How start-ups need to assess risk
A number of start-ups have still managed to secure venture capital support despite the challenged markets but key to any sustainable business remains risk management.
When taking a stake in a business, the focus for venture capitalists is on growth. For risk management expert Peter Deans, it is also incumbent on these investors to take a broader view of the businesses they are backing including the assessment of risks.
Equally, it is crucial that start-ups also have a robust plan in place that addresses the risks confronting a business.
An industry veteran of over 30 years, Deans was also the former chief risk officer of Bank of Queensland.
Deans has outlined 52 risks that businesses need to recognise and has put together a risk management framework simply branded 52Risks.
This framework could just as easily be applied to start ups.
Deans recognises that start-ups don’t have the vast resources that bigger organisations – be they banks or corporates - such as regional banks can harness – including a chief risk officer - however, there are workable solutions that can be applied to budding entrepreneurs.
For example, his 52Risks framework includes a number of strategic risk such product development risk, major project risk and key person risk.
“Those risks are inherent in a startup. For example. these businesses are taking on the risk to develop the product that may or may not work. Equally, a major project is often the sole initiative of the startup,” Deans said.
He notes that while start-ups may have successfully launched a product and received investor backing, these nascent business need to start thinking about whether these risks will become even more critical to the business.
The most obvious risk key person risk.
“A lot of early stageangel investors are acutely aware of the key person risk and funding rounds are constructed to ensure that founders and other key peronnel retain high level of equitythis is normally addressed by giving the founder equity. At the same time, start ups need to develop a plan that lessens the dependency on each that person in case they get hit by the proverbial bus.”
Some new businesses may have come into the market with a fantastic product but only to find that two years later, profitability is lower because of challenges such as low barriers to entry.
Start-ups also need to be mindful of operational risks.
These include risks such as the viability reliability of technology, outsourcing partners, cyber security risks and data privacy.
Another key risk is of course around regulation and compliance, and it here that start- ups need to recognise the importance of compliance.
Deans notes that despite their disruptive technology Uber, and Airbnb crashed through a lot of markets and ignored a lot of regulations. There was this perception that start-ups can equally crash through regulatory issues if they have the innovative technology and customer appeal.
“But for many start ups you are not going to operate effectively with other businesses if you are going to ignore your regulatory obligations.”
Start-ups also need to be mindful about how they can fund growth and how to allocate scarce capital.
“These businesses to remain focused on not losing their existing contracts and therefore revenue stream. For a lot of these businesses, once they get their momentum, losing a major contract can set them back,” Deans said
Here he identifies the ‘product obsolete’ risk where some new businesses may have come into the market with a fantastic product but only to find that two years later, profitability is lower because of challenges such as low barriers to entry.
Therefore a good framework is needed for busiensse4s to help them mitigate these risks.
“For start-up ventures, the initial design of the business model provides an opportunity to implement upfront risk mitigation techniques,” Deans said.
“A more structured approach to the enterprise wide management of risk is an important step in establishing a sustainable and robust business.”
Deans advocates a four-step approach to helping these businesses better manage their processes.
These include conducting an initial workshop (or series of workshops) to assess the risks confronting a business.
The other second important step is to allocate responsibility within the business to ensure who needs to take a role in ensuring compliance with regulation.
The third step is to develop an action plan and finally setting up a ‘management rhythm’ to ensure that management of risk is not set or forget.
Ultimately starts ups can also look at putting together an advisory board – Deans is currently on one such board with fintech Your Financial Wellness.
“Advisory board members also have the business acumen that can help new businesses grow and at the same time manage risks. It also helps with engaging in the risk conversation.”