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Most people don’t like to think of the downsides of starting a business – they are excited and want to only think about all the wonderful things that are going to happen and how much money they are going to make. Good things can and do happen at the start. However, far more bad things happen than good and working your way through these things will mean whether you are successful or not.
There is a reason I have put “Risks” near the top of the pyramid. Unless you understand what the risks are and how you are going to work with them – your business will fail. Simple as that. The word “risk” really means “uncertainty” which really means stuff you are not sure about. For a start-up, this means just about everything! Risks include: customers not wanting to pay for your product; cash flow running out before you are launched; injury to you or a key employee; changes in regulations to your industry; etc. etc. Some of these items you can deal with in advance or when they happen – some you can not. However, all of them should be written down, considered and then planned around.
The process of “risk management” also includes possible good things happening. Things you never expected. However, I have found that most entrepreneurs have already half-expected these good things to happen and indeed, hope and plan for them :-). Therefore, when looking at risk management I tend to be a downer and suggest people only focus on the bad things and work from there.
Doesn’t focusing on the bad things tend to make entrepreneurs think that their business won’t succeed? Absolutely! And quite frankly, most businesses shouldn’t even be started given the amount of thought that has gone into them. Another way of looking at it and the way that I prefer is the following: Would you rather deal with the bad news before you lose a bunch of money and time. Or after? Would you rather spend an hour making some calls now to check some stuff out? Or, would you rather find out later and spend weeks fixing the problem and paying ten times the amount of money? Although the answers to these questions seem obvious, getting entrepreneurs to do risk management is still one of the most difficult steps in the process. They want to believe in their idea, not doubt it. However, please doubt it a lot or as one entrepreneur suggested to me a long time ago – “Never love your idea.”
So, how do you do risk management? There are lots of tools of course (e.g. SWOT analysis, Probability/Impact Matrix, etc.), many books have been written on the subject and to be honest, the entire planning process is really just a big “risk mitigation” exercise (because it is all about reducing your chances of failure). For most entrepreneurs, I start off with a simple little exercise that involves a some brainstorming and a table with two columns. I suggest to the entrepreneur that s/he can do it themselves but if they can find a cynical friend or two to help them out (someone with start-up experience is always good) it would be much better. On one side of the table I suggest writing “Risks” or simply “Stuff That Could Go Wrong.” On the other side “How To Deal With It.” For the risks themselves, be as negative and as creative as you can. The more detail the better. For the “how to deal with it” column, the same advice applies. In some cases you can deal with it by doing a bit of research right now. In other cases you might have to buy some insurance or pay for a lawyer. Give yourself different options and think about those options.
I’ve put an example down below of a former business of mine – a web tv start-up. Since the business didn’t succeed in the end, it does demonstrate how the risk management process helped me to avoid investing too much money or time. This is the true upside of risk management. It allows you to dream up all sorts of things and if necessary, shut them down before they do you too much harm! This then allows you to rise again and give it another shot.
Things That Can Go Wrong
How To Deal With It
|Producers not interested in another start up.||Contact lots and get new people involved.|
|Cash flow runs out||Go slow and test market before investing a lot.|
|Companies not interested in investing.||Build good show sheets, bring designer on board, hire media sales people.|
|Can't find new shows.||Create meetup group for new producers.|
Get the idea? In the case of the Web TV start-up my actual risk list was several pages long. When I looked at it and realized both the number of risks, their impact and my commitment to the business, I quickly started planning! I wanted to try out this business but I was not so sure that it would be a success (I figured about a 1% chance to be honest). The risk list really helped me to understand what I was getting into. As mentioned earlier, I wanted the bad news right away so I could plan for it. So do you!