and shifting to another customer segment (e.g., starting to sell SaaS in B2B instead of targeting B2C). Or trying a new geographic location, modifying your product altogether, or anything along these lines.

‍ Pivots are a huge risk , as there are zero guarantees, and not all the acquired customers will be happy about the changes (yes, many of them might as well abandon you). Therefore, in order not to burn to ashes, founders and teams have to be very careful when making U-turns, as one too many times, the road may be too slippery and lead to a fall down the cliff.

9. Reputational Risk

You wouldn't spend hours strategizing, setting traps (metaphorically speaking), and finally escaping, only to trip over a hidden wire and trigger an alarm in the final seconds, right? Similarly, after meticulous planning, development, launch, and marketing, don't let a tarnished reputation set you back.

These are the major reputational damage causes:

• Security breaches expose sensitive user information, causing panic, mistrust, and potentially legal repercussions.
• Mishandling user data or failing to comply with privacy regulations erodes trust and can lead to hefty fines.
• Buggy software, inconsistent service, or unmet customer expectations create a negative buzz that travels fast online.
• Not delivering on your promises can also do serious harm. As such, if you've accepted waitlist payments from customers who wished to be the first users of your future product but couldn't even release it, this will likely result in scandals (especially if you can't return their cash).
• Unethical business practices , like misleading marketing or discriminatory behavior, can spark outrage and tarnish your reputation irreparably.

The preventative actions we mentioned before will help you avoid these factors that could lead to a reputational disaster. The key message is that your failure is not just a mistake; depending on severity, it can come with consequences that can potentially destroy your brand, your name, and the careers of the people you hire, as well as have serious legal consequences.

10. Exit Risk

Last but not least, at a particular period, you'll have to ask yourself: "What will happen to the company in the long run?".

The most common approaches are either to sell the company to a bigger one, go public, or just simply keep growing on your own. But if you're planning on a great exit, consider these startup risks:

• An inflated valuation creates unrealistic expectations and can erupt in disappointment for investors and founders. Set realistic startup valuation expectations based on data-driven analysis, market and startup trends , and comparable exits to avoid post-deal fallout.
• Accepting an unfavorable acquisition offer can leave you feeling buried. Negotiate diligently, consider alternative exit options, and prioritize a deal that aligns with your vision and promises a positive outcome for all stakeholders.
• Navigating the public markets with no proper preparation can be like hitting an iceberg. Double-check if your company is financially sound, legally compliant, and operationally ready for the scrutiny and complexities of an IPO before setting sail toward this exit route.
• Internal conflicts or disengagement among founders and key personnel can derail an exit at the last minute. Foster open communication, align team goals with the chosen exit strategy, and incentivize everyone to stay committed throughout the process.

‍ Bonus tip: diversify your exit strategy options (acquisition, IPO, secondary sale) to maintain flexibility and leverage them as bargaining chips during negotiations for the most favorable outcome.

Quite a few risks to be considered, right? Don't worry, though, as we have practical startup risk management tips and recommendations on how to boost your company's confidence as you march forward.

Don't want to risk building a product of poor quality?

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Establishing a Business Risk Management Framework in Startups 

While the road ahead might seem a bit bumpy with all those potential startup risks, we'll guide you through setting up a rock-solid framework for handling risks in your startup. In short, by identifying and addressing each one proactively, you'll be prepared for whatever comes your way — potholes, detours, or even the occasional flat tire.

The safest way to establish proper risk management in business is to make sure you integrate these six steps into the way you tackle issues.

Step 1. Identifying Risks

You should identify your unique roadblocks — like relying on few clients or navigating industry shifts. Is it possible that one bad month can lead to the end of your runway?

By diversifying your customer base, building a strong startup community around your product, staying informed, and strengthening the support system, you'll be ready to tackle almost anything. Remember, knowing your risks and making a plan is the first thing on the agenda. Moreover, you already have an idea of what to expect. 

Step 2. Assessing the Likelihood and Impact of Risks

After determining the risks that your startup can bump, you should assess the likelihood and impact of the scenarios on your company. Here is how we suggest doing it.

First, you need to assess the likelihood of the risk actually occurring . Is it a rogue asteroid hurtling towards Earth or a more mundane misstep like forgetting your keys? While predicting the future perfectly is impossible, gather all available intel and estimate the risk's odds with a healthy dose of realism.

Second, let's imagine the worst-case scenario. If the risk materializes:

• How much damage could it cause?
• Will it be a minor inconvenience like a flat tire or a full-blown catastrophe?

Carefully contemplate the potential consequences , aiming for a balanced and informed assessment. Jot down your assumptions.

Finally, the power move: devising strategies to minimize the risk's impact . Can you create safeguards to prevent its occurrence or reduce its severity? Brainstorming mitigation strategies, even if they seem elusive at first, can significantly improve your resilience in the face of uncertainty.

Now, the risks are identified, and worst-case scenarios are documented. What's next? After the law (your scenarios) comes the order. 

Step 3. Prioritizing Risks

Now, let's wrangle this menagerie into order! Sorting the startup risks by severity will help you allocate resources wisely and build resilience for whatever your venture throws your way.

Follow these risk prioritization criteria:

• Probability: prioritize risks that threaten imminent tempests, not distant wisps of uncertainty. Focus your precious resources on the most realistic scenarios, not on chasing hypothetical butterflies.
• Impact: imagine the potential financial losses, reputational blows, and operational disruptions. Estimating risks in their monetary equivalent can provide a stark, eye-opening comparison. Remember, the bigger the potential loss, the higher the risk climbs on your priority list.
• Control: assess your control over each risk. Prioritize risks where you have little to no control, as these demand proactive preparation for inevitable bumps in the road.

With your risks ranked and prioritized, it's time to move from awareness to action. Develop effective workarounds — the paths that circumvent these bumps and keep your business smoothly gliding forward.

Step 4. Developing a Startup Risk Management Plan

The arsenal of how to manage business risk boasts a variety of tools. One popular weapon is insurance , acting as a shield against unforeseen dangers like property damage, liability, and even business disruptions.

Another powerful tool is the contingency plan , your battle plan for unexpected storms. These ensure your business can weather setbacks like natural disasters or customer losses, keeping you afloat even when the seas get rough.

One more crucial point to put on your list is cash conservation and capital burn prevention . This is your "emergency cash stash", which you'll store in case the bad times hit. It's also your plan on how to minimize resource waste, as getting extra funding is never easy.

Other plans will be specialized to your risks that were previously identified. There are several common strategies to deal with them:

• Avoidance: basically, dodging the risk altogether. If you're diving into a shaky industry, think about mixing up your products and services to steer clear of potential issues.
• Reduction: lessen the blow if the risk does hit. Grabbing insurance to cover some costs tied to the potential risk is a smart move.
• Transfer: pass the risk baton to someone else. So, you might sign a deal where the other party takes on the responsibility for any damages.
• Acceptance: embrace the fact that the risk might show up and get ready for it. For instance, stash some cash in a reserve fund to handle any unexpected surprises.

Mapping out these scenarios might seem like a non-urgent task when there are more pressing matters at hand. But it's better to have them unused than nonexistent when disaster strikes. 

Step 5. Implementing the Risk Management Plan

To make sure you won't miss any potential crises, spread out responsibilities across the team and set up a clear emergency chain of command . The key to solid risk management in business is not just talking about it but making sure everyone knows exactly what to do when a crisis hits. That means assigning responsibilities and holding people accountable for managing the risks.

When emergencies pop up, having a clear plan with defined responsibilities will help you bounce back quickly. Train the team to spot warning signs , know when to sound the alarm, and kick in containment or contingency plans. This way, you'll be ready to respond swiftly and effectively when the unexpected happens.

Step 6. Monitoring and Reviewing Risks

As usual, risk management is an ongoing task. To be truly all-armed, the plans should be reviewed regularly . You must make sure:

• the previously identified risks are relevant;
• all newly appeared risks are considered and evaluated;
• the team is up to date about risk management and their responsibilities.

Set up some half-year or quarterly sessions to keep your backup plans and the overall business risk management framework up to date. Some market shifts (like the release of Apple Vision Pro for the Meta Quest department) may require some emergency sessions.

Need a hand with your startup's project?

Upsilon is a reliable tech partner that can bring your ideas to life.

Concluding Thoughts on Startup Risks

Yep, launching an IT startup is awesome, but it's not exactly a walk in the park. This guide just unpacked some of the most common roadblocks tech startups face, along with ways to dodge them (feel free to use this handy startup risk management cheat sheet anytime).

But hey, even the best cheat sheet can't replace experience. That's where we are ready to share more. At Upsilon, we've launched about 25 products, so we've seen just about everything. Feeling lost or need a helping hand to figure out how to manage business risk? We're here to guide you on your startup path to success and make it smooth sailing all the way. Feel free to contact us to discuss your needs. We provide MVP development services for early-stage startups and can assist growth-stage startups with scaling their solutions to the next level. So, don't be shy about reaching out!

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Uncovering Hidden Risks: A Comprehensive Guide to Business Plan Risk Analysis

A modern business plan that will lead your business on the road to success must have another critical element. That element is a part where you will need to cover possible risks related to your small business. So, you need to focus on  managing risk  and use  risk management processes  if you want to succeed as an entrepreneur.

How can you manage risks?

You can always plan and  predict  future things in a certain way that will happen, but your impact is not always in your hands. There are many  external factors  when it comes to the business world. They will always influence the realization of your plans. Not only the realization but also the results you will achieve in implementing the specific plan. Because of that, you need to look at these factors through the prism of the risk if you want to implement an appropriate management process while implementing your business plan.

By conducting a thorough risk analysis, you can manage risks by identifying potential threats and uncertainties that could impact your business. From market fluctuations and regulatory changes to competitive pressures and technological disruptions, no risk will go unnoticed. With these insights, you can develop contingency plans and implement risk mitigation strategies to safeguard your business’s interests.

This guide will provide practical tips and real-life examples to illustrate the importance of proper risk analysis. Whether you’re a startup founder preparing a business plan or a seasoned entrepreneur looking to reassess your risk management approach, this guide will equip you with the knowledge and tools to navigate the complex landscape of business risks.

Why is Risk Analysis Important for Business Planning?

Risk analysis is essential to business planning as it allows you to proactively identify and assess potential risks that could impact your business objectives. When you conduct a comprehensive risk analysis, you can gain a deeper understanding of the threats your business may face and can take proactive measures to mitigate them.

One of the key benefits of risk analysis is that it enables you to prioritize risks based on their potential impact and likelihood of occurrence . This helps you allocate resources effectively and develop contingency plans that address the most critical risks.

Additionally, risk analysis allows you to identify opportunities that may arise from certain risks , enabling you to capitalize on them and gain a competitive advantage.

It is important to adopt a systematic approach to effectively analyze risks in your business plan. This involves identifying risks across various market, operational, financial, and legal areas. By considering risks from multiple perspectives, you can develop a holistic understanding of your business’s potential challenges.

What is a Risk for Your Small Business?

In dictionaries, the risk is usually defined as:

The possibility of dangerous or bad consequences becomes true .

When it comes to businesses,  entrepreneurs , or in this case, the business planning process, it is possible that some aspects of the business plan will not be implemented as planned. Such a situation could have dangerous or harmful consequences for your small business.

It is simple. If you don’t implement something you have in your business plan, there will be some negative consequences for your small business.

Here is how you can  write the business plan in 30 steps .

Types of Risks in Business Planning

When conducting a business risk assessment for your business plan, it is essential to consider various types of risks that could impact your venture. Here are some common types of risks to be aware of:

1. Market risks

These risks arise from fluctuations in the market, including changes in consumer preferences, economic conditions, and industry trends. Market risks can impact your business’s demand, pricing, and market share.

2. Operational risk

Operational risk is associated with internal processes, systems, and human resources. These risks include equipment failure, supply chain disruptions, employee errors, and regulatory compliance issues.

3. Financial risks

Financial risks pertain to managing financial resources and include factors such as cash flow volatility, debt levels, currency fluctuations, and interest rate changes.

4. Legal and regulatory risks

Legal and regulatory risks arise from changes in laws, regulations, and compliance requirements. Failure to comply with legal and regulatory obligations can result in penalties, lawsuits, and reputational damage.

5. Technological risks

Technological risks arise from rapid technological advancements and the potential disruptions they can cause your business. These risks include cybersecurity threats, data breaches, and outdated technology infrastructure.

Basic Characteristics of Risk

Before you start with the development of your small  business risk  management process, you will need to know and consider the essential characteristics of the possible risk for your company.

What are the basic characteristics of a possible risk?

The risk for your company is partially unknown.

Your  entrepreneurial work  will be too easy if it is easy to predict possible risks for your company. The biggest problem is that the risk is partially unknown. Here we are talking about the future, and we want to prepare for that future. So, the risk is partially unknown because it will possibly appear in the future, not now.

The risk to your business will change over time.

Because your businesses operate in a highly dynamic environment, you cannot expect it to be something like the default. You cannot expect the risk to always exist in the same shape, form, or consequence for your company.

You can predict the risk.

It is something that, if we want, we can predict through a  systematic process . You can easily predict the risk if you install an appropriate risk management process in your small business.

The risk can and should be managed.

You can always focus your resources on eliminating or reducing risk in the areas expected to appear.

Risk Management Process You Should Implement

The risk management process cannot be seen as static in your company. Instead of that, it must be seen as an interactive process in which information will continuously be updated and analyzed. You and your small business members will act on them, and you will review all risk elements in a specified period.

Adopting a systematic approach to identifying and assessing risks in your business plan is crucial. Here are some steps to consider:

1. Risk Identification

First, you must identify risk areas . Ask and respond to the following questions:

• What are my company’s most significant risks?
• What are the risk types I will need to follow?

In business, identifying risk areas is the process of pinpointing potential threats or hazards that could negatively impact your business’s ability to conduct operations, achieve business objectives, or fulfill strategic goals.

Just as meteorologists use data to predict potential storms and help us prepare, you can use risk identification to foresee possible challenges and create plans to deal with them.

Risk can arise from various sources, such as financial uncertainty, legal liabilities, strategic management errors, accidents, natural disasters, and even pandemic situations. Natural disasters can not be predicted or avoided, but you can prepare if they appear.

For example, a retail business might identify risks like fluctuating market trends, supply chain disruptions, cybersecurity threats, or changes in consumer behavior. As you can see, the main risk areas are related to types of risk: market, financial, operational, legal and regulatory, and technological risks.

You can also use business model elements to start with something concrete:

• Value proposition,
• Customers ,
• Customers relationships ,
• Distribution channels,
• Key resources and
• Key partners.

It is not necessarily that there will be risk in all areas and that the risk will be with the same intensity for all areas. So, based on your business environment, the industry in which your business operates, and the business model, you will need to determine in which of these areas there is a possible risk.

Also, you must stay informed about external factors impacting your business, such as industry trends, economic conditions, and regulatory changes. This will help you identify emerging risks and adapt your risk management strategies accordingly.

The idea for this step is to create a table where you will have identified potential risks in each important area of your business.

2. Risk Profiling

Conduct a detailed analysis of each identified risk, including its potential impact on your business objectives and the likelihood of occurrence. This will help you develop a comprehensive understanding of the risks you face.

Qualitative Risk Analysis

The qualitative risk analysis process involves assessing and prioritizing risks based on ranking or scoring systems to classify risks into low, medium, or high categories. For this analysis, you can use customer surveys or interviews.

Qualitative risk analysis is quick, straightforward, and doesn’t require specialized statistical knowledge to conduct a business risk assessment. The main negative side is its subjectivity, as it relies heavily on thinking about something or expert judgment.

This method is best suited for initial risk assessments or when there is insufficient quantitative analysis data .

For example, if we consider the previously identified risk of a sudden shift in consumer preferences, a qualitative analysis might rate its likelihood as 7 out of 10 and its impact as 8 out of 10, placing it in the high-priority quadrant of our risk matrix. But, qualitative analysis can also use surveys and interviews where you can ask open questions and use the qualitative research process to make this scaling. This is much better because you want to lower the subjectivism level when doing business risk assessment.

Quantitative Risk Analysis

On the other side, the quantitative risk analysis method involves numerical and statistical techniques to estimate the probability and potential impact of risks. It provides more objective and detailed information about risks.

Quantitative risk analysis can provide specific, data-driven insights, making it easier to make informed decisions and allocate resources effectively. The negative side of this method is that it can be time-consuming, complex, and requires sufficient data.

You can use this approachfor more complex projects or when you need precise data to inform decisions, especially after a qualitative analysis has identified high-priority risks.

For example , for the risk of currency exchange rate fluctuations, a quantitative analysis might involve analyzing historical exchange rate data to calculate the probability of a significant fluctuation and then using your financial data to estimate the potential monetary impact.

Both methods play crucial roles in effectively managing risks. Qualitative risk analysis helps to identify and prioritize risks quickly, while quantitative analysis provides detailed insights for informed decision-making.

3. Business Risk Assessment Matrix

Once you have identified potential risks and analyzed their likelihood and potential impact, you can create a business risk assessment matrix to evaluate each risk’s likelihood and impact. This matrix will help you prioritize risks and allocate resources accordingly.

A business risk assessment matrix, sometimes called a probability and impact matrix, is a tool you can use to assess and prioritize different types of risks based on their likelihood (probability) and potential damage (impact). Here’s a step-by-step process to create one:

• Step 1: Begin by listing out your risks . For our example, let’s consider four of the risks we identified earlier: a sudden shift in consumer preferences (Market Risk), currency exchange rate fluctuations (Financial Risk), an increase in the minimum wage (Legal), and cybersecurity threats (Technological Risk).
• Step 2: Determine the likelihood of each risk occurring . In the process of risk profiling, we’ve determined that a sudden shift in consumer preferences is highly likely, currency exchange rate fluctuations are moderately likely, an increase in the minimum wage, and cybersecurity threats are less likely but still possible.
• Step 3: Assess the potential impact of each risk on your business if it were to occur . In our example, we might find that a sudden shift in consumer preferences could have a high impact, currency exchange rate fluctuations a moderate impact, an increase in minimum wage minor impact, and cybersecurity threats a high impact.
• Step 4: Plot these risks on your risk matrix . The vertical axis represents the likelihood (high to low), and the horizontal axis represents the consequences (high to low).

By visualizing these risks in a risk assessment matrix format, you can more easily identify which risks require immediate attention and which ones might need long-term strategies.

4. Develop Risk Indicators for Each Risk You Have Identified

The question is, how will you measure the business risks for your company?

Risk indicators are metrics used to measure and predict potential threats to your business. Simply, a risk indicator is a measure that should tell you whether the risk appears or not in a particular area you have defined previously. They act like a business’s early warning system. When these indicators change, it’s a signal that the risk level may be increasing.

For example, for distribution channels, an indicator can be a delay in delivery for a minimum of three days. This indicator will tell you something is wrong with that channel, and you must respond appropriately.

Now, let’s consider some risk indicators for the risks we have already identified and analyzed:

If you conduct all the steps until now, you can have a similar table with risk indicators in your business plan. You should monitor these indicators regularly, and if you notice a significant change, such as a drop in sales or an increase in attempted breaches, it’s time to investigate and take some action steps. This might involve updating your product line, hedging against currency risk, budgeting for higher wages, or improving your cybersecurity measures.

Remember, risk indicators can’t predict the future with certainty. But they can give you valuable insights that can help you prepare for potential threats.

5. Define Possible Action Steps

The question is, what can you do regarding the risk if the risk indicator tells you that there is a potential risk?

Once the risk has appeared and is located, it is time to take concrete action steps. The goals of this step are not only to reduce or eliminate the impact of the risk for your company but also to prevent them in the future and reduce or eliminate their influence on the business operations or the execution of your business plan.

For example, for distribution channels with delivery delayed more than three days, possible activities can be the following:

• Apologizing to the customers for the delay,
• Determining the reasons for the delay,
• Analysis of the reasons,
• Removing the reasons,
• Consideration of alternative distribution channels, etc.

In this part of the business plan for each risk area and indicator, try to standardize all possible actions. You can not expect that they will be final. But, you can cover some basic guidelines that must be implemented if the risk appears. Here is an example of how this part will look in your business plan related to risks we have already identified through the risk assessment process.

6. Monitoring

Because this risk management process is dynamic , you must apply the monitoring process. In such a way, you can ensure the elimination of a specific kind of risk in the future, and you will allocate your resources to new possible risks.

After implementing the actions, you need to ask yourself the following questions:

• Are the actions taken regarding the risk the proper measures?
• Can you improve something regarding the risk management process? Is there a need for new risk indicators?

Techniques and Tools for Business Plan Risk Assessment

Various risk analysis methods, techniques, and tools are available to conduct an effective risk analysis for your business plan. Here are some commonly used ones:

1. SWOT analysis

A SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis can help you identify internal strengths and weaknesses and external opportunities and threats. This analysis provides valuable insights into possible business risks and opportunities.

2. PESTEL analysis

A PESTEL (Political, Economic, Sociocultural, Technological, Environmental, Legal) analysis assesses the external factors that could impact your business. This analysis will help you identify risks and opportunities arising from these factors.

3. Scenario analysis

Consider different scenarios that could impact your business, such as best-case, worst-case, and most likely scenarios, as a part of your risk assessment process. You can anticipate potential risks and develop appropriate response strategies by analyzing these scenarios.

4. Monte Carlo simulation

Monte Carlo simulation uses random sampling and probability distributions to model various scenarios and assess their potential impact on your business. This technique provides you with a more accurate understanding of risk exposure.

5. Risk register

A risk register is a risk analysis tool that helps you record and track identified risks and their relevant details, such as impact, likelihood, mitigation strategies, and responsible parties. This tool ensures that risks are appropriately managed and monitored.

6. Business Impact Analysis (BIA)

Business impact analysis helps you understand the potential effects of various disruptions on your business operations and objectives. It’s about identifying what could go wrong and understanding how it could impact your bottom line. So, you can conduct business impact analysis as a part of your risk assessment inside your business plan.

7. Failure Mode and Effects Analysis (FMEA)

Using FMEA in your risk assessment process, you can proactively address potential problems, ensuring your business operations run as smoothly as you planned. It’s all about preparing for the worst while striving for the best.

8. Risk-Benefit Analysis (RBA)

The risk-benefit analysis allows you to make informed decisions, balancing the potential for gain against the potential for loss. It helps you choose the best path, even when the way forward isn’t entirely clear. This tool is a systematic approach to understanding the specific business risk and benefits associated with a decision, process, or project.

9. Cost-Benefit Analysis

By conducting a cost-benefit analysis as a part of your risk assessments, you can make data-driven decisions that consider both the possible risks (costs) and rewards (benefits). This approach provides a clear picture of the potential return on investment, enabling more effective and confident decision-making.

These techniques and tools allow you to conduct a comprehensive risk analysis for your business plan.

Mitigating and Managing Risks in a Business Plan

Identifying risks in your business plan is only the first step. To ensure the success of your venture, it is crucial to develop effective risk mitigation and management strategies. Here are some critical steps to consider:

• Risk avoidance : Some risks may be too high to justify taking. In such cases, consider avoiding these risks altogether by adjusting your business plan or exploring alternative strategies.
• Risk transfer : Transferring risks to third parties, such as insurance companies or outsourcing partners, can help mitigate their impact on your business. Evaluate opportunities for risk transfer and consider appropriate insurance coverage.
• Risk reduction : Implement measures to reduce the likelihood and impact of identified risks. This may involve improving internal processes, implementing safety protocols, or diversifying your supplier base .
• Risk acceptance : Some risks may be unavoidable or negatively impact your business. In such cases, accepting the risks and developing contingency plans can help minimize their impact.

In conclusion, a comprehensive risk analysis is essential for identifying, assessing, and managing different types of risk that could impact your success.

Conducting a thorough risk analysis can safeguard your business’s interests, capitalize on opportunities, and increase your chances of long-term success.

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Managing Startup Risks: Identifying and Mitigating Potential Pitfalls

No matter what you do, risk is an inherent part of the journey. While risk can be a driving force behind innovation and growth, it can also lead to setbacks and failures if not managed effectively.

Successful startups understand the importance of identifying and mitigating potential pitfalls. In this comprehensive blog, we'll explore the key strategies and tactics to manage risks in startups, allowing you to navigate the entrepreneurial landscape with confidence.

What are Startup Risks?

Before we dive into risk management strategies, it's crucial to have a clear understanding of the types of risks startups typically face:

1. Market Risk

Market risk relates to uncertainties in your target market. This could involve changes in customer preferences, shifts in the competitive landscape, or economic downturns affecting your industry.

2. Financial Risk

Financial risk involves the challenges associated with managing cash flow, securing funding, and maintaining financial stability during the early stages when revenue may be limited.

3. Operational Risk

Operational risks encompass everything from supply chain disruptions to technical glitches and employee issues impacting day-to-day business operations.

4. Regulatory and Compliance Risk

Startups must navigate various regulations and compliance requirements, which can lead to legal issues and penalties if not addressed properly.

5. Strategic Risk

Strategic risks involve decisions related to product development, market entry, and partnerships. A wrong move in these areas can have long-lasting consequences.

Identifying Risks

Conduct a risk assessment.

Start by conducting a thorough risk assessment. Consider all the potential risks mentioned above, and identify any specific risks unique to your industry or business model. Involve your team in this process to gain diverse perspectives.

SWOT Analysis

Perform a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis to evaluate your startup's internal strengths and weaknesses and external opportunities and threats. This exercise can reveal critical risk factors.

Market Research

Continuously monitor your target market through market research. Stay updated on industry trends, customer behavior, and the activities of competitors. Market shifts often signal potential risks.

Mitigating Risks

1. diversification.

Diversify your products, services, or customer base to reduce dependence on a single revenue stream. This can help mitigate both market and financial risks.

2. Robust Financial Planning

Create detailed financial projections and maintain a buffer of capital for unexpected challenges. Implement strict financial controls to manage cash flow effectively.

3. Build a Strong Team

Your team is your first line of defense against operational risks. Hire experienced professionals and invest in training to ensure everyone understands their roles in risk management.

4. Compliance and Legal Support

Consult with legal experts who specialize in your industry to ensure compliance with regulations. Develop and implement clear policies and procedures to minimize legal risks.

5. Contingency Planning

Develop contingency plans for potential disruptions. This could involve disaster recovery plans, cybersecurity measures, or supply chain alternatives.

6. Scenario Planning

Engage in scenario planning exercises to prepare for various outcomes. Identify the worst-case scenarios and develop strategies to address them proactively.

The Continuous Process of Risk Management

Risk management is not a static checklist but a living process that demands constant attention. Here's how you can make it a core part of your startup's DNA:

1. Regular Reporting and Key Risk Indicators

• Regular Reporting: Establish a structured system for tracking and reporting on key risk indicators. This involves regularly collecting, analyzing, and sharing data related to identified risks. Set up reporting intervals that suit your business's risk profile. Monthly, quarterly, or even real-time reporting may be necessary, depending on the nature of your startup.
• Key Risk Indicators (KRIs): Identify and define specific metrics or indicators that serve as early warning signals for potential risks. These could include financial ratios, customer satisfaction scores, or operational efficiency benchmarks. Ensure that KRIs are aligned with your business goals and risk appetite.

2. Feedback Loops and Employee Involvement

• Encourage Employees to Report: Your employees are often the first to spot potential risks within their areas of responsibility. Create an environment where employees feel comfortable reporting concerns, near-misses, or unusual risks-related observations. Establish formal channels for reporting, making it easy for them to communicate their findings.
• Mechanisms for Reporting: Provide clear mechanisms for reporting risks, such as anonymous suggestion boxes, digital platforms, or designated risk liaisons within teams. Ensure that employees know these mechanisms and understand how to use them.

3. Fostering a Risk-Aware Culture

• Cultivate Risk Awareness: Promote a culture of risk awareness and responsibility within your organization. Encourage employees at all levels to consider the potential risks and consequences of their decisions and actions.
• Training and Education: Offer training and educational programs on risk management. Ensure that employees understand the basics of risk assessment, mitigation, and reporting. Periodic workshops and seminars can help reinforce this knowledge.
• Leadership Example: Leadership should lead by example. Executives and managers should openly discuss risks, share experiences, and commit to risk management. When employees see that leadership takes risk seriously, they are likelier to do the same.

Technology and Tools for Effective Monitoring

To support your risk monitoring efforts, consider leveraging technology and tools:

• Risk Management Software: Invest in risk management software that can automate data collection, analysis, and reporting. These tools can provide real-time insights and facilitate the tracking of KRIs.
• Data Analytics: Utilize data analytics to identify trends, outliers, or patterns that may signal emerging risks. Advanced analytics can help you predict and prepare for potential threats.
• Communication Platforms: Implement digital communication platforms that enable easy and secure reporting of risks. These platforms can also facilitate collaboration among teams working on risk mitigation strategies.

Learning from Others - Mitigating Risk

To gain a deeper understanding of risk management in startups, let's examine a couple of case studies:

• Risk: Regulatory and Compliance Risk
• Mitigation Strategy: Airbnb has worked closely with local governments worldwide to address regulatory concerns. They have adapted their business model and policies to comply with local laws and regulations, reducing the risk of legal actions.
• Risk: Market Risk
• Mitigation Strategy: Dropbox diversified its product offering by expanding beyond file storage into collaboration tools. This move reduced their dependence on a single market segment and expanded their customer base.

Here’s a complete guide on building a strong tech startup team .

Build a Risk-Free Team with Remotebase

In the words of Reid Hoffman, the co-founder of LinkedIn, "An entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down." With effective risk management, you can build that airplane more skillfully and soar to new heights in the world of startups.

Managing risks in startups is an ongoing process that requires vigilance, adaptability, and a proactive approach. By understanding the types of risks your startup faces, identifying potential pitfalls, and implementing robust mitigation strategies, you can navigate the challenging entrepreneurial landscape with greater confidence.

Remotebase is more than a hiring platform; it's a partner dedicated to helping your startup thrive in the remote work revolution. By leveraging remote talent through Remotebase, you can:

• Boost Productivity: Tap into a pool of motivated professionals who are often more productive and focused when working remotely.
• Scale Efficiently: Quickly adapt to changing market demands by scaling your team up or down as needed, without the constraints of physical office space.
• Access Diverse Skills: Find the right expertise, whether a specialized developer or a virtual assistant . Our talent network spans various domains.
• Save Resources: Cut costs associated with office space, commuting, and relocation while retaining access to top-tier talent.
• Embrace Flexibility: Enable your team to achieve a work-life balance that fosters creativity, engagement, and long-term commitment.

With our unique offering of a 2-week no-risk trial , you’re safe to make a great choice!

Frequently Asked Questions

How can startups proactively address market risk.

Start by conducting thorough market research and staying updated on industry trends. Adapt your strategy swiftly to market changes.

What role does financial modeling play in risk mitigation for startups?

Financial modeling helps startups assess different financial scenarios and make informed decisions to navigate financial risks.

How can startups foster a culture of risk awareness among employees?

Encourage employees to report potential risks, provide training on risk management, and incorporate risk discussions into regular team meetings.

Hire Vetted Remote Developers for Your Startup

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8 Startup Business Risks that should be Considered

Every business faces uncertainty at the commencing. It is known to everyone that any size of business has minimum risk which is why survival of that business becomes harder. If we manage our businesses carefully taking steps to diversify the risks, it will be easier to survive which will result in high growth. This article will explain the startup risk factors that should be considered at the starting level. You can follow the 5 step of risk management process to assess and .

You can follow the 5 step of risk management process to assess and manage the risks associated with your business.

Why should you consider the risks at the beginning? Well, you may have a huge personal fund for investment, or you can borrow from somewhere else. Also, you may have a nice business strategy. But if you do not consider the risks associated with your business, everything will result in less return which could be the reasons to shutting down. You will be able to minimize the risks to be successful.

8 Startup Business Risks That Should Be Considered

1. Choosing The Right On e : This is the  riskiest, but important decision for any business. Choosing the right one will give you huge opportunity at the commencing. As the business or sell of products/services and the pricing depends on the supply and demand, the right selection will be beneficial for the survival at the starting phase.

2. Lack Of Experience : success depends vastly on your experience on the field. If you already know what you are doing, and have huge experience on that field then it will be easier to conduct your business. Moreover, if you think from the point of the investors, investors will be interested in investing if they are convinced that you have real expertise on that field. So, you will be taking huge risk if you do not have expertise and experience on those field of your business.

3. Historical failure rate : Historical failure rate of startups is high. And for some specific sectors they are pretty high. For the internet, these are blogging, match-making, and social networking etc.

4. Changes in government regulations : This is another important factor you should be considering. Any changes in government policy can result in positivity as well as negativity. For example, if the government raises tax rate, it will decrease your net income.

5. Initial investment requirements : For some business startups, initial investment requirements are very high. For example, if you are going to start a business which needs huge technological advantages, will be risky for you if you didn’t know it earlier. While money is invested, a risk you are taking.

6. Poor Public Image : Some businesses have a bad public image. If you have one of those, it will be very tough to regain reputation.

7. Choosing the right product : Say you are manufacturing products. But you do not have the correct information about the demand and supply of those specific products. As a result, you do not know how much you need to produce. If you over produced, you may have to take a loss. Also, a wrong choice of product will be resulting in a loss.

8. Specifying the target market : Perhaps you started your business with a nice setup. You did everything right, also, you have employed a good investment. But if you are not familiar with your target market , your products and services will remain unsold as you do not know who need those products and services. Also, for marketing purpose you need to know for whom you are going to produce your product and services.

Other Risks Associated With Startup Businesses

Risk includes the uncertainty associated with business. The main goal of any business is related to the risk and the return. The more the risk, the more it makes the return. So, the profit you will make will be highly related to the risks you will take. There are many types of risks, some are common and some are really uncommon and therefore unknown. Keeping your small businesses away from common risks will help you to deal with the uncertainty and grow your business properly. There are some usual risks associated with small businesses which are easily avoidable. However, these uncertainty can be reduced by following risk management process.

Business risk can be classified into six main parts. the paragraph below will describe those.

• Strategic Risk : these are the risk that are associated with the industry in which your business is operated.
• Compliance risks : risks those are related with the need to comply with govt. regulations and laws.
• Financial risks : These are the common risk associated with all types of business. It is related to the financial operations like financial transactions with the customers or the suppliers.
• Operating Risk : these are the risks that are related to the operations of your business.
• Environmental risks : the risks that are related to the environment which is are related to nature. These include natural disaster like storms, cyclone etc.

Some risks are non-diversifiable, but can be mitigated. Also, there are some risks for which you can not do anything like the change in government laws.

Some examples of startup business risks are:

• Theft of machinery, and breakdown.
• Proper insurance policies
• a sudden hike in labor prices
• Declines in sales
• Losing key staff members of unique skills
• Security of official data
• Sudden natural disaster
• Competition among the companies in the industries
• Changes in government laws and regulations and failure to comply with those
• Price hike of raw materials
• Accidents in the company like electricity failure

I would say these are the rules of thumb which you should see in depth while starting your business. For facing the uncertainty, you should be proactive. At the commencing point, you should calculate every possible risk of the business, measure it, and identify the solutions for it.

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• Importance of Management in Small Business

Sheikh Faizul Haque is an internet entrepreneur and the founder of The Strategy Watch ; Graduated from North South University with a double major in Accounting & Finance in Bangladesh.

With a strong interest in developing and improving Business Strategy and to Conduct Business Analysis.

How to make a business plan

Table of Contents

How to make a good business plan: step-by-step guide.

A business plan is a strategic roadmap used to navigate the challenging journey of entrepreneurship. It's the foundation upon which you build a successful business.

A well-crafted business plan can help you define your vision, clarify your goals, and identify potential problems before they arise.

But where do you start? How do you create a business plan that sets you up for success?

This article will explore the step-by-step process of creating a comprehensive business plan.

What is a business plan?

A business plan is a formal document that outlines a business's objectives, strategies, and operational procedures. It typically includes the following information about a company:

Products or services

Target market

Competitors

Marketing and sales strategies

Financial plan

Management team

A business plan serves as a roadmap for a company's success and provides a blueprint for its growth and development. It helps entrepreneurs and business owners organize their ideas, evaluate the feasibility, and identify potential challenges and opportunities.

As well as serving as a guide for business owners, a business plan can attract investors and secure funding. It demonstrates the company's understanding of the market, its ability to generate revenue and profits, and its strategy for managing risks and achieving success.

Business plan vs. business model canvas

A business plan may seem similar to a business model canvas, but each document serves a different purpose.

A business model canvas is a high-level overview that helps entrepreneurs and business owners quickly test and iterate their ideas. It is often a one-page document that briefly outlines the following:

Key partnerships

Key activities

Key propositions

Customer relationships

Customer segments

Key resources

Cost structure

Revenue streams

On the other hand, a Business Plan Template provides a more in-depth analysis of a company's strategy and operations. It is typically a lengthy document and requires significant time and effort to develop.

A business model shouldn’t replace a business plan, and vice versa. Business owners should lay the foundations and visually capture the most important information with a Business Model Canvas Template . Because this is a fast and efficient way to communicate a business idea, a business model canvas is a good starting point before developing a more comprehensive business plan.

A business plan can aim to secure funding from investors or lenders, while a business model canvas communicates a business idea to potential customers or partners.

Why is a business plan important?

A business plan is crucial for any entrepreneur or business owner wanting to increase their chances of success.

Here are some of the many benefits of having a thorough business plan.

Helps to define the business goals and objectives

A business plan encourages you to think critically about your goals and objectives. Doing so lets you clearly understand what you want to achieve and how you plan to get there.

A well-defined set of goals, objectives, and key results also provides a sense of direction and purpose, which helps keep business owners focused and motivated.

Guides decision-making

A business plan requires you to consider different scenarios and potential problems that may arise in your business. This awareness allows you to devise strategies to deal with these issues and avoid pitfalls.

With a clear plan, entrepreneurs can make informed decisions aligning with their overall business goals and objectives. This helps reduce the risk of making costly mistakes and ensures they make decisions with long-term success in mind.

Attracts investors and secures funding

Investors and lenders often require a business plan before considering investing in your business. A document that outlines the company's goals, objectives, and financial forecasts can help instill confidence in potential investors and lenders.

A well-written business plan demonstrates that you have thoroughly thought through your business idea and have a solid plan for success.

Identifies potential challenges and risks

A business plan requires entrepreneurs to consider potential challenges and risks that could impact their business. For example:

Is there enough demand for my product or service?

Will I have enough capital to start my business?

Is the market oversaturated with too many competitors?

What will happen if my marketing strategy is ineffective?

By identifying these potential challenges, entrepreneurs can develop strategies to mitigate risks and overcome challenges. This can reduce the likelihood of costly mistakes and ensure the business is well-positioned to take on any challenges.

Provides a basis for measuring success

A business plan serves as a framework for measuring success by providing clear goals and financial projections . Entrepreneurs can regularly refer to the original business plan as a benchmark to measure progress. By comparing the current business position to initial forecasts, business owners can answer questions such as:

Are we where we want to be at this point?

Did we achieve our goals?

If not, why not, and what do we need to do?

After assessing whether the business is meeting its objectives or falling short, business owners can adjust their strategies as needed.

How to make a business plan step by step

The steps below will guide you through the process of creating a business plan and what key components you need to include.

1. Create an executive summary

Start with a brief overview of your entire plan. The executive summary should cover your business plan's main points and key takeaways.

Keep your executive summary concise and clear with the Executive Summary Template . The simple design helps readers understand the crux of your business plan without reading the entire document.

2. Write your company description

Provide a detailed explanation of your company. Include information on what your company does, the mission statement, and your vision for the future.

Provide additional background information on the history of your company, the founders, and any notable achievements or milestones.

3. Conduct a market analysis

Conduct an in-depth analysis of your industry, competitors, and target market. This is best done with a SWOT analysis to identify your strengths, weaknesses, opportunities, and threats. Next, identify your target market's needs, demographics, and behaviors.

Use the Competitive Analysis Template to brainstorm answers to simple questions like:

What does the current market look like?

Who are your competitors?

What are they offering?

What will give you a competitive advantage?

Who is your target market?

What are they looking for and why?

How will your product or service satisfy a need?

These questions should give you valuable insights into the current market and where your business stands.

4. Describe your products and services

Provide detailed information about your products and services. This includes pricing information, product features, and any unique selling points.

Use the Product/Market Fit Template to explain how your products meet the needs of your target market. Describe what sets them apart from the competition.

5. Design a marketing and sales strategy

Outline how you plan to promote and sell your products. Your marketing strategy and sales strategy should include information about your:

Pricing strategy

Advertising and promotional tactics

Sales channels

The Go to Market Strategy Template is a great way to visually map how you plan to launch your product or service in a new or existing market.

6. Determine budget and financial projections

Document detailed information on your business’ finances. Describe the current financial position of the company and how you expect the finances to play out.

Some details to include in this section are:

Startup costs

Revenue projections

Profit and loss statement

Funding you have received or plan to receive

Strategy for raising funds

7. Set the organization and management structure

Define how your company is structured and who will be responsible for each aspect of the business. Use the Business Organizational Chart Template to visually map the company’s teams, roles, and hierarchy.

As well as the organization and management structure, discuss the legal structure of your business. Clarify whether your business is a corporation, partnership, sole proprietorship, or LLC.

8. Make an action plan

At this point in your business plan, you’ve described what you’re aiming for. But how are you going to get there? The Action Plan Template describes the following steps to move your business plan forward. Outline the next steps you plan to take to bring your business plan to fruition.

Types of business plans

Several types of business plans cater to different purposes and stages of a company's lifecycle. Here are some of the most common types of business plans.

Startup business plan

A startup business plan is typically an entrepreneur's first business plan. This document helps entrepreneurs articulate their business idea when starting a new business.

Not sure how to make a business plan for a startup? It’s pretty similar to a regular business plan, except the primary purpose of a startup business plan is to convince investors to provide funding for the business. A startup business plan also outlines the potential target market, product/service offering, marketing plan, and financial projections.

Strategic business plan

A strategic business plan is a long-term plan that outlines a company's overall strategy, objectives, and tactics. This type of strategic plan focuses on the big picture and helps business owners set goals and priorities and measure progress.

The primary purpose of a strategic business plan is to provide direction and guidance to the company's management team and stakeholders. The plan typically covers a period of three to five years.

Operational business plan

An operational business plan is a detailed document that outlines the day-to-day operations of a business. It focuses on the specific activities and processes required to run the business, such as:

Organizational structure

Staffing plan

Production plan

Quality control

Inventory management

Supply chain

The primary purpose of an operational business plan is to ensure that the business runs efficiently and effectively. It helps business owners manage their resources, track their performance, and identify areas for improvement.

Growth-business plan

A growth-business plan is a strategic plan that outlines how a company plans to expand its business. It helps business owners identify new market opportunities and increase revenue and profitability. The primary purpose of a growth-business plan is to provide a roadmap for the company's expansion and growth.

The 3 Horizons of Growth Template is a great tool to identify new areas of growth. This framework categorizes growth opportunities into three categories: Horizon 1 (core business), Horizon 2 (emerging business), and Horizon 3 (potential business).

One-page business plan

A one-page business plan is a condensed version of a full business plan that focuses on the most critical aspects of a business. It’s a great tool for entrepreneurs who want to quickly communicate their business idea to potential investors, partners, or employees.

A one-page business plan typically includes sections such as business concept, value proposition, revenue streams, and cost structure.

Best practices for how to make a good business plan

Here are some additional tips for creating a business plan:

Use a template

A template can help you organize your thoughts and effectively communicate your business ideas and strategies. Starting with a template can also save you time and effort when formatting your plan.

Miro’s extensive library of customizable templates includes all the necessary sections for a comprehensive business plan. With our templates, you can confidently present your business plans to stakeholders and investors.

Be practical

Avoid overestimating revenue projections or underestimating expenses. Your business plan should be grounded in practical realities like your budget, resources, and capabilities.

Be specific

Provide as much detail as possible in your business plan. A specific plan is easier to execute because it provides clear guidance on what needs to be done and how. Without specific details, your plan may be too broad or vague, making it difficult to know where to start or how to measure success.

Be thorough with your research

Conduct thorough research to fully understand the market, your competitors, and your target audience . By conducting thorough research, you can identify potential risks and challenges your business may face and develop strategies to mitigate them.

Get input from others

It can be easy to become overly focused on your vision and ideas, leading to tunnel vision and a lack of objectivity. By seeking input from others, you can identify potential opportunities you may have overlooked.

Review and revise regularly

A business plan is a living document. You should update it regularly to reflect market, industry, and business changes. Set aside time for regular reviews and revisions to ensure your plan remains relevant and effective.

Create a winning business plan to chart your path to success

Starting or growing a business can be challenging, but it doesn't have to be. Whether you're a seasoned entrepreneur or just starting, a well-written business plan can make or break your business’ success.

The purpose of a business plan is more than just to secure funding and attract investors. It also serves as a roadmap for achieving your business goals and realizing your vision. With the right mindset, tools, and strategies, you can develop a visually appealing, persuasive business plan.

Ready to make an effective business plan that works for you? Check out our library of ready-made strategy and planning templates and chart your path to success.

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Nov 07, 2018, 3 steps to finding the biggest risks to your startup (and how to eliminate them).

“Risk comes from not knowing what you're doing.” - Warren Buffett

There are a multitude of risks that come along with launching a tech startup. When you take your first step on the path of entrepreneurship, not only do you have to invest your own personal funds in the venture, but you must sacrifice your family, social, and work life to build your dream company. This is a lot to put on the line for something that may fail before even getting off the ground.

While there is no surefire way to found a successful risk-free startup, there are plenty of ways to help you identify and remove many of the risks that face your company. Taken from top industry experts, this blog post is full of startup tips and tricks to help give you peace of mind as you launch your venture.

What Are Your Business Assumptions?

The first step to identifying and eliminating the risks your startup faces is to lay out your business assumptions, which will serve as the foundation of your business plan. According to Inc.com, “An assumption is a statement that is presumed to be true without concrete evidence to support it. In the business world, assumptions are used in a wide variety of situations to enable companies to plan and make decisions in the face of uncertainty.”

While it may be easy to gloss over the importance of carefully listing out your assumptions, taking the time to do so will greatly affect the future of your startup. In the Ivey Business Journal article, “ Strategic Assumptions: The Essential (and Missing) Element of Your Strategic Plan ,” Mark Hollingworth posits that assumptions reflect the vision, strategic map, and performance targets of a business, and are vital to the success of your company.

Your company’s business model should be comprised of nine basic building blocks, which are listed out below:

• Your Customer Segments . Tabulate all of the people and/or organizations for whom you are providing value.

Your Value Proposition for each segment. Describe your product and its features that will create value for your customers.

The Channels to reach your customers. List out the means by which you interact with and deliver value to your customers.

The Customer Relationships you establish. Describe what type of connection or exchange you plan to establish with your customers.

The Revenue Streams you generate. Detail how your company will capture value and the pricing methods you will employ.

The Key Activities you require to create value. Illustrate the essential actions your company needs to make to perform well.

The Key Resources you require to create value. Tabulate the necessary assets for your infrastructure to create, deliver, and capture value.

The Key Partnerships . List out who can help you leverage your business model since you most likely do not have easy access to all of your key resources, nor will you be able to perform all of your Key Activities on your own.

The Cost Structure of the model. Once you clearly understand your business model’s infrastructure, you should then have an idea of its cost structure.

Each of these elements must be accounted for, which means that you have to clearly describe your hypothesis, or assumption, for every aspect of your business model which will then be tested later on.

To help you organize your business assumptions, here is the  Business Model Canvas  created by  Alex Osterwalder , speaker, author, and co-founder of  Strategyzer :

Rank Your Assumptions

Now that you’ve thoroughly organized your business assumptions, you must prioritize them based on their risk factor. In the LeanStack article, “How to Identify Your Riskiest Business Model Assumptions ”, Ash Maurya , author of Running Lean: Iterate from Plan A to a Plan That Works , states that regardless of how amazing your company is, you should continuously strive to eliminate the risks that face your company. If you neglect to take the time to accurately rank your riskiest assumptions, no amount of experimenting and iterating will increase your chances of mitigating the obstacles that face your startup, and you will fail to rise above what Maurya refers to as the “ceiling of achievement.”

It makes sense that the riskiest assumptions require the most attention, yet you cannot simply rely on your own intuition and expertise correctly prioritize your company’s risks, regardless of how business-savvy you are. Luckily, Mayra has provided a couple of ways for you to get started.

Start with the 3 Universal Risks

If you’re not sure which types of risks will demand the most scrutiny, begin by taking a look at the universal risks that apply to almost every product. These are:

• Ensuring your customer/problem assumptions are valid.
• Ensuring these problems represent a monetizable pain (revenue stream).
• Ensuring that you have a path or can build a path to customers (channels).

Talk to Domain Experts

Take the time to meet with experts and advisors with experience in the industry you’re working in. Assuming you’re meeting with knowledgeable authorities, this can be a valuable means of discovering the potential risks  that your startup faces. However, keep in mind that you may receive conflicting views on the risk factors of your company, and that what worked for someone else may not necessarily work for you.

Diana Kander , author of the New York Times bestseller All In Startup , outlined a systematic approach to prioritizing business assumptions in her blog post, “ How to Diagnose Your Riskiest Assumptions ”. According to Kander’s method, each assumption you’ve written down must be ranked according to two criteria:

Possibility of assumption being wrong

Level of impact if assumption is wrong

Analyze every one of your assumptions and assign each a score of 1 to 5 on the possibility of it being wrong, and assign each a score of 1 to 10 on how detrimental an incorrect guess of this assumption would be to your startup. Then, multiply the two numbers to determine the overall risk level of each of your assumptions. The assumptions with the highest scores will need the most testing and planning.

Click below for an easy to use Google Spreadsheet template: 

Test Your Assumptions

After you’ve thoroughly laid out your assumptions and carefully scrutinized the risk factor of each, then you must test your assumptions and validate your ideas. While it may be tempting to adopt the rebellious mindset so often associated with innovative thinkers, it’s best to avoid risking your livelihood if you can and take the time to ensure that your company will succeed.

In fact, not only is substantiating your hypotheses a vital step in improving your startup’s prospects, it can also be an inexpensive process. In the Growth List blog post, “ 5 Ways To Validate Your Startup Ideas With $100 ”, Sean Kim summarizes several ways that entrepreneurs can test their assumptions with little money.

Build a Landing Page

Aaron Patzer , founder of Mint.com , recommends the following approach:

With a landing page, you can bring people to your website, collect the emails of potential users, build your audience, and test the demand of your offering and discover what resonates with your audience.

Launch a Crowdfunding Campaign

With the proliferation of crowdfunding platforms in recent years, entrepreneurs can now introduce their products and generate sales for it before they have their first prototype finished. If your crowdfunding goals are met, and hopefully even exceeded, you will then have the money you need to build and launch your product, as well as the confirmation that your product has an audience.

Host a Webinar

While not talked about as much as a viable method, hosting a live webinar about your product or service is another effective way to measure the demand for your offering. Be sure to provide an exclusive offer to your audience at the end of your webinar with a link to a checkout page. With enough sales, you can build and launch your product to a waiting customer base.

If you’re the extraverted type, interviewing potential customers in person and hosting survey panels may be more suitable for your needs. In the eFounders blog post, “ How to validate a startup idea? ”, Thibaud Elziere emphasizes how interviewing customers brings a quantitative aspect to a usually very qualitative process, and outlines several methods for getting the most out of meeting people in person.

Interview at least 20 people who you think represent your target market and ask them about their current needs and how those needs are currently met.

Next, ask these people questions the price of their currently solution, its quality, its performance, and its convenience. Each of these qualities may vary depending on the product or service, so be sure to establish the proper context for your questions. Here are examples of context for each of these qualities to help guide you:

Price : purchase fee, setup, fee, subscription fee, license fee

Quality : relevance of results, infrastructure availability, customer service quality

Performance : response time, delivery time, travel speed, quantity of items, number of results

Convenience : easy to use, easy to carry on, easy to park, easy to access, easy to order.

Final Thoughts

Risks are what make life worth living. Without taking the occasional risk, we may never get out of our comfort zone, learn new lessons, or experience the thrill of doing something most people never do. However, before you go diving into a potentially dangerous adventure (i.e. launching a tech startup), taking the time to carefully analyze the troubles that you may encounter along the way will help you determine if that risk is worth taking.

"The biggest risk is not taking any risk... In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” - Mark Zuckerberg

Graduates of the Founder Institute are creating some of the world's fastest growing startups , having raised over $1.8BN in funding, and building products people love across over 200 cities worldwide.

See the most recent news from our Grads at FI.co/news , or learn more about their stories at FI.co/journey . 

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The Rollercoaster Ride: Understanding the Risks of Starting a New Business

Starting a new business can be thrilling, akin to a rollercoaster ride with its highs and lows. For many, the allure of entrepreneurship lies in creating something from scratch, being one’s boss, and potentially reaping significant rewards. However, just as a rollercoaster has its risks, so does the path of entrepreneurship. This article explores the various risks associated with starting a new business and provides insights into the world of entrepreneurship, helping potential entrepreneurs make informed decisions.

Table of Contents

Financial Risks

Starting a new business entails various financial risks that entrepreneurs must navigate to ensure the success and sustainability of their ventures. These risks stem from the inherent uncertainty and unpredictability of business operations, particularly in the early stages of development. Let’s delve into the key financial risks associated with starting a new business:

Initial Capital

One of the primary challenges for entrepreneurs is securing the initial capital required to launch and operate a new business. The upfront costs can be substantial, encompassing expenses such as:

• Marketing expenses
• Inventory procurement
• Equipment acquisition

Securing funding to cover these initial capital requirements can be challenging, as traditional financing sources may be hesitant to invest in unproven ventures, and alternative funding options may come with higher costs or stringent terms.

Cash Flow Issues

Managing cash flow is critical for the survival of a new business. Cash flow refers to the movement of money in and out of the business, including revenue from sales and expenses for operating costs, inventory purchases, and other expenditures. Poor cash flow management can lead to liquidity challenges, hindering the ability to pay bills, meet financial obligations, and sustain day-to-day operations. Common cash flow issues faced by new businesses include:

• Inadequate revenue generation to cover expenses
• Delayed payments from customers
• Unforeseen expenses or emergencies
• Seasonal fluctuations in sales

Effective cash flow forecasting, monitoring, and management are essential to mitigate cash flow risks and ensure the financial stability and viability of the business.

Return on Investment (ROI)

Entrepreneurs face significant uncertainty regarding the return on investment (ROI) for their startup ventures. While the goal is to generate profits and achieve financial success, there is no guarantee that the business will be profitable, and it may take years to realize a positive ROI. Factors influencing ROI include market demand, competitive dynamics, operational efficiency, and external economic conditions.

Entrepreneurs must carefully assess the potential risks and rewards of their business ventures and develop realistic financial projections to gauge the likelihood of achieving profitability within a reasonable timeframe. Additionally, ongoing monitoring and evaluation of financial performance are essential to identify areas for improvement and optimize resource allocation.

Table: Expense Category and Estimated Cost Range

The table above outlines common expense categories and their estimated cost ranges associated with starting a new business. These expenses represent essential investments required to establish and operate the business effectively, ranging from legal fees and marketing expenditures to inventory procurement and equipment acquisition.

Market Risks

Market risks involve external factors that a business cannot control but must navigate. These include:

Competition

Competition poses a significant risk for businesses, especially new entrants or those operating in highly competitive industries. Key aspects of competition risk include:

• Established Players: New entrants may face stiff competition from established companies with established market presence, brand recognition, and customer loyalty.
• Market Saturation: Saturated markets with numerous competitors may result in pricing pressures, reduced profit margins, and challenges in gaining market share.
• Technological Disruption: Technological advancements and disruptive innovations can alter market dynamics, create new competitors, and render existing business models obsolete.

To mitigate competition risk, businesses must differentiate their offerings, focus on innovation, and cultivate strong customer relationships to stand out in the marketplace.

Market Demand

Misjudging market demand is a significant risk for businesses, as it can lead to product or service failure, excess inventory, and financial losses. Key considerations related to market demand risk include:

• Customer Preferences: Changes in consumer preferences, tastes, and purchasing behaviors can impact product demand and market acceptance.
• Seasonality: Businesses operating in seasonal industries may face fluctuations in demand throughout the year, requiring effective inventory management and marketing strategies.
• Emerging Trends: Failure to anticipate and adapt to emerging market trends, such as shifts in consumer lifestyles, technological preferences, or regulatory changes, can result in missed opportunities and competitive disadvantages.

To mitigate market demand risk, businesses should conduct thorough market research, analyze customer feedback, and continuously monitor market trends to align their offerings with evolving consumer needs and preferences.

Economic Changes

Economic changes, including fluctuations in macroeconomic indicators such as GDP growth, inflation rates, and unemployment levels, can have profound effects on businesses’ operations and financial performance. Key aspects of economic risk include:

• Economic Downturns: Economic recessions or downturns can lead to reduced consumer spending, declining demand for goods and services, and increased business uncertainty.
• Currency Fluctuations: Businesses operating in global markets are exposed to currency exchange rate fluctuations, which can impact import/export costs, profitability, and competitiveness.
• Interest Rates: Changes in interest rates can affect borrowing costs, investment decisions, and consumer purchasing power, influencing business investment and consumer spending patterns.

To mitigate economic risk, businesses should maintain financial flexibility, diversify revenue streams, and implement proactive cost management strategies to withstand economic downturns and capitalize on growth opportunities.

Operational Risks

Operational risks of entrepreneurship include issues related to the day-to-day running of a business. They encompass:

Supply Chain Disruptions

Supply chain disruptions represent a significant operational risk for businesses, particularly those reliant on external suppliers and logistics networks. Key aspects of supply chain risk include:

• Dependency on Suppliers: Businesses depend on suppliers for raw materials, components, and finished goods. Any disruptions in the supply chain, such as delays, quality issues, or shortages, can hinder production processes and impact business continuity.
• Logistical Problems: Transportation delays, customs clearance issues, and disruptions in freight services can disrupt the flow of goods and materials, leading to inventory shortages, order fulfillment delays, and customer dissatisfaction.
• Single Point of Failure: Relying heavily on a single supplier or a limited number of suppliers increases vulnerability to supply chain disruptions. Diversifying suppliers and establishing contingency plans can mitigate this risk.

To mitigate supply chain disruptions, entrepreneurs should establish robust supplier relationships, diversify sourcing channels, maintain safety stock levels, and implement supply chain visibility and risk management systems.

Regulatory Changes

Changes in laws, regulations, and compliance requirements pose operational risks for businesses, as they may necessitate adjustments to processes, procedures, and business practices. Key considerations related to regulatory risk include:

• Compliance Obligations: Businesses must comply with a myriad of regulations governing areas such as taxation, employment, environmental protection, data privacy, and industry-specific regulations. Failure to adhere to regulatory requirements can result in fines, penalties, legal liabilities, and reputational damage.
• Uncertainty and Complexity: Regulatory landscapes are constantly evolving, with new laws, regulations, and compliance standards introduced regularly. Navigating regulatory changes requires ongoing monitoring, interpretation, and adaptation to ensure compliance and minimize risks.

To mitigate regulatory risks, entrepreneurs should stay informed about relevant laws and regulations, engage legal counsel or regulatory experts, conduct compliance audits, and implement robust compliance management systems.

Technology Failures

Technology failures, including system downtimes, data breaches, and cybersecurity threats, pose significant operational risks for businesses in today’s digital era. Key aspects of technology risk include:

• Reliance on Technology: Businesses rely on technology for various operational functions, including communication, data storage, transaction processing, and customer service. Any disruptions in technology infrastructure, such as hardware failures, software glitches, or cyberattacks, can disrupt business operations and compromise data integrity.
• Data Security and Privacy: Data breaches, unauthorized access, and cybersecurity vulnerabilities can result in data loss, theft, or exposure, leading to financial losses, legal liabilities, and reputational damage.
• Business Continuity Planning: Implementing robust technology infrastructure, data backup and recovery measures, and cybersecurity protocols are essential for maintaining business continuity and resilience in the face of technology failures.

To mitigate technology risks, entrepreneurs should invest in reliable technology infrastructure, implement cybersecurity measures, conduct regular IT audits and assessments, and develop comprehensive business continuity and disaster recovery plans.

Personal Risks

The risks of starting a new business also extend to personal impacts, which are often overlooked:

Work-Life Balance

Maintaining a healthy work-life balance can be challenging for entrepreneurs, given the demanding nature of starting and running a business. Key aspects of work-life balance risk include:

• Time Commitment: Entrepreneurs often invest significant time and energy into their ventures, working long hours and sacrificing personal time for business needs. This imbalance can lead to burnout, fatigue, and neglect of personal relationships.
• Impact on Relationships: The demands of entrepreneurship can strain personal relationships with family, friends, and significant others. Conflicts may arise due to time constraints, financial pressures, and emotional stress, affecting overall well-being and happiness.
• Health Implications: Neglecting self-care and prioritizing work over health can lead to physical and mental health issues, including exhaustion, anxiety, depression, and chronic stress.

To mitigate work-life balance risks, entrepreneurs should prioritize self-care, set boundaries between work and personal life, delegate tasks when possible, and cultivate a support network of friends, family, and mentors.

Entrepreneurship inherently involves high levels of responsibility, uncertainty, and pressure, contributing to elevated stress levels among business owners. Key aspects of stress risk include:

• Responsibility Overload: Entrepreneurs shoulder immense responsibility for the success and survival of their ventures, facing constant decision-making, problem-solving, and risk management challenges.
• Uncertainty: The unpredictable nature of entrepreneurship, including market volatility, competitive dynamics, and regulatory changes, can exacerbate stress levels and induce feelings of anxiety and apprehension.
• Financial Pressure: Financial challenges, such as cash flow constraints, debt obligations, and revenue fluctuations, can intensify stress and impact mental well-being.

To manage stress effectively, entrepreneurs should practice stress-reduction techniques such as mindfulness, meditation, exercise, and seeking professional support from therapists or counselors.

Personal Finances

Entrepreneurs often invest their personal assets, savings, and resources into their businesses, exposing them to financial risks and uncertainties. Key aspects of personal finance risk include:

• Financial Insecurity: Entrepreneurs may experience financial instability and insecurity as personal assets become tied up in the business, leaving them vulnerable to income fluctuations and business losses.
• Debt Accumulation: Borrowing funds to finance business operations or expansion can result in personal debt accumulation, increasing financial stress and risking personal financial stability.
• Retirement Planning: Entrepreneurs may neglect retirement planning and long-term financial security as they focus on building and growing their businesses, potentially jeopardizing their financial future.

To safeguard personal finances, entrepreneurs should maintain separate business and personal accounts, create emergency funds, develop financial contingency plans, and seek professional financial advice when necessary.

Navigating the Risks Of Being An Entrepreneur

Understanding and mitigating the risks associated with starting a new business are crucial. Here are some strategies to manage these risks:

• Thorough Research: Conducting comprehensive market and competitor analysis can mitigate market risks.
• Financial Planning: Robust financial planning and management can cushion against financial uncertainties.
• Diversification: Diversifying product lines or services can reduce dependency on a single market.

The journey of starting a new business is fraught with risks that challenge even the most seasoned entrepreneurs. However, with proper planning, awareness, and adaptability, these risks can be managed. The risks of entrepreneurship should not deter aspiring entrepreneurs but should encourage them to prepare diligently, ensuring they are ready for the rollercoaster ride of starting a new business. Understanding these risks and how to mitigate them sets the foundation for not just surviving but thriving in the challenging yet rewarding world of entrepreneurship.

The biggest risk is financial instability, which not only affects the business but can also impact the entrepreneur’s personal life.

Conducting thorough market research, planning financially, seeking advice from experienced entrepreneurs, and preparing for flexibility in business plans are effective strategies.

While the risks are significant, the potential rewards of self-fulfillment, financial gain, and personal growth often outweigh them for many entrepreneurs.

By Olivia Watts

Related post, navigating the seed stage of startup funding, decoding the entrepreneur acronym: entrepreneurship’s essence, angels and ventures: why due diligence differs between investors, leave a reply cancel reply.

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Understanding Competitive Environment Analysis

How to Highlight Risks in Your Business Plan

Tallat Mahmood

5 min. read

Updated October 25, 2023

One of the areas constantly dismissed by business owners in their business plan is an articulation of the risks in the business.

This either suggests you don’t believe there to be any risks in your business (not true), or are intentionally avoiding disclosing them.

Either way, it is not the best start to have with a potential funding partner. In fact, by dismissing the risks in your business, you actually make the job of a lender or investor that much more difficult.

Why a funder needs to understand your business’s risks:

Funding businesses is all about risk and reward.

Whether it’s a lender or an investor, their key concern will be trying to balance the risks inherent in your business, versus the likelihood of a reward, typically increasing business value. An imbalance occurs when entrepreneurs talk extensively about the opportunities inherent in their business, but ignore the risks.

The fact is, all funders understand that risks exist in every business. This is just a fact of running a business. There are risks that exist with your products, customers, suppliers, and your team. From a funder’s perspective, it is important to understand the nature and size of risks that exist.

• There are two main reasons why funders want to understand business risks:

Firstly, they want to understand whether or not the key risks in your business are so fundamental to the investment proposition that it would prevent them from funding you.

Some businesses are not at  the right stage to receive external funding  and placate funder concerns. These businesses are best off dealing with key risk factors prior to seeking funding.

The second reason why lenders and investors want to understand the risk in your business is so that they can structure a funding package that works best overall, despite the risk.

In my experience, this is an opportunity that many business owners are wasting, as they are not giving funders an opportunity to structure deals suitable for them.

Here’s an example:

Assume your business is  seeking equity funding,  but has a key management role that needs to be filled. This could be a key business risk for a funder.

Highlighting this risk shows that you are aware of the appointment need, and are putting plans in place to help with this key recruit. An investor may reasonably decide to proceed with funding, but the funding will be released in stages. Some will be released immediately and the remainder will be after the key position has been filled.

The benefit of highlighting your risks is that it demonstrates to investors that you understand the danger the risks pose to your company, and are aware that it needs to be dealt with. This allows for a frank discussion to take place, which is more difficult to do if you don’t acknowledge this as a problem in the first place.

Ultimately, the starting point for most funders is that they  want  to invest in you, and  want  to validate their initial interest in you.

Highlighting your business risks will allow the funder to get to the nub of the problem, and give them a better idea of how they may structure their investment in order to make it work for both parties. If they are unsure of the risks or cannot get clear explanations from the team, it is unlikely they will be forthcoming when it comes to finding ways to make a potential deal work.

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• The right way to address business risks:

The main reason many business owners don’t talk about business risks with potential funders is because they don’t want to highlight the weaknesses in their business.

This is a fair concern to have. However, there is a right way to address business risk with funders, without turning lenders and investors off.

The solution is to focus on how you  mitigate the risks.  

In other words, what are the steps you are taking in your business as a direct reaction to the risks that you have identified? This is very powerful in easing funder fears, and in positioning you as someone who has a handle on their business.

For example, if a business risk you had identified was a high level of customer concentration, then a suitable mitigation plan would be to market your products or services targeting new clients, as opposed to focusing all efforts on one client.

Having net profit margins that are lower than average for your market would raise eyebrows and be considered a risk. In this instance, you could demonstrate to funders the steps you are putting in place over a period of time to help increase those margins to at least market norms for your niche.

The process of highlighting risks—and, more importantly, outlining key mitigating actions—not only demonstrates honesty, but also a leadership quality in solving the problems in your business. Lenders and investors want to see both traits.

• The impact on your credibility:

Any lender or investor  backs the leadership team  of a business first, and the business itself second.

This is because they realize that it is you, the management team, who will ultimately deliver value and grow the business for the benefit for all. As such, it is imperative that they have the right impression about you.

The consequence of highlighting business risks in your business plan with mitigations is that it provides funders a real insight into you as a business leader. It demonstrates that not only do you have an understanding of their need to understand risk in your business, but you also appreciate that minimizing that risk is your job.

This will have a massive impact on your credibility as a business owner and management team. This impact is more acute when compared to the hundreds of businesses they will meet that omit discussing the risks in their business.

The fact is, funders have seen enough businesses and business plans in all sectors to instinctively know what risks to expect. It’s just more telling if they hear it from you first.

• What does this mean for you going forward?

Funders rely on you to deliver on your inherent promise to add value to your business for all stakeholders. The weight of this promise becomes much stronger if they can believe in the character of the team, and that comes from your credibility.

A business plan that discusses business risks and mitigations is a much more complete plan, and will increase your chances of securing funding.

Not only that, but highlighting the risks your business faces also has a long-term impact on your character and credibility as a business leader.

Tallat Mahmood is founder of The Smart Business Plan Academy, his flagship online course on building powerful business plans for small and medium-sized businesses to help them grow and raise capital. Tallat has worked for over 10 years as a small and medium-sized business advisor and investor, and in this period has helped dozens of businesses raise hundreds of millions of dollars for growth. He has also worked as an investor and sat on boards of companies.

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Risk Analysis for Startups

Risks are unavoidable in every startup venture, and you cannot always anticipate all possible risks. The only way to face potential dangers is to prepare and reduce the harmful effects of adverse events.

To effectively manage startup risks, you must take your assessment one step further. What you need is to conduct a risk analysis.

There are a lot of uncertainties when it comes to business ventures. The most effective way to protect your business , as well as your employees and customers, is to anticipate possible crises and create a risk management plan.

A tactical risk management plan follows a systematic process. The first step is to identify all risks and assess how they can affect the safety of the business. This step is crucial since it does not merely identify risks but label them according to their urgency. It is also in this step that you will administer strategic risk analysis.

What is Risk Analysis?

Everyone knows the demise of the RMS Titanic. On its maiden voyage, the “unsinkable” ship plunged to the bottom of the ocean. However, the tragedy would not occur if they did not succumb to the pressure of fierce competition.

They could prevent it if they acknowledged the design flaw and anticipated all the worst possible events during the voyage. To put it simply, it could have been prevented if they conducted a thorough risk analysis.

In a business environment, risk analysis is a crucial process of evaluating the probable occurrence of any detrimental situation within an organization or a company. This process shows an estimate of the extent of the impact once the event occurs.

Risk Analysis Benefits

Every startup should always conduct a risk analysis before they make significant decisions. This is because startups are more exposed to potential risks. Here are a few reasons why you should not forego a startup risk analysis:

Accurate Assessment

A lot of entrepreneurs may relate to this, but risks are usually based on gut feelings. Through a risk analysis, this gut feeling becomes quantitative information. It materializes the risk and, in turn, gives startups leaders a chance to plan suitable methods to decrease and mitigate possible impact to the organization.

Create a Strategic Risk Management Plan

Assessment and analysis are one of the primary steps in creating a risk management plan. The output will serve as the foundation and the leading information in creating a tactical strategy to decrease the impact of risks to the startup . If something goes wrong in the risk analysis stage, the succeeding steps could not be as practical as they should be.

Boost Confidence

When you pitch your business to investors and capitalists , one of the things that will enter their minds are multiple adverse situations that can significantly impact your business. Not only them but your employees would also think the same.

With a tactical risk management plan, which is possible by a thorough analysis, you can be confident in pitching your product. At the same time, you assure your employees of the security of the business. When employees feel secure, company morale increases, which boosts productivity.

Risk Analysis vs. Assessment

Though intricately linked to each other, risk analysis and risk assessment are not the same.

In a nutshell, risk assessment is a system itself. This system includes risk-related processes such as identifying, evaluating and reporting. Risk analysis, on the other hand, is a more specific process within the assessment phase. The analysis process focuses more on the quantification of the identified risks.

Comparing the two, the assessment is the general process of identifying external and internal risks, while the analysis is a step further from the former method. The latter combines the probability of the event to happen and its estimated impact.

There are two types of risk analysis approach : qualitative and quantitative. These two approaches are similarly practical depending on the situation and the type of risk identified.

As a starter, a qualitative approach is more subjective, while a quantitative approach is more objective. It is at the business leader’s discretion on what they deem is the best analysis approach to use.

Qualitative Risk Analysis

A qualitative approach is assessing each project risk according to its characteristics. This approach does not deal with calculations, statistics, and numerical ratings.

Instead, qualitative analysis requires a written definition of possible business hazards and an extensive evaluation of the extent of the impact. Then, countermeasures are recorded to react to when the occasion arises quickly.

A qualitative approach has three scaling categories in which the identified risks may fall based on the severity of their impact: low, medium, and high. The SWOT analysis and Cause and Effect diagrams are examples of qualitative risk analysis approaches.

Quantitative Risk Analysis

Another analysis approach that you should consider is the quantitative risk analysis . Under this approach is a more numerical estimate of the risk of the organization. The quantitative approach calculates the probabilities of project objectives.

Manage Risks with Full Scale

Risk analysis is an essential process in creating a risk management plan. Without a comprehensive report, business leaders cannot determine the most critical risks with high failure probability. Then, there is no strategic counter-plan. As a result, the business is not all set once the situation ensues.

Do not make your maiden voyage your last; conduct a thorough risk analysis for your startup to be ready for any possible risks. If software development is part of your risk management strategy, Full Scale can help you with that.

Full Scale is an offshore software development center offering development solutions for startups. Our CEOs, Matt DeCoursey and Matt Watson, have been helping a lot of businesses take the first step to scale up.

As successful entrepreneurs, they acquired extensive knowledge in the art and science of entrepreneurship. They experienced a lot of challenges and faced many risks in all of their business ventures.

Start planning the future of your business and be ready for any challenges coming your way. Talk to us now and book a FREE consultation.

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How to protect your tech company from 6 common startup business risks

Launching a tech startup is difficult for even the most experienced entrepreneurs. It’s no surprise that startups often fail. Anything from inadequate cash flow to poor team management can cause a promising tech startup to go under.

While you may be a risk-taker, you’ll want to avoid these common startup business risks to improve your chance of success. Here are six types of risk that business owners should be aware of, and how you can protect your company from hidden threats.

1. Underestimating the competition or misjudging market demand

Successful startups often fill a gap in the market, yet many tech startups misjudge market demand and underestimate competitors.

That’s why it’s important to conduct market research as you launch your tech startup. This involves gathering and analyzing information about consumer preferences, competition, and trends in your industry.

You don’t necessarily need to hire a marketing consultant to do this. Here are some low-cost ways to reduce competitive risk by conducting your own market research:

• Search Google and read reports from reputable organizations to follow trends in your market
• Send potential customers an email survey about their product preferences
• Use social media polls to ask your target audience what they want from your brand
• Request feedback from customers
• Learn the competition and keep track of their marketing efforts, product updates, etc.

Based on the results of your market research, you may find that the market is oversaturated. It’s tough for tech startups in overly crowded markets to succeed, unless they’re really disrupting the space.

If you’re facing a highly competitive or saturated market, look at marketplace alternatives and re-examine your offering. Identify your niche early on, and figure out what sets your startup apart from other companies in the industry.

2. Poorly defined or poor product or services

While you may know your offering well, understanding who you’re selling to is critical.

Tech startups need to clearly define what their product is, what it does, and who needs it. This is something potential customers and investors need to know.

A good way to define your offering is to start with a Minimally Viable Product (MVP). An MVP is a new product that’s released with very basic features as a way to gauge consumer interest.

If the launch is successful, you can build on your MVP using what you learned from the initial release. If the product isn’t viable, you’ll have saved much needed capital.

One of the best tech startup tips is to write a business plan early on. Even if you don’t need to raise capital, a business plan is still a good idea. It will serve as a roadmap for your business going forward.

Your business plan should include:

• An executive summary
• A description of your business
• A list of your products and services
• What sets you apart from the competition
• Market research/SWOT analysis
• Marketing strategy
• Business model, management and team structure
• Financial plan
• Funding goals (if any)

It can be tempting for startups to rush a product to market. You need to resist the urge and take your time with product development. Product quality can make or break your company’s reputation – and a poor quality product could even lead to litigation.

You may want to consider professional liability insurance if your tech startup provides a service. Also called errors and omissions insurance , this coverage will protect you from claims of negligence, mistakes, and oversights.

To manage risk around product development, you may consider product liability insurance . It protects against claims that your product caused injury or property damage. This coverage is typically included as a rider with general liability insurance policies.

3. Cash flow problems

Running out of money is a huge risk for startups. More than 80% of small businesses fail because of cash flow problems.

Make sure you accurately forecast your spending to account for this risk. If your operating costs are higher than what your budget allows, you’ll need to make adjustments.

Creating a financial plan in the early days of your tech startup is a must. Your financial plan should include the following information:

• Your total budget
• Operating expenses (rent, salaries, inventory, etc.)
• Current cash flow and income statements
• Capital raised
• Debts and loans
• Financial projections

The financial plan should be included in your business plan. If you seek funding, banks and venture capital firms will want to see your financial plan to understand why their money is needed. Along with good accounting practices and careful record-keeping, a detailed budget can go a long way.

In the early stages of a business, conserving capital is key. Keep an emergency fund to cover unexpected expenses, and don’t rush to pay off debt. It’s better to repay low-interest loans slowly than to blow your entire budget in one payment.

4. Cyber threats

A data breach or cyber attack is a threat to any business. But tech startups that store or handle sensitive data are at even greater risk.

The costs of a data breach can be steep. If your business is breached, you could take a big financial hit. Plus, if you’re blamed for a client’s data breach you could face an expensive lawsuit.

To protect your startup against cyber threats, consider getting cyber liability insurance . There are two kinds of cyber liability insurance: first-party and third-party.

First-party cyber liability insurance protects your business if your own network or systems are affected. It helps pay for costs such as:

• Customer notifications and credit/fraud monitoring services
• Investigating/correcting security weaknesses
• Public relations costs

Third-party cyber liability insurance will pay the costs if a client sues you over a data breach at their business. It helps cover legal expenses including:

• Attorney fees
• Settlements or judgments
• Other court costs

5. Team troubles

Countless startups have failed because their team didn’t have the right experience, or they took advice from questionable sources. Your team members and management are crucial to your startup’s success, so be strategic in your recruiting.

Surround yourself with people who have the talent and expertise to help grow and guide your company. Networking with successful startup founders and soliciting feedback can help. If you’re starting your first company, find a veteran who can show you the ropes.

A directors and officers insurance (D&O) policy can also help you attract and retain top leadership. D&O insurance protects your co-founders, board members, and officers if they make a decision on behalf of the company which results in a financial loss.

Directors and officers insurance covers lawsuits related to:

• Mismanaged funds
• Employee complaints
• Slander, libel, and copyright infringement claims
• Failure to follow company bylaws
• Regulatory compliance

To protect your business from lawsuits by your employees, you might also consider employment practices liability insurance . This can help cover claims related to:

• Mismanaged benefits
• Sexual harassment
• Wrongful termination
• Discrimination
• Breach of employment contract

A common mistake among startup owners is asking a skeleton crew to do too much, or having you and your partners be too hands-on when it comes to every decision. Either way, important details can slip through the cracks.

Cross-train your team to ensure that important information isn’t lost. Make sure that someone is taking a bird’s eye view to spot potential issues quickly.

6. Protecting intellectual property and other legal issues

Tech startups can have large amounts of intellectual property. Information like patents and product designs can accidentally get exposed if you work with subcontractors.

To legally protect your intellectual property , make sure you have a written subcontractor agreement that you require every subcontractor you work with to sign. It should include:

• Work scope and payment details
• Non-compete and non-disclosure terms
• Ownership rights
• A warranty clause
• A hold harmless clause or agreement
• Insurance requirements

To safeguard your business from employee theft of intellectual property or other crimes, you may want to consider fidelity bond insurance . This coverage comes in two forms: first-party and third-party.

First-party fidelity bond insurance covers costs related to:

• Employee theft or embezzlement from your company
• Employee fraud against your company
• Employee forgery that affects your company

Third-party fidelity bond insurance will pay costs related to:

• Employee theft from a client
• Employee fraud against a client
• Employee forgery that affects a client

Startup owners may be unaware of all the legal risks and requirements for their company. It helps to find an attorney or other trusted advisor to provide legal advice on issues like copyright infringement or a customer injury.

If your company gets involved in a lawsuit, having a general liability insurance policy can protect you from common situations like:

• Client property damage
• Client injuries
• Advertising injuries like slander, libel, and copyright infringement

If you own or rent an office or own company vehicles, your business may also benefit from commercial property insurance and commercial auto insurance .

It’s easy to become so focused on day-to-day operations that you forget about the potential risks to your startup. But successful businesses keep these common startup risks top of mind as they develop their risk management strategy.

Whatever your risks, the right business insurance is an important part of an effective risk management strategy. With careful planning and the right protection, you can improve the odds of success for your tech startup.

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Elizabeth Rivelli, Freelance Writer

Elizabeth is a freelance writer with extensive experience covering commercial insurance and personal insurance lines. Her work has been featured in dozens of online finance publications, including Forbes, Bankrate, and Investopedia. Elizabeth also writes for several insurance carriers.

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Financial Risk

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Market Risk

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Reputational Risk

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What Risks Does an Entrepreneur Face?

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Most entrepreneurs are risk-takers by nature, or at minimum calculated visionaries with a clear plan of action to launch a new product or service to fill a gap in the industry. On a personal level, many entrepreneurs take big risks to leave stable jobs to throw their efforts (and sometimes their own money) into launching a business.

For entrepreneurs, there is no guaranteed monthly income, no guarantee of success, and spending time with family and friends can be a challenge in the early days of launching a company. Here are some of the most common risks that every entrepreneur and investor should evaluate and minimize before starting a business.

Key Takeaways

• Entrepreneurs face multiple risks such as bankruptcy, financial risk, competitive risks, environmental risks, reputational risks , and political and economic risks.
• Entrepreneurs must plan wisely in terms of budgeting and show investors that they are considering risks by creating a realistic business plan.
• Entrepreneurs should also consider technology changes as a risk factor.
• Market demand is unpredictable as consumer trends can change rapidly, creating problems for entrepreneurs.

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 income projections, how much cash will be required to break even, and the expected return for investors in the first five-year timeframe. Failure to accurately plan could mean that the entrepreneur risks bankruptcy, and investors get nothing.

Entrepreneurs face many risks when they launch a venture, and they should take measures to insure against those that are most likely to affect them.

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 key performance indicators (KPIs). 

Technology Risk 

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.

Competitive Risk 

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, the company might struggle 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 post from a disgruntled customer can lead to 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 percentage of small businesses launched in 2018 that made it to their third year, according to the Bureau of Labor Statistics.

The U.S. Bureau of Labor Statistics found that of the small businesses that were started in 2018, 81.3% made it to their second year (2019), and 65.4% made it to the third year (2020). 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.

Bureau of Labor Statistics. " Table 7. Survival of Private Sector Establishments by Opening Year ."

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Startups ireland, how to assess the risks of a new business.

By definition, an entrepreneur is a person who is willing to take risks in lieu of a profit. Therefore, acknowledging and embracing risk is a fundamental aspect of starting a new business. There will always be a certain level of uncertainty that you will have to prepare for and deal with when you work on establishing a startup business.

Anticipating Failure

The temptation is to ignore these risks and move forward with a false sense of security mingled with irrational ambition. Such an approach will lead to inevitable failure. Once you enter the world of business, you put your name in an intense competition that will either get the best out of you or bring you crashing down. Therefore, you do not have the luxury to believe for a second that you are immune to financial danger. There are going to be plenty of ups and downs for a startup business. The smart thing to do is anticipate the failure before it arrives. This is what gives rise to the concept of risk assessment.

Risk Management

The reason why you would want to assess the risks of your new business is because you want to learn how to manage them. Risk assessment is a prerequisite to risk management. Risk management involves the ability to predict risks, identify risks and develop strategies to effectively counter these risks that threaten the success or survival of your business. The risk management plan is an integral part of any startup business plan. Understanding the potential risks of your business and figuring out ways in which you can reduce the impact of these risks is essential to maximizing your chances of succeeding in the world of business.

Identifying Major Risks

It is not humanly possible for an entrepreneur to list down all the risks that the business can encounter within the first few years. What the entrepreneur needs to do is identify some of the major risks that are likely to impact the startup. This requires the entrepreneur to research the industry and study risk patterns. In other, you need to learn from the mistakes of the businesses that you will be competing with soon.

There are many different types of major risks that you can possibly identify and these vary based on the nature of your business. For example, if you are starting a new business in the clothing industry, then your risks are going to be much different from that of an automobile business. That being said, there are some common major risks that can be associated with most types of new businesses. Here is a list of them along with brief descriptions:

1) Financial Risks

These cover both external and internal risks. External risks include changes in the interest rates or commodity prices. Internal rates on the other hand can be described as cash flow shortages, depreciation of assets and customers defaulting on payments without prior notice.

2) Legal Risks

A breach in the contract is the perfect example of a legal risk. Your business could also be in trouble for non-compliance with regulations imposed by the industry authorities. For example, there are plenty of businesses in the construction sector that are fined heavily for not maintaining onsite health and safety standards.

3) Operational Risks and/or Environmental Risks

If your key employee fails to show up to work for a month because of a serious illness, then your new business is going to be in hot water. This is a very simple example of an operational risk. Things could get even worse when there is an equipment breakdown or software failure. Imagine the kind of risk that your business would suffer if your inventor was wiped out by a natural disaster. All of these mishaps fall under the umbrella of operational risks.

4) Strategic Risks

This one is slightly more complicated than the others. A strategic risk is something you face when your business fails to adapt to changes in the market or the industry. For example, companies can go out of business if they are unable to respond to fluctuations in customer demand, innovation of superior technology or an overall increase in competition. Sometimes, companies fail simply because they are too short sighted to chase fresh business opportunities.

Risk Evaluation

Risk identification is only the first step to risk assessment. You need to analyze the severity of each risk to fully understand the kind of issues that you may have to deal with in the future. The simplest and most effective way of evaluating a risk is to scale the risk on the basis of the following two criteria:

a) The Chances of the Risk Occurring

b) The Major Consequences of the Risk

By grading your risks, you will be able to prioritize the ones that are a bigger threat to your business. Risks do not affect businesses one at a time. They are likely to attack you in combinations. As your new business grows and evolves, you will have to learn to deal with these combinations by employing effective strategies at the right time. Your risk assessment should serve as a platform for devising your risk management strategies.

Leslie works at Cube Online Marketing , a digital marketing company he founded in 2007.

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7 Effective Ways to Minimize Risks When Starting Your Business

Launching a new business is a thrilling and ambitious endeavor that carries the promise of growth, innovation, and success. However, it’s essential to acknowledge that the path to business success is often accompanied by various risks that can potentially derail even the most promising ventures. In the early stages of a business, the importance of minimizing risk cannot be overstated, as it directly impacts the viability and longevity of the enterprise. From financial uncertainties to market fluctuations, a myriad of factors can influence a new business’s trajectory.

Here are some of the most strategic and pragmatic ways to not only recognize but also effectively minimize early-stage business risk. By exploring these insights, aspiring entrepreneurs can navigate the challenges with greater confidence, seize opportunities for growth, and position their startups for sustainable prosperity.

1. Thorough Market Research

Foundational to risk mitigation in the early stages of a business is the diligent and comprehensive undertaking of market research . This involves delving deep into the dynamics of your target audience and understanding their needs, preferences, and behaviors. Equally important is the assessment of existing competitors, deciphering their strengths and vulnerabilities.

By gaining these insights, you can fine-tune your business model, craft strategies that resonate with your audience, and formulate a compelling value proposition that sets you apart in the market.

2. Build a Solid Business Plan

A meticulously crafted business plan serves as an invaluable roadmap that guides your startup through uncharted territory. It lays out your goals, strategies, and potential challenges, providing a clear direction for your business’s growth trajectory.

Beyond being a strategic blueprint, a well-structured business plan is also a testament to your preparedness and foresight. It demonstrates to potential investors and stakeholders that you’ve not only acknowledged the risks but also developed thoughtful strategies to mitigate them effectively.

3. Secure Adequate Financing

Insufficient funding remains one of the most common risks that startups face in their early stages. Adequate financing is not only essential to cover initial expenses but also to establish a cushion for unforeseen challenges that may arise. Exploring a variety of funding options, such as bootstrapping, venture capital, angel investors, and crowdfunding, ensures that you have the financial foundation necessary to navigate uncertainties with confidence and maintain operations even during periods of financial strain.

Also, avoid potentially dangerous financial ideas such as dangerous junk insurance that could jeopardize your business and make it weaker than ever – and the worst thing is that you don’t need it at all!

4. Develop a Minimum Viable Product (MVP)

A cornerstone of risk minimization in early-stage business development is the creation of a Minimum Viable Product (MVP). An MVP allows you to test the waters by releasing a simplified version of your product or service. This approach enables you to gather real-user feedback, validate market demand, and identify areas for improvement before fully committing resources to a comprehensive product.

By iterating based on user insights, you can significantly reduce the risk of investing extensively in a product that might not align with customer expectations.

5. Focus on Customer Validation

The early stages of a startup are characterized by the potential risk of developing products or services that do not resonate with the target market. Prioritizing customer validation becomes imperative.

Engaging potential customers through surveys, focus groups, and direct interactions allows you to gauge interest and gather insights directly from the audience. This approach ensures that your solution genuinely addresses pain points and fulfills market needs, ultimately minimizing the risk of investing in a product that lacks demand.

6. Build a Diverse Team

A diverse and skilled team is a vital asset in mitigating risks associated with decision-making and problem-solving. Surrounding yourself with individuals who bring varied perspectives and expertise helps combat the pitfalls of groupthink and ensures a well-rounded approach to challenges.

Collaborators with diverse backgrounds can navigate uncertainties more effectively, adapt to changing circumstances, and collectively devise strategies to mitigate risks and capitalize on opportunities.

7. Implement Scalable Growth Strategies

While rapid growth is a tempting proposition, it can pose significant risks if not managed strategically. Implementing scalable growth strategies ensures that your business can expand while maintaining operational efficiency . This involves considering factors such as hiring processes, supply chain management, and customer support infrastructure. A balanced approach to growth and stability positions your business to meet increased demand without compromising on quality or sustainability.

Bottom Line

Launching a business in its early stages demands a meticulous approach to risk management that accounts for uncertainties while capitalizing on opportunities. While risk is inherent in any business venture, the strategic application of these tactics equips startups to mitigate potential setbacks and establish a strong foundation for sustainable growth and success.

As you embark on your entrepreneurial journey , remember that risk minimization isn’t about erasing all challenges but about equipping yourself with the knowledge and strategies to navigate them strategically, emerging stronger and more prepared for the road ahead.

Salman Zafar is a serial entrepreneur, digital marketer, writer and publisher. He is the Founder of Techie Loops

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Business Plan Risks How to present your business risks without scaring away investors

By Stever Robbins Dec 11, 2004

Opinions expressed by Entrepreneur contributors are their own.

Q: I would like to include a risk analysis in my business plan. I don't know how to show risks without sending investors into an anxious frenzy.

A: Any start-up idea will have enough risk to fill a dozen business plans. No investor expects a risk-free plan. Angels and VCs know start-ups are incredibly risky. If they don't, don't take their money--they don't know what they're doing! Most projects fail for reasons that could have been (and sometimes were) predicted far in advance. Since entrepreneurs are optimistic folks by nature: They tend to brush off predictions of doom and charge ahead assuming they will find a way to overcome. You can often avoid the most dire scenarios with intelligent upfront risk planning.

The risk analysis in your plan is to show that you've thought through risks, that you know how to plan for probable risks, and that your plan can survive when things go wrong.

Your plan can address several kinds of risk. You don't need to address every kind of risk in the book, but pick the risk categories that are most relevant to your company and include a paragraph or two about each:

• Product risk is the risk that the product can't be created. Biotech firms often have a high degree of product risk. They never know for sure they can produce the drug they are hoping to produce.
• Market risk is the risk that the market will develop differently than expected. Sometimes markets take too long to develop, and cash runs out while a company is waiting for customers.
• People risk is big in companies that depend on having certain employees or certain kinds of employees. I was with a company that had hired one of the world experts in a certain type of 3-D modeling. It was possible that without this man on board and happy, the company wouldn't be able to create their product.
• Financial risk is the risk that a company will run out of money or mismanage their money in some way. Finance companies may have huge financial risk, since bad lending policies combined with poor investment policies can sink them.
• Competitive risk is the risk that a competing product or service will be able to win. Many Web-based businesses have high competitive risk since they can be started with little money and have no way of locking in customers.

What investors want is to know that you are prepared to respond to risks. To the extent possible, outline what your response is to the risk you anticipate. After all, assuming you get funding, those risks may really come to pass. And you will really have to do something about it. By showing investors some of the alternatives you've thought through, you raise their confidence that you'll be able to deal if things don't go according to plan.

For example, consider the risk to a restaurant that people won't come back. What are the reasons you believe that would happen? What can you do to keep that from happening in the first place? It amazes me how many restaurants have a lousy menu selection or bad food and go under without ever asking customers, "Did you enjoy your meal? What could we do to make it better?" An at-the-table survey may be how you propose to avoid having the wrong menu. If things go wrong, you may decide to proactively invite critics to the restaurant for specific feedback on how to make the experience better.

The key is acknowledging that things can go wrong and demonstrating some creativity in finding a solution. You certainly needn't respond to every risk imaginable. Your goal is to provide enough to help your investors feel secure that you have anticipated and dealt with major risks, and they can count on you to handle things that come up once the business is under way.

Stever Robbins is a consultant specializing in mastering overwhelm, power and influence. The author of It Takes a Lot More Than Attitude...to Lead a Stellar Organization , he has been a team member or co-founder of nine startups, an advisor and angel investor, and co-developer of Harvard's MBA program. You can find his other articles and information at SteverRobbins.com .

This article originally appeared on Entrepreneur.com in 2002.

Stever Robbins is a venture coach, helping entrepreneurs and early-stage companies develop the attitudes, skills and capabilities needed to succeed. He brings to bear skills as an entrepreneur, teacher and technologist in helping others create successful ventures.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

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More From Forbes

3 signs it’s time to start your own business in 2024.

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If you're feeling frustrated and restricted in your current job, channel that frustration and ... [+] negative energy into driving your own venture

Are you feeling frustrated with your work and hoping for something better in your career?

You know you deserve a healthier work/life balance and you deserve to be respected and valued for your work; in fact, people have been telling you this for a long while, but perhaps you lack the motivation to get started as an entrepreneur and become a freelancer, or even launch your own start-up.

If you're still weighing up the costs and benefits of being employed versus being self-employed, here ae a few signs you should look out for which typically indicate that you need to take at least the first step towards leaving your job and launching your own venture:

1. Frustration With Lack Of Innovation And Creativity

Some people, like Dieter Hsiao, an L.A.-based AI and tech entrepreneur, leave their jobs in favor of starting their own business venture because they observe that the current state of affairs in their company stifles growth and creativity.

"I decided to launch my side hustle, DIVISA , a strategic advisory firm, in 2008 during the financial crisis," Hsiao recalls. "After working for major corporations for over 10 years, I grew frustrated with the lack of innovation and vision. DIVISA officially launched in 2009, and through delivering impact for clients, the company grew steadily. The flexibility of running my own business has allowed me to invest in growth areas like ecommerce and new technologies. DIVISA now works with major brands and VC-backed startups across industries," he continues.

Hsiao has been able to fully unleash his creative thinking as an entrepreneur, and he hasn't looked back since.

"The key to our success has been staying ahead of trends and building strong relationships," he says. "We’ve developed innovative strategies leveraging AI and analytics before others. By understanding both the challenges and opportunities of ecommerce, we’ve helped numerous brands scale and improve customer experiences. The success of DIVISA has provided the freedom to explore new areas and work with forward-thinking clients, which fuels our continued passion for growth."

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When asked what advice he'd give to others who are similarly frustrated with their current jobs, Hsiao relates:

"Starting a side hustle is challenging, but focusing on your purpose and values can lead to great rewards. For DIVISA, our purpose is using strategy and technology to accelerate business growth in a sustainable way. By aligning our work with our purpose, we’ve built a company culture focused on innovation."

If you find that you are constantly brimming with ideas, but you are the only one initiating them and your ideas are not being embraced or at the very least, considered, but are brushed aside or repulsed, it's high time you think about taking your wealth of wisdom elsewhere and using it to grow your own empire.

Observing a need and setting out to fill a gap in your industry enables you to become innovative and ... [+] extremely successful in business

2. Observing A Need That Your Employer Cannot/Does Not Fill

Working for an employer can provide a helpful boost to any future entrepreneurial pursuits, not only because of the financing aspect, but also because your experience there furnishes you with ideas on ways that you can fill a unique gap in the market. Through your in-depth expertise and role in the company, you are uniquely positioned to understand the market and your industry inside out, and use this knowledge to your advantage.

Take Courtney Zalesak as an example. The Texas-based entrepreneur decided to start her own side hustle, Home Service Amplifier , in 2015 after spending over 15 years managing HVAC and plumbing companies.

"I recognized a need to help other home service business owners scale their operations through digital marketing," she says. "Home Service Amplifier officially launched in 2016, and we’ve since worked with hundreds of contractors to amplify their online presence.

"The flexibility of running my own business has allowed me to stay on the cutting edge of marketing trends and tailor solutions for each client’s unique needs. Our specialized experience in the home services industry gives us a competitive advantage; we understand the pain points and can develop strategies that actually drive results.

"By focusing on lead generation through social media, PPC, and SEO, our clients have increased sales, streamlined operations, and boosted brand awareness."

Zalesak believes that although building her business as a side hustle was not easy to begin with, the ability to empower fellow business owners while having the ultimate freedom to innovate according to their needs fuels her passion and success today.

3. When You Have No Other Option

Another sign that it's time to start your own business—even if it just begins as a side hustle—is when circumstances indicate that you have no other choice. It might not be what you actually want to hear, but have you ever paused for a moment to consider that perhaps the reason you are still unemployed after all these months, even years, of waiting for a job opportunity and applying desperately every chance you get, is because maybe working for someone is no longer for you anymore?

Have you reflected on the fact that life passes through stages, and perhaps you are at a stage in your life where employers are telling you "no" to your job applications, so much that you are fueled by their rejections to take your skills elsewhere and give yourself a "yes" for a change?

Sometimes we need to get cornered against a wall before we realize that we are not where we should be, and that we are forcing and kicking down a door of opportunity, when in reality, there is a door already swung open elsewhere.

So if you find your creativity and problem-solving initiative stifled at work, observe that there is a gap in the market that you are uniquely positioned to fill, or are backed up against the wall with rejection emails overwhelming your inbox every day—maybe, just maybe, it could be your sign to start your own business or become a freelancer.

Sometimes a barrage of rejections can be all you need to propel you forward into entrepreneurship

It surely won't be easy, but at least you will have peace of mind knowing that you are following your passion and fulfilling your dreams—uninhibited.

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FACT SHEET: Biden- ⁠ Harris Administration Announces New AI Actions and Receives Additional Major Voluntary Commitment on   AI

Nine months ago, President Biden issued a landmark Executive Order to ensure that America leads the way in seizing the promise and managing the risks of artificial intelligence (AI). This Executive Order built on the voluntary commitments he and Vice President Harris received from 15 leading U.S. AI companies last year. Today, the administration announced that Apple has signed onto the voluntary commitments, further cementing these commitments as cornerstones of responsible AI innovation. In addition, federal agencies reported that they completed all of the 270-day actions in the Executive Order on schedule, following their on-time completion of every other task required to date . Agencies also progressed on other work directed for longer timeframes. Following the Executive Order and a series of calls to action made by Vice President Harris as part of her major policy speech before the Global Summit on AI Safety, agencies all across government have acted boldly. They have taken steps to mitigate AI’s safety and security risks, protect Americans’ privacy, advance equity and civil rights, stand up for consumers and workers, promote innovation and competition, advance American leadership around the world, and more. Actions that agencies reported today as complete include the following: Managing Risks to Safety and Security: Over 270 days, the Executive Order directed agencies to take sweeping action to address AI’s safety and security risks, including by releasing vital safety guidance and building capacity to test and evaluate AI. To protect safety and security, agencies have:

• Released for public comment new technical guidelines from the AI Safety Institute (AISI) for leading AI developers in managing the evaluation of misuse of dual-use foundation models. AISI’s guidelines detail how leading AI developers can help prevent increasingly capable AI systems from being misused to harm individuals, public safety, and national security, as well as how developers can increase transparency about their products.
• Published final frameworks on managing generative AI risks and securely developing generative AI systems and dual-use foundation models. These documents by the National Institute of Standards and Technology (NIST) will provide additional guidance that builds on NIST’s AI Risk Management Framework, which offered individuals, organizations, and society a framework to manage AI risks and has been widely adopted both in the U.S. and globally. NIST also submitted a report to the White House outlining tools and techniques to reduce the risks from synthetic content.
• Developed and expanded AI testbeds and model evaluation tools at the Department of Energy (DOE). DOE, in coordination with interagency partners, is using its testbeds to evaluate AI model safety and security, especially for risks that AI models might pose to critical infrastructure, energy security, and national security. DOE’s testbeds are also being used to explore novel AI hardware and software systems, including privacy-enhancing technologies that improve AI trustworthiness. The National Science Foundation (NSF) also launched an initiative to help fund researchers outside the federal government design and plan AI-ready testbeds.
• Reported results of piloting AI to protect vital government software.  The Department of Defense (DoD) and Department of Homeland Security (DHS) reported findings from their AI pilots to address vulnerabilities in government networks used, respectively, for national security purposes and for civilian government. These steps build on previous work to advance such pilots within 180 days of the Executive Order.
• Issued a call to action from the Gender Policy Council and Office of Science and Technology Policy to combat image-based sexual abuse, including synthetic content generated by AI. Image-based sexual abuse has emerged as one of the fastest growing harmful uses of AI to-date, and the call to action invites technology companies and other industry stakeholders to curb it. This call flowed from Vice President Harris’s remarks in London before the AI Safety Summit, which underscored that deepfake image-based sexual abuse is an urgent threat that demands global action.

Bringing AI Talent into Government Last year, the Executive Order launched a government-wide AI Talent Surge that is bringing hundreds of AI and AI-enabling professionals into government. Hired individuals are working on critical AI missions, such as informing efforts to use AI for permitting, advising on AI investments across the federal government, and writing policy for the use of AI in government.

• To increase AI capacity across the federal government for both national security and non-national security missions, the AI Talent Surge has made over 200 hires to-date, including through the Presidential Innovation Fellows AI cohort and the DHS AI Corps .
• Building on the AI Talent Surge 6-month report , the White House Office of Science and Technology Policy announced new commitments from across the technology ecosystem, including nearly $100 million in funding, to bolster the broader public interest technology ecosystem and build infrastructure for bringing technologists into government service.

Advancing Responsible AI Innovation President Biden’s Executive Order directed further actions to seize AI’s promise and deepen the U.S. lead in AI innovation while ensuring AI’s responsible development and use across our economy and society. Within 270 days, agencies have:

• Prepared and will soon release a report on the potential benefits, risks, and implications of dual-use foundation models for which the model weights are widely available, including related policy recommendations. The Department of Commerce’s report draws on extensive outreach to experts and stakeholders, including hundreds of public comments submitted on this topic.
• Awarded over 80 research teams’ access to computational and other AI resources through the National AI Research Resource (NAIRR) pilot —a national infrastructure led by NSF, in partnership with DOE, NIH, and other governmental and nongovernmental partners, that makes available resources to support the nation’s AI research and education community. Supported projects will tackle deepfake detection, advance AI safety, enable next-generation medical diagnoses and further other critical AI priorities.
• Released a guide for designing safe, secure, and trustworthy AI tools for use in education. The Department of Education’s guide discusses how developers of educational technologies can design AI that benefits students and teachers while advancing equity, civil rights, trust, and transparency. This work builds on the Department’s 2023 report outlining recommendations for the use of AI in teaching and learning.
• Published guidance on evaluating the eligibility of patent claims involving inventions related to AI technology,  as well as other emerging technologies. The guidance by the U.S. Patent and Trademark Office will guide those inventing in the AI space to protect their AI inventions and assist patent examiners reviewing applications for patents on AI inventions.
• Issued a report on federal research and development (R&D) to advance trustworthy AI over the past four years. The report by the National Science and Technology Council examines an annual federal AI R&D budget of nearly $3 billion.
• Launched a $23 million initiative to promote the use of privacy-enhancing technologies to solve real-world problems, including related to AI.  Working with industry and agency partners, NSF will invest through its new Privacy-preserving Data Sharing in Practice program in efforts to apply, mature, and scale privacy-enhancing technologies for specific use cases and establish testbeds to accelerate their adoption.
• Announced millions of dollars in further investments to advance responsible AI development and use throughout our society. These include $30 million invested through NSF’s Experiential Learning in Emerging and Novel Technologies program—which supports inclusive experiential learning in fields like AI—and $10 million through NSF’s ExpandAI program, which helps build capacity in AI research at minority-serving institutions while fostering the development of a diverse, AI-ready workforce.

Advancing U.S. Leadership Abroad President Biden’s Executive Order emphasized that the United States lead global efforts to unlock AI’s potential and meet its challenges. To advance U.S. leadership on AI, agencies have:

• Issued a comprehensive plan for U.S. engagement on global AI standards.  The plan, developed by the NIST, incorporates broad public and private-sector input, identifies objectives and priority areas for AI standards work, and lays out actions for U.S. stakeholders including U.S. agencies. NIST and others agencies will report on priority actions in 180 days. 
• Developed guidance for managing risks to human rights posed by AI. The Department of State’s “Risk Management Profile for AI and Human Rights”—developed in close coordination with NIST and the U.S. Agency for International Development—recommends actions based on the NIST AI Risk Management Framework to governments, the private sector, and civil society worldwide, to identify and manage risks to human rights arising from the design, development, deployment, and use of AI. 
• Launched a global network of AI Safety Institutes and other government-backed scientific offices to advance AI safety at a technical level. This network will accelerate critical information exchange and drive toward common or compatible safety evaluations and policies.
• Launched a landmark United Nations General Assembly resolution . The unanimously adopted resolution, with more than 100 co-sponsors, lays out a common vision for countries around the world to promote the safe and secure use of AI to address global challenges.
• Expanded global support for the U.S.-led Political Declaration on the Responsible Military Use of Artificial Intelligence and Autonomy.   Fifty-five nations now endorse the political declaration, which outlines a set of norms for the responsible development, deployment, and use of military AI capabilities.

The Table below summarizes many of the activities that federal agencies have completed in response to the Executive Order:

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China Wants to Start a National Internet ID System

The government said the proposal would protect online privacy. Critics said it could further concentrate government control over the internet.

By Meaghan Tobin and John Liu

Meaghan Tobin reported from Taipei, Taiwan, and John Liu from Seoul.

It’s hard to be anonymous online in China. Websites and apps must verify users with their phone numbers, which are tied to personal identification numbers that all adults are assigned.

Now it could get more difficult under a proposal by China’s internet regulators: The government wants to take over the job of verification from the companies and give people a single ID to use across the internet.

The Ministry of Public Security and the Cyberspace Administration of China say the proposal is meant to protect privacy and prevent online fraud.

A national internet ID would reduce “the excessive collection and retention of citizens’ personal information by internet platforms on the grounds of implementing real-name registration,” the regulators said.

Use of the ID system by websites and apps would be voluntary, according to the proposal, which is open for public comment until the end of August.

The Chinese government has for years exercised tight control over information, and it closely monitors people’s behavior on the internet. Over the last few years, China’s biggest social media platforms, like the microblogging site Weibo, the lifestyle app Xiaohongshu and the short video app Douyin, have started to display users’ locations in their posts.

But until now, that control has been fragmented as censors have had to track people across different online platforms. A national internet ID could centralize it.

“With this internet ID, your every move online, all your digital traces, will be monitored by the regulators,” said Rose Luqiu, an assistant professor of journalism at the Hong Kong Baptist University. “That will definitely impact people’s behavior.”

On Weibo, the proposal became a trending topic since it was released on Friday. Many comments echoed regulators’ concerns that too many different apps had access to their personal information.

Dr. Luqiu said many influencers had embraced the narrative that the online platforms profited off people’s personal information and were unable to protect their privacy.

Some Chinese legal scholars said a system of national internet IDs risked giving the government too much power to monitor what people do online.

The protection of personal information is merely a pretense to make social control routine and regular, Lao Dongyan, a law professor at Tsinghua University, warned in a post that she said had since been taken down. Ms. Lao compared the system to the Chinese government’s health code app that tracked people’s movements during the Covid-19 pandemic.

Another law professor, Shen Kui of Peking University, said in a commentary posted online that a centralized internet ID would make people fear using the internet.

“The potential risks and harms of a unified ‘internet ID’ and ‘internet license’ are immense,” he wrote.

Meaghan Tobin covers business and tech stories in Asia with a focus on China and is based in Taipei. More about Meaghan Tobin

John Liu covers China and technology for The Times, focusing primarily on the interplay between politics and technology supply chains. He is based in Seoul. More about John Liu