Initial risks startups face


In the case of startups, I typically find the definition of ‘first year’ itself an interesting matter of interpretation. Let me share a few ways I have seen it being measured by entrepreneurs in their own minds.

The clock could start ticking from the time:

  • One starts incurring cost on the new idea.
  • The promoter(s) start dedicating significant, if not all, of their time to the startup.
  • The startup starts earning revenues.
  • The time angel investor/seed capital infuses funds into the business.

All of the above may well be completely justifiable or completely flawed, but they all impact a startup’s risk profile in its early years. If I were to think of early-stage risks for startups, I would classify them into the following categories:

Market assessment and definition of their unique selling proposition

Startups are either innovative business ideas and models, or attempts to replicate existing business models in newer geographies, or in some way a differentiated replication. In any case, they need to think through what it is that will allow them to differentiate themselves — cost, speed to customer, customisation, exceptional quality, or whatever else it might be. In the case of new business ideas as well, startups need to be able to define very sharply why a customer would pay for their product/service/solution. All startups need to be able to assess their addressable market size, and also what their right would be to play in that market. Inability to do all or some of the above is potentially one of the biggest risks that can result in a startup failing in its very first or initial years of operation.

Is the market reacting to the product/service/solution as per plan?

All startups need to be very focused on assessing how the market reacts to their launch. While they may have done a lot of pre-work in addressing the risks called out in the pre-launch phase, it is still possible that the market or customers react differently from what they had expected and modelled their business plans on. To give a few examples, the difference in market response may be in terms of inadequate acceptance of new product/service/solution, or the response to price points of the startup. In the event of that happening, the biggest skill of a startup lies in being nimble. Adapting to the market reality, and adaptation agility and speed of response in implementing alternative Plan B or C determine how likely they are to overcome the first-year blues.

Timing of revenues kicking in for the business

All startups have a certain revenue model built into their business plans. These revenue models would assume certain volumes and price points in the initial year. Many startups are aggressive with their business plans and expect a quick off take in the market, and hence a slower-than-expected market acceptance can sometimes hit such startups very hard. Those that are duly cautious and conservative in their business plan in terms of expectation of sales volume and revenues in the initial stages are usually able to cope much better with this risk.

Is the startup able to attract and retain appropriate talent in the initial setup team?

The success of any organisation, and startups are no exception to the rule, depends on the people who run the organisation. It is never enough to have just a great business idea or a strong visionary as a promoter/investor. The success of a startup depends to a very large extent on the quality of its initial team that is involved in the setup. It takes a lot to find people in a competitive talent market who believe in a vision of a startup, are willing to give it 200 percent of themselves, can operate in a less structured environment, and yet be able to thrive in that environment and be self-driven to succeed.

When a startup hires someone in its very early days it is able to sell a dream or a vision. The unfortunate reality is that while a promoter is typically willing to give it the necessary gestation time before it gets to full-scale operations and success, the new employees who were sold the dream usually have far less patience, and want to see rapid personal growth and success, as they believe they gave up options of being in large branded and apparently secure organisations. This is when most startups start losing these good workers, just as their initial period of learning is over and they are turning out to be strong, independent team members/ leaders valuable to the organisation. This is an important risk that startups need to be able to deal with in their own way. Stock option is one of the old operating models but today there are many young professionals in the talent market for whom even stock options do not cut ice. This is why startups need to be really good at spotting the best talent in their setup, betting big on a few of them, and doing what it takes to retain them. There will never be a one-size-fits-all approach that works in people retention, but it can be achieved if one has a good connect with those team members. Also, in parallel, startups need to be able to institutionalise their processes very early, which would allow them to live with much higher rates of attrition than what has been historically an acceptable benchmark for it. This is a reality of doing business in the current age.

To summarise, here are the top seven ways to de-risk a startup:

  1. Spend the maximum amount of time prior to launch in defining a laser-sharp unique selling proposition of the startup. If this is not easy to understand, crisp and obvious, a startup is very unlikely to succeed.
  2. Stress test market need of the product/service/solution really well and take time over this, including using external expertise, if required.
  3. Keep business plans and projections extremely real and conservative. All businesses can be made to look good on Excel sheets and simulated business models, but the world of reality is where it counts and that is usually quite different from what entrepreneurs would like it to be — less logical, extremely price-sensitive, less forgiving, and so on.
  4. Work towards strong business fundamental ideas, as against quick-win ideas, in order to be successful in the longer run.
  5. Do frequent and honest assessments of market reactions once the product/service/solution is launched and, if required, be quick to address market needs not thought through earlier. This needs to be done quickly, as customers give startups very little time to get it right.
  6. If the market reactions are significantly divergent from what was envisaged, the leadership needs to show agility and preparedness to launch Plan B and C, while simultaneously making the necessary tweaks in response to market feedback.
  7. Attract the right talent in the initial team and spot the ones you want to bet big on for the longer run, and find ways to ring fence them — remember, money can’t buy you retention.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)