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Understand and mitigate startup risks

What Kills Startups

Entrepreneurs are, by definition, risk takers. Thus, strong risk management is an important source of competitive advantage. Although over half of all startups fail within their first five years, you can beat the odds and build a thriving and rewarding venture by learning to recognize and manage risks.

“What Kills Startups” provides a framework for identifying, thinking about, and mitigating the biggest risks ahead of you. So roll up your sleeves and dig in!

When you’re done reading, please come back to the blog to leave your feedback – we look forward to hearing your thoughts!

Akira Hirai

Akira is the Founder & CEO of Cayenne Consulting. He has over 30 years of experience both as an entrepreneur and helping other entrepreneurs succeed. Akira earned his BA in Engineering Sciences from Harvard University. View details.

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  1. I enjoyed the article. What I am finding is with the fear that everyone has right now due to the “economy” which is fueled by the media, no one is letting go of funds. My business plan has all the risk management covered and over allows for incidentals that may arise. It is structured for todays “economy” and paying big interest to the investor with short term buy out options, and still hard to find $’s!!! Where are the investors hiding? How do we contact them? Please let me know.

  2. Wow, this is the first post I’m receiving and reading from you and all I can say is WOW!!! Amazing. It just came handy. I am looking forward to reading your next post.

    Thanks very much

  3. thanks for the interesting article – so many points in there that most people don’t consider when starting a business

  4. I’ve experienced a very narrow minded President that didn’t listen to more seasoned upper management. Marketing plan in his mind was to be another Mike Dell / direct sales vs OEM sales ….. he picked direct sales which killed the company chapter 11, etc. We would have still been in business if we didn’t go down that single path.
    My second startup – we bought too much inventory and white knuckled 2 VC companies, then they both pulled the plug and the I have to lay off my staff – not a good senerio, since I hired them all !

    keith kowal

    yet I’m looking to find a start-up again , currently in the Boston area…. I must be crazy!

  5. Super article. Being able to proactively anticipate risks is the difference between perpetual firefighting mode and getting ahead of the curve. The (probability, severity) rating system is also very helpful. Nice job!

  6. Best article I’ve seen on mitigating risks – love it! I like the four quadrants, the framework for identifying and categorizing risks. I just gave a talk to an entrepreneur group yesterday that included a list of risks to mitigate – I had market, competitor, product, technology, financial, team – this would have taken it to the next level.

    I disagree with the recommendation to “Release – observe – improve – repeat.” By doing this, it implies it’s okay to build the product without first understanding the market need you’re addressing. Most startups, particularly technology startups led by engineers, are unclear on the unmet customer need they’re addressing, and have not confirmed the need is important enough for customers to spend enough money on it to sustain the business. While I agree with iterating, customer needs can absolutely be understood before incurring product development and launch costs by interviewing statistically valid samples of those who would be your customers, greatly increasing the product success rate, and lowering market risk.

    Thank you for sharing and for the stimulating read!

  7. Well researched article Akira but I’d like to challenge the assumption that entrepreneurs are by definition risk takers. I believe this is a dangerous stereotype that doesn’t do the world of entrepreneurship any good. The theme in successful entrepreneur’s ventures is not that they are better at taking risks than their corporate counterparts but rather that they are better at building environments that reduce risk (or increase control). I’d suggest that good entrepreneurs, the one’s that succeed multiple times, are extremely risk adverse. In my business we see about 150 new businesses every year face-to-face. Without doubt we can predict the outcome of their businesses by seeing which entrepreneurs create a series of proof points to reduce the possibility of failure along the way.

    Richard Branson is a great example of this. Although his public persona is modeled as a risk taker (balloon flying, etc.) he prefers a very methodical approach to testing ideas in small bites before committing lots of money or resources to them. When he launched Virgin Atlantic he rented a Boeing 747 for a year and researched the level of customer service in the airline industry. He realized that for a small investment he could test his theory that airline passengers would love the idea of a fun, customer driven airline.

    Your article does an excellent job in outlining how other entrepreneurs might learn to reduce risk which would bring the new-comer to startups a better likelihood of success. However, placing the mantle of risk-taker on entrepreneurship makes it sound like gambling. That only makes it harder for real entrepreneurs to build the credibility they need to secure loans, investment and support.

  8. This is a great point and well researched! It all comes down to Management. In defense of entrepreneurs, risk management takes a back seat because entrepreneurs have never seen a revolution of technology since the industrial age. Because of outsourcing, crisis management is a lost art as managing a convoluted hierarchy and the implementation of new, innovative technology becomes the priority. In addition, it becomes difficult to find CEOs’with these skill sets in this new environment. Alvin and Heidi Toffler states, “Corporate CEO succeed one another like passengers pushing through rush hour turnstile: merging, divesting, kowtowing to the stock market; pursuing core competence one month, synergy the next, the latest management fad a month later.” (Alvin Toffler, 2006) So finding an entire Management Team is very hard among a sea of Engineers in the 21 century. In my humble opinion, we need to go back to the seminal teachings of Management Science.

    Looking forward to the next posting,
    NaShawn Branch

    Alvin Toffler, H. T. (2006). Revolutionary Wealth. New York: Alfred A. Knoph.

  9. Excellent article.

    Governance risk coupled with founder risk (people risk, as noted above) can be a fast way to sink a company of any size. In most instances, entrepreneurs are great at starting companies but not at managing them for the long term. Google’s founders, for example, understood this and stepped aside to make way for a proven professional, Eric Schmidt.

    Founders are often too tied to a company’s original mission and are emotionally unable to alter a company’s direction even though the market has changed and they’re headed over a cliff.

    Further, board members who are too closely linked to a founder also lack the wherewithall to vote a founding CEO out of his job when a company is headed down the wrong path. It took President Obama’s intervention to fire GM’s Rick Wagoner and his board for not obliging proper governance, and specifically, for abicating its fiduciary responsibilty to the company’s shareholders.

    Before you join a start-up, investigate whether the founder is still running the show and/or if the board is made up of close friends/associates.

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