Most Common Startup Risks and How to Manage Them

Starting a new business is an ambitious yet risky endeavor. It's no secret that only one out of ten startups ultimately succeeds. So, why is that the case? Let's delve into the common pitfalls and risks many startups encounter and explore the secrets to effective startup risk management, helping a select few to navigate and mitigate these challenges.

The Fundamentals of Startup Risk Management 

When a bunch of people run into the same problem for a while, they naturally start figuring out a general plan or algorithm to tackle it. With the whole startup scene of past and new companies, it's pretty evident that different people have faced similar hurdles and their fair share of startup failures. Thus, we can take a look at these experiences and how entrepreneurs have already learned from them, starting with what exactly a startup risk is.

Startup Business Risks: Definition, Factors, and Examples

In simple terms, a startup risk is the chance or threat of something going wrong — be it liability, loss, damage, or any other not-so-great outcome. These issues can stem from factors inside and outside the company, and they might be things you saw coming, or that totally blindsided you.

One of the most popular factors is market dynamics, as it happened to Juicero in 2016. They set out to shake up the juicing scene with a fancy machine and exclusive pouches, promising a hassle-free home juicing experience. Yet, after hitting the market in 2016, people questioned the necessity of a pricey Wi-Fi juicer and the inconvenient pouch subscription model. Faced with criticism, Juicero closed shop in 2017 and underscored the importance of conducting thorough market research and meeting real consumer needs rather than just chasing tech trends.

A bit earlier, back in 2010, WeWork burst onto the scene with a mission to shake up the whole office space through flexible co-working setups. They were on fire, expanding globally and dreaming big about becoming the top dog in the industry. But their aggressive business growth strategy led to some serious financial hiccups — losses, sky-high operational costs, and some side-eye from the governance. This wild ride made WeWork hit the brakes and reevaluate its whole deal — the business model's market potential and financial strategies.

These are just some factors that startups need to keep on their radar when crafting strategic plans. The good news is that by drawing from past experiences, businesses have come up with various methods to spot, assess, and cut down on the risk factors most pertinent to their specific type of operation.

What Is Startup Risk Management, and Why Is It Important?

Briefly, risk management in business is a systematic approach that involves spotting, evaluating, and addressing potential uncertainties or threats that could throw a wrench into the success of the business. The goal here is to shrink the chances of these issues negatively affecting the startup's objectives and increase the likelihood of hitting its goals.

Starting a startup is inherently risky, though, with a myriad of potential pitfalls. That's why every entrepreneur should be at home with the common challenges, prepared to cope with them head-on, and adept at resolving issues efficiently to advance their company's chances of success.

To help you with this, we'll further break down the most typical startup risks and provide a step-by-step plan to build your business risk management framework.

10 Types of Risks Startups Face

We mentioned only two of the most popular startup risk factors previously, and obviously, there are more to keep in mind when working on your startup risk management plan.

1. Market Risk

Simply, market risk for startups is the possibility that nobody is going to use your product, even if it's great. This can happen because:

• No one needs it: people don't have the problem your product solves, or they have other solutions. Sadly, lack of product-market fit kills off too many startups.
• The market is too small: not enough people want it (to make the startup profitable), or only a few can afford it, which also pinpoints the importance of spending time on hypothesis validation prior to investing time and resources into building the product.
• Competition is strong: similar products already exist, making yours harder to sell.
• Market changes: drastic market shifts leave your product outdated or irrelevant.

In essence, you need to figure out how to manage business risk and not build something nobody wants. One of the smart ways to do that is to go through proof-of-concept to ensure your ideas are worth it. You're looking for a key, not for a hammer or a chainsaw.

2. MVP or Product Quality Risk

When most teams have proof of concept, they often move on to building a product. One huge risk is investing in a huge and costly development project without testing the waters well enough. You might end up with wasted cash for nothing.

A safer path is making a minimum viable product (MVP). And all though the name implies enrolling the bare minimum, one of the biggest risks startups face in this respect is not delivering enough for potential customers to discover its value. If the solution is sloppy, glitchy, and overall mediocre, how are people supposed to love it and wait for it to evolve? This is, indeed, a risk, as teams have to find the perfect middle ground where the feature set isn't too extensive (here, also meaning expensive to develop) and yet is good enough to be called "viable".

As the product gradually evolves and more money is poured into its development, it is also fundamental to continuously improve the offering's quality. Instead of blindly rolling out dozens of new features, it might as well be more logical to make a minimum lovable product that'll stick with the users for good.  

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3. Team Risk

The right people in the right place at the right time can do fascinating things. To amplify your team's potential, be aware of the key team risks:

• picking the wrong employees (e.g., failing when hiring developers for a startup);
• hiring excessively or out of your startup budget);
• not being able to build a strong startup culture;
• having radical friction in the team (e.g., people not getting along);
• having not enough people to cope with the workload;
• employee burnout;
• losing key people.

Basically, you need a mix of skills to achieve a strong and effective startup team structure, such as tech experts, marketers, or salespeople — depending on the nature of your business. Picking people who can't work together or don't have the right skills can cause trouble.

Besides, even great players can fight. Unclear roles, different goals, discordance in OKRs and KPIs of different departments, or just clashing personalities can make things messy. Clear communication and shared goals are key here.

Next, working too hard without time off can lead to exhaustion and unhappiness. The best strategy is encouraging breaks, healthy habits, and open communication about workload. Make work-life balance not only a line in the job posting but one of the primary values.

Anyway, life happens. Someone might get a better offer or need to move. Having a backup plan and treating everyone well helps reduce this risk. However, don't try to do too much on your own. Make sure you have enough people to handle all the tasks and scale your startup team as your company grows.

4. Financial Risk

To make something new, you have to use resources. Money is one of your (usually, limited) assets. Use them wisely and make a backup plan for the following cases:

• Money gauge: running out of cash is mission-critical. Plan expenses, secure capital during various startup funding stages, and have a "survival reserve" for the unknown.
• Prioritizing essentials: fancy office toys are tempting, but prioritize essential spending. Remember, every unnecessary expense is a potential engine sputter.
• Equity: make sure to distribute startup equity wisely, as giving too much away can leave you with nothing in the long run.
• Debt: borrowing can boost your business or MVP launch, but too much debt becomes a heavy anchor. Borrow wisely and have a clear repayment plan.
• Unexpected costs: some things, such as legal fees or tech glitches, can strike at the most inconvenient time. Have an emergency fund to weather the storm.

Don't become another cautionary tale, though. Solve the puzzle efficiently by using hints wisely and managing your time strategically.

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5. Legal Risk

The legal landscape can be riddled with landmines. To avoid getting lost and paying big fines, team up with a legal pro who knows the ropes. They'll help you stay on the right path and keep your startup squeaky clean. First and foremost, you'll likely need to handle these legal matters:

1. incorporate the startup properly;
2. trademark your catchy names;
3. copyright your innovative content;
4. patent your groundbreaking inventions;
5. ensure your agreements and contracts are flawless.

That said, make sure everyone knows who's boss with well-defined ownership agreements, and lock things down with airtight confidentiality pacts. Vague and weak agreements just set you up for fights later. Instead, use solid, pre-made contracts written by lawyers. Then, tweak them for your specific deal and make sure everyone understands the clear terms.

Leaks and rule-breaking can be brutal, too, so keep your information security strong. Use top-notch tools, follow the data privacy rules for your area, and always get a clear "go-ahead" from people before using their data.

On the employee side, playing fast and loose with their rights or leaving contracts as clear as mud can turn ugly fast. Stick to the employment laws in your area, write contracts that everyone understands, and treat your people with respect.

When disagreements with partners, investors, or customers pop up (they will), have a plan to settle things smoothly. Include "peacemaker clauses" like mediation or arbitration in your agreements. It's way cheaper and faster than lawyers and courtrooms, and everyone can keep their cool.

One of the best ways to mitigate legal startup risks is to be upfront about what you're doing, be honest about any tricky spots, and always keep your numbers clean. This transparency builds trust with your existing stakeholders and when you're pitching to investors, not to mention that it saves you from legal headaches down the line. 

Sure, there might be shortcuts that look tempting, but trust us, busting down the window in the business world usually ends badly. Play by the rules, even if they seem weird at first, and you'll have a much smoother journey. 

6. Technical Risk

Just like raising a child, nurturing your startup's technology requires careful preparation before it enters the competitive "adult" world. Don't underestimate the importance of selecting an optimal startup technology stack from the outset. Prioritize scalability, security, and future-proof technology choices to avoid costly rewrites down the line.

Another hiccup is the need for complex integrations between internal systems, third-party APIs, or external platforms that often cause delays and headaches. Thoroughly plan and test integrations to ensure seamless functionality and avoid compatibility issues.

Next, security goes beyond agreements of data use. Data breaches and cyberattacks are ever-present threats. So, you need robust security measures built into your tech, regular penetration testing, and constant updates on emerging vulnerabilities. You wouldn't want to get sued for a data leak of your customers' personal details, huh?

The right tech stack will also anticipate some performance issues like latency, bugs, or downtime that can damage user experience and reputation. Additionally, rigorous QA testing, code optimization, and monitoring performance metrics will ensure a perfect user experience.

Beware, though, that relying on specific hardware, software, or service providers can create extra vulnerabilities. Diversify your technology stack and avoid single points of failure to ensure operational resilience.

Plus, if you plan to get external funds or sell the company, a well-coded product that can pass a technical due diligence check-up has a higher chance of getting a good offer. And, even better, it is worth taking the time to think such tech matters through early on, say, during the discovery stage. With foresight, careful planning, and technological adaptability, your venture can overcome any obstacle and emerge victorious.

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7. Inefficient Sales or Marketing Risk

This part is tightly connected with the market risk we discussed previously. However, the sales and marketing processes have their own well-known difficulties to tackle. For example, crafting a generic or unclear value proposition leaves potential customers confused and unengaged. A strong startup marketing strategy coupled with best practices like conducting in-depth customer research to understand their pain points and desires and then tailoring your messaging to resonate with their specific needs can make a difference.

Moving on to distribution and strong startup branding, choosing the wrong marketing channels for your target audience wastes resources and delivers mediocre results. Analyze your ideal customer's online and offline behavior, then invest in targeted channels like social media platforms, industry publications, or search engine optimization that match their preferences.

At the sales stage, not qualifying leads effectively causes wasted effort and resources. Establish clear criteria for identifying high-potential leads based on budget, decision-making authority, and industry fit. Training your sales team to qualify leads meticulously before pursuing them will be of much help.

In the data-driven today, flying blind without tracking and analyzing data makes it impossible to optimize your campaigns. So, startup data analytics can't be ignored. Implement analytics tools (such as ahrefs, Google Analytics, Mixpanel or Amplitude) to monitor website traffic, lead generation sources, and conversion rates. Use daily, weekly, monthly, and other insights to refine your approach and maximize return on investment.

On the customer care side, treating all leads the same results in missed opportunities. Monitor product performance metrics and utilize marketing automation tools to personalize communication based on individual interests and behaviors. Create targeted content and nurture leads with what just clicks.

Finally, once again, ignoring your competitors sets you up for failure right away. Analyze their strengths and weaknesses, identify their messaging and targeting strategies, and differentiate your offering by highlighting unique value propositions and competitive advantages.

‍The main customer-centric rule: don't make your target audience work that hard to find your amazing offering. Inform everyone who might be interested, guide them through your product's potential, and empower them to solve their problems in a way that's clear and engaging. 

8. Pivot Risk

At times, you'll have no choice but to make a business pivot. In many cases, that means you'll need to steer your startup's product or offering in a completely different direction to keep it afloat. Remember how many companies had to quickly "change boots" when COVID-19 and all the lockdowns hit?

In some scenarios, this implies changing your sales strategy and shifting to another customer segment (e.g., starting to sell SaaS in B2B instead of targeting B2C). Or trying a new geographic location, modifying your product altogether, or anything along these lines.

‍Pivots are a huge risk, as there are zero guarantees, and not all the acquired customers will be happy about the changes (yes, many of them might as well abandon you). Therefore, in order not to burn to ashes, founders and teams have to be very careful when making U-turns, as one too many times, the road may be too slippery and lead to a fall down the cliff.

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9. Reputational Risk

You wouldn't spend hours strategizing, setting traps (metaphorically speaking), and finally escaping, only to trip over a hidden wire and trigger an alarm in the final seconds, right? Similarly, after meticulous planning, development, launch, and marketing, don't let a tarnished reputation set you back.

These are the major reputational damage causes:

• Security breaches expose sensitive user information, causing panic, mistrust, and potentially legal repercussions.
• Mishandling user data or failing to comply with privacy regulations erodes trust and can lead to hefty fines.
• Buggy software, inconsistent service, or unmet customer expectations create a negative buzz that travels fast online.
• Not delivering on your promises can also do serious harm. As such, if you've accepted waitlist payments from customers who wished to be the first users of your future product but couldn't even release it, this will likely result in scandals (especially if you can't return their cash).
• Unethical business practices, like misleading marketing or discriminatory behavior, can spark outrage and tarnish your reputation irreparably.

The preventative actions we mentioned before will help you avoid these factors that could lead to a reputational disaster. The key message is that your failure is not just a mistake; depending on severity, it can come with consequences that can potentially destroy your brand, your name, and the careers of the people you hire, as well as have serious legal consequences.

10. Exit Risk

Last but not least, at a particular period, you'll have to ask yourself: "What will happen to the company in the long run?".

The most common approaches are either to sell the company to a bigger one, go public, or just simply keep growing on your own. But if you're planning on a great exit, consider these startup risks:

• An inflated valuation creates unrealistic expectations and can erupt in disappointment for investors and founders. Set realistic startup valuation expectations based on data-driven analysis, market and startup trends, and comparable exits to avoid post-deal fallout.
• Accepting an unfavorable acquisition offer can leave you feeling buried. Negotiate diligently, consider alternative exit options, and prioritize a deal that aligns with your vision and promises a positive outcome for all stakeholders.
• Navigating the public markets with no proper preparation can be like hitting an iceberg. Double-check if your company is financially sound, legally compliant, and operationally ready for the scrutiny and complexities of an IPO before setting sail toward this exit route.
• Internal conflicts or disengagement among founders and key personnel can derail an exit at the last minute. Foster open communication, align team goals with the chosen exit strategy, and incentivize everyone to stay committed throughout the process.

‍Bonus tip: diversify your exit strategy options (acquisition, IPO, secondary sale) to maintain flexibility and leverage them as bargaining chips during negotiations for the most favorable outcome.

Quite a few risks to be considered, right? Don't worry, though, as we have practical startup risk management tips and recommendations on how to boost your company's confidence as you march forward.

Establishing a Business Risk Management Framework in Startups 

While the road ahead might seem a bit bumpy with all those potential startup risks, we'll guide you through setting up a rock-solid framework for handling risks in your startup. In short, by identifying and addressing each one proactively, you'll be prepared for whatever comes your way — potholes, detours, or even the occasional flat tire.

The safest way to establish proper risk management in business is to make sure you integrate these six steps into the way you tackle issues.

Step 1. Identifying Risks

You should identify your unique roadblocks — like relying on few clients or navigating industry shifts. Is it possible that one bad month can lead to the end of your runway?

By diversifying your customer base, building a strong startup community around your product, staying informed, and strengthening the support system, you'll be ready to tackle almost anything. Remember, knowing your risks and making a plan is the first thing on the agenda. Moreover, you already have an idea of what to expect. 

Step 2. Assessing the Likelihood and Impact of Risks

After determining the risks that your startup can bump, you should assess the likelihood and impact of the scenarios on your company. Here is how we suggest doing it.

First, you need to assess the likelihood of the risk actually occurring. Is it a rogue asteroid hurtling towards Earth or a more mundane misstep like forgetting your keys? While predicting the future perfectly is impossible, gather all available intel and estimate the risk's odds with a healthy dose of realism.

Second, let's imagine the worst-case scenario. If the risk materializes:

• How much damage could it cause?
• Will it be a minor inconvenience like a flat tire or a full-blown catastrophe?

Carefully contemplate the potential consequences, aiming for a balanced and informed assessment. Jot down your assumptions.

Finally, the power move: devising strategies to minimize the risk's impact. Can you create safeguards to prevent its occurrence or reduce its severity? Brainstorming mitigation strategies, even if they seem elusive at first, can significantly improve your resilience in the face of uncertainty.

Now, the risks are identified, and worst-case scenarios are documented. What's next? After the law (your scenarios) comes the order. 

Step 3. Prioritizing Risks

Now, let's wrangle this menagerie into order! Sorting the startup risks by severity will help you allocate resources wisely and build resilience for whatever your venture throws your way.

Follow these risk prioritization criteria:

1. Probability: prioritize risks that threaten imminent tempests, not distant wisps of uncertainty. Focus your precious resources on the most realistic scenarios, not on chasing hypothetical butterflies.
2. Impact: imagine the potential financial losses, reputational blows, and operational disruptions. Estimating risks in their monetary equivalent can provide a stark, eye-opening comparison. Remember, the bigger the potential loss, the higher the risk climbs on your priority list.
3. Control: assess your control over each risk. Prioritize risks where you have little to no control, as these demand proactive preparation for inevitable bumps in the road.

With your risks ranked and prioritized, it's time to move from awareness to action. Develop effective workarounds — the paths that circumvent these bumps and keep your business smoothly gliding forward.

Step 4. Developing a Startup Risk Management Plan

The arsenal of how to manage business risk boasts a variety of tools. One popular weapon is insurance, acting as a shield against unforeseen dangers like property damage, liability, and even business disruptions.

Another powerful tool is the contingency plan, your battle plan for unexpected storms. These ensure your business can weather setbacks like natural disasters or customer losses, keeping you afloat even when the seas get rough.

One more crucial point to put on your list is cash conservation and capital burn prevention. This is your "emergency cash stash", which you'll store in case the bad times hit. It's also your plan on how to minimize resource waste, as getting extra funding is never easy.

Other plans will be specialized to your risks that were previously identified. There are several common strategies to deal with them:

1. Avoidance: basically, dodging the risk altogether. If you're diving into a shaky industry, think about mixing up your products and services to steer clear of potential issues.
2. Reduction: lessen the blow if the risk does hit. Grabbing insurance to cover some costs tied to the potential risk is a smart move.
3. Transfer: pass the risk baton to someone else. So, you might sign a deal where the other party takes on the responsibility for any damages.
4. Acceptance: embrace the fact that the risk might show up and get ready for it. For instance, stash some cash in a reserve fund to handle any unexpected surprises.

Mapping out these scenarios might seem like a non-urgent task when there are more pressing matters at hand. But it's better to have them unused than nonexistent when disaster strikes. 

Step 5. Implementing a Risk Management Plan

To make sure you won't miss any potential crises, spread out responsibilities across the team and set up a clear emergency chain of command. The key to solid risk management in business is not just talking about it but making sure everyone knows exactly what to do when a crisis hits. That means assigning responsibilities and holding people accountable for managing the risks.

When emergencies pop up, having a clear plan with defined responsibilities will help you bounce back quickly. Train the team to spot warning signs, know when to sound the alarm, and kick in containment or contingency plans. This way, you'll be ready to respond swiftly and effectively when the unexpected happens.

Step 6. Monitoring and Reviewing Risks

As usual, risk management is an ongoing task. To be truly all-armed, the plans should be reviewed regularly. You must make sure:

• the previously identified risks are relevant;
• all newly appeared risks are considered and evaluated;
• the team is up to date about risk management and their responsibilities.
  

Set up some half-year or quarterly sessions to keep your backup plans and the overall business risk management framework up to date. Some market shifts (like the release of Apple Vision Pro for the Meta Quest department) may require some emergency sessions.

Concluding Thoughts on Startup Risks

Yep, launching an IT startup is awesome, but it's not exactly a walk in the park. This guide just unpacked some of the most common roadblocks tech startups face, along with ways to dodge them (feel free to use this handy startup risk management cheat sheet anytime).

But hey, even the best cheat sheet can't replace experience. That's where we are ready to share more. At Upsilon, we've launched about 25 products, so we've seen just about everything. Feeling lost or need a helping hand to figure out how to manage business risk? We're here to guide you on your startup path to success and make it smooth sailing all the way. Feel free to contact us to discuss your needs. We provide MVP development services for early-stage startups and can assist growth-stage startups with scaling their solutions to the next level. So, don't be shy about reaching out!