Risk management for startups: best practices

The COVID-19 pandemic saw unprecedented upheaval as businesses and people struggled to work under the new normal. Not surprisingly, the economy went into recession, contracting for the second consecutive quarter (July-September) in 2020. However, behind these gloomy headlines, there lies a glimmer of hope. Even as India recorded its first official recession, the figures were better than the first quarter (April-June).

The other more heartening story is the emergence of Indian startups. For these fledgling businesses, the pandemic proved to be a mixed bag, with some of them barely surviving, and others recording a boom in business. The success of these startups provides valuable lessons in strategic risk management for Indian entrepreneurs.

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Importance of risk management strategies

The pandemic exposed the lack of sound disaster management strategies, among Indian startups, in a volatile market. Entrepreneurs, who need to prioritise their limited resources, often neglect the development of disaster management plans for fear of overextending themselves.

However, during the COVID-19 pandemic, edtech startups that showed initiative in adapting to a changing environment were able to weather the storm successfully.

Increasingly, many traditional and legacy corporations are looking at startups as part of their own risk management strategies. For instance, Hero MotoCorp has invested heavily in Ather Energy, an electric scooter manufacturing startup. This allows the company to dilute the business risk created from automotive offerings based on traditional, limited fuel sources, through the development of vehicles designed in accordance with the world’s focus on reducing fossil fuel reliance.

It also highlights the changing business models of legacy enterprises, from investing in cash-rich businesses, to moving towards value-driven acquisitions, which provides these businesses with a competitive advantage in a rapidly changing economy, and helps in minimising geopolitical risks.

Risk management strategies for startups

There are several takeaways from the pandemic experience that entrepreneurs can learn from, to build successful businesses that can overcome known as well as unknown challenges.

Adaptive learning:

Many Indian startups have learned from other successful new businesses worldwide, to build more effective offerings. Their USP lies in aligning an established business model to the Indian market. For instance, Paytm launched ‘Paytm Mini Programs’ on the lines of WeChat, to create a hyperlocal commerce platform that now hosts brands like Faasos, Zoomcar, Practo, 1mg, Park+, and Magicpin.

Agility in response

Change is inevitable, and often unexpected, as the pandemic has amply demonstrated, and the most effective risk strategy for any organisation is to create a culture that fosters rapid adaption to evolving situations.

For example, when the COVID-19 pandemic hit, Pharmeasy, India’s largest healthcare delivery platform provided safe and contactless delivery of medicines across India, greatly reducing stress on the healthcare infrastructure that was already overstretched due to the lockdown.

Collaborative approach

This is an important principle that is followed by startups, where collaborations can range from investments to innovations and protective action, and some of the most active venture capitalists are startup entrepreneurs.

Collaborations are also useful when dealing with government policies. For instance, the Indian Hemp Association is a collaboration aimed at establishing norms for personal and industrial use of hemp and cannabis. Membership in such collaborations can be critical in shaping future policy to be relevant and constructive, thereby reducing compliance risk.

Proactivity over reactivity

Reactive policies require a greater investment of time and are often inefficient, and startups cannot afford either. Hence, they must be proactive in identifying emerging opportunities, and capitalising on them early.

For example, ed-tech companies such as BYJU’s and Whitehat Jr were two of the most successful startups during the pandemic. They were quick to bridge the gap between the traditional brick-and-mortar educational system that was hamstrung by the lockdown, and parents who were anxious to ensure the continuation of fruitful education for their children during that time.

Online grocery startups also had to scale quickly to keep up with their skyrocketing memberships, as the lockdown forced consumers to stay home, relying on deliveries of home essentials. Companies that were proactive in responding to the changes necessitated by the pandemic turned out to be the most successful.

Constant vigilance

COVID-19 has also exposed the lack of cyber risk preparedness and inadequate processes of technology risk management in Indian startups. Given that most startups today leverage technology as the foundation of their primary offerings, such vulnerabilities pose a major threat, presenting the potential to seriously undermine the confidence of investors.

Reports have shown that cyber-attacks have grown manifold since the pandemic began and, with governments and regulators tightening cyber and data security policies, it is imperative for startups such as those in the fintech sector, to focus on cyber risk management.

Startups are particularly vulnerable to a volatile economy, because of their limited capital and resources. However, the stories of many of them demonstrate how they can leverage their strengths to navigate uncertainties and crises successfully.

The key lies in anticipating when evolution is needed, and in being prepared to deal with different kinds of threats. Strategic risk management, by staying proactive and vigilant, while learning and collaborating with others, is the only way for startups to grow and prosper in any environment.