Startup risk management – critical process or inherent capability?

Some claim that risk management is vital for businesses. We are advised to use risk management frameworks estimating likelihood to happen and consequences for the operations of known probable events. Risk management processes developed for larger organizations are quite rigorous and may not be well suited for startups. Startup risk management is essential but should rather be integrated in all actions and not be run as a separate process. Running a startup is in essence handling risk or uncertainty. The responsibility and role of a large organization risk manager is in a startup rather part of the founding team DNA. Asking young successful entrepreneurs What is one risk management tactic you implemented during the early stages of your business to protect you and the company? you get quite good advice and answers. Looking at the answers published by the Huffington Post, further emphasize that risk management can be seen as another term for running a growing small company under quite uncertain conditions. It’s all about minimizing risk while maximizing opportunity for sound, steady and sensible growth. Tools, as the risk management framework referred to above, may still be a good when evaluating a venture or to capture risks from the staff.

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7 responses to “Startup risk management – critical process or inherent capability?

  1. I agree that risk management for start ups differs quite a lot from risk management in large firms. Larger firms often use ISO 31000 standards [1] for risk management. As mentioned in the above article, following such a procedure can be very time consuming. Since time is something that is always missing in start ups, it may be better to simply write down risks and chances/rewards and weigh them against each other, avoiding unnecessary bureaucracy.

    Estimation of risks is very dependent on whom is doing the analysis. If one tend to interpret risks as more serious than they actually are, when trying to run a start up, the outcome probably is that you don’t even try to get started. A great deal of speculation and belief of future prosperity is involved in creating a new company. Of course there will be risks, otherwise someone else would have done it. As the article above says, some simple tips can be more suited as risk management tools in early phases, such as mentioned in [2]. In the article “8 Risk Management Tactics Your Startup Should Have In Place” [2] I find the point A. Void the Red Flags interesting. I agree that listening to employees and other people that for example have daily contact with your customers is crucial. If they have warnings, they should be taken seriously.

    [1] https://en.wikipedia.org/wiki/ISO_31000
    [2] http://www.huffingtonpost.com/young-entrepreneur-council/8-risk-management-tactics_b_4441233.html

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  2. Startup Risk Management
    From being a small business owner myself I first want to deliver my personal view of risk management. In many cases doing an explicit risk analysis of potential actions in the business has felt like buying an insurance. There is a lot of unawareness of actual risk and impact, and the effort needed to increase the accuracy of ones presumptions seems to great. This in turn has lead to an unhealthy impact on taking on risk, which in some aspects have delayed expansion in some fields.

    Out of this perspective I believed the proposed framework to mitigate risk may be an effective way to counteract this. I believe the simplicity and straight forward approach to risk management as described may be an effective way to “get-to-action” within in startups and small businesses where many of there is high uncertainty regarding the outcome of certain actions. Note that this view is from taking on actions that does not even involve other stakeholders.

    With the regards to many other startups, where dependencies in some form can not be fully avoided, the need for effective management of such risk gets magnified many times over. As the potential outcomes of actions involving stakeholders may have far greater impact on the company there must be a systematic approach both in order to get-to-action, and to survive as a company.

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  3. During the various courses were we have touched upon the subject of risk management at KTH, one has been introduced to the foundations of risk analysis in general. This has mostly consisted of risk matrixes and arbitrary calculations of certain projects or situations. However, these learnings might be very applicable to some situations, but also not adequate enough to be applied at more complex problems when the stake is high. Since the balance between risk vs reward varies from situation to situation, we can conclude that start up-business operating under volatile conditions perhaps should stress this heavier than any other operating organization to be able to survive the harsh and changing business environment.

    The material presented regarding in the risk management for startups is however slightly more applicable to these situations we stand in front of with respect to the business venture-project, since it differs quite a bit from the other material we have been acquainted with. The risk matrix for instance is explained in an elaborate way applicable for start-up situations to prevent “company killers” sneaking into the business model. With this in mind while evaluating the input given from Huffington Post, I would say that the risk management regarding start ups differs quite a lot from the classic picture of corporate risk management as described in the wiki-reference. This very particular set of advices is surely a way to minimize the most obvious risks for a growing company but with reference to the source presenting risk management frameworks one should emphasize that these actions also need to be taken.

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  4. My view is that startups are more forced to take risks than existing ventures, especially in a company’s early days. It is likely necessary for the startup to take risks if it wants to grow and compete with incumbents. Thus, it should have a clear strategy regarding risk management. Since the startup knows exactly what it must accomplish, they have plans and numbers it should reach. A startup has less parameters affecting their results, because of this they can have clear risk management. This should make it easy to monitor any decision that involves risk, and therefore immediately notice if something related to that risk fails. However, even if taking a risk is vital for startups, it can also be so much more damaging than for a larger company. One miscalculated risk can potentially destroy the whole company making risk management a complex business. Large firms can safely try different things involving high risk since the impact it will have in event of failure is so small compared to for a startup, thus risk management in cases like this don’t have to be as strict and controlled. Obviously, it’s the opposite for huge decisions that affects the whole company. These are easier to make for startups since a failure have a much lower impact, than it has for a large firm.

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  5. It is true that all businesses operates in the unknown to various degrees. Hence, the old saying ”no risk, no reward” has become a mantra for entrepreneurs. It implies that one has to venture into the unknown (taking risks) inorder to procure profit. Risks are a natural part of a business, especially for startups where the unknown factor is very high compared to other more mature businesses. In order to become successful, startups needs to take a lot of risks. However, in my view, what separates successful startups from failures is the ability to take calculated risks. A calculated risk is a risk know to- and evaluated by the entrepreneur, an awareness achieved by being informed in the subject matter. How this risk awareness comes about is entirely up to the entrepreneur, either through actively using risk management frameworks or just by being well read in the field that the business operates. I can imagine that startups needs to act fast and take quick decisions, thus one may find that risk management frameworks are to time consuming when trying to continuously map risks. Thus, I believe that risk management in startups is usually more of a inherent capability of the entrepreneur, by being well informed about the business environment.

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  6. Risk is present everywhere and by not addressing or managing it, it might grow to a costly and time consuming crisis. The first step of managing risks is awareness as mentioned by one of the entrepreneurs of the Young Entrepreneur Council as “Voice the Red Flags”. By being aware of all potential risks as early as possible enables better decision making as the most severe risks can be avoided or their effects managed in some way.

    Risk is necessary to make business and especially for start-ups with their fast growth rate and movements in sometimes blue oceans where many factors may be unknown. As mentioned by Akira Hirai in “What kills startups?” there is a direct relationship between risk and potential reward. But no business partner, supplier or customer (and sometimes even the competitors) benefit from the startup going into bankruptcy and this can be used by the startup to get better deals and conditions and thereby reducing their risk.

    As a startup it is important to act fast to adjust to the market (possibly by using lean startup) as this is to avoid the risk of not meeting the demands from the market. If it was obvious where the risk lays and how the market responds the risk would be easy to avoid but as I believe this is very seldom the case the risk must continuously be monitored and therefore it is a process. But knowing how to respond to the identified risks and actually manage it is probably more based on experience and therefore an inherent capability of the entrepreneur.

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  7. As we all know by know, startups differs much from a established company in many ways. Therefore, risk management is something that has to be taken into account in every action to estimate the potential outcome. Risks can also end up in finding a better solution, that is why I think that it is a good idea to be aware of them in every step of the groth of the comany. By integrating the risk management, every co-worker must be aware of the risks. But at the same time, you usually have to take some risks to create a successful company. I guess that’s why many of todays entreprenours are willing to take risks more than other. Calculate risks is always hard, and especially here since startups not even fit in well in the established models. But the framework for risk management is something that startups can use in some extent by make some adjustments for their needs.

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