How to reduce risk in a start-up?

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A long and lonely desert road in Namibia.

Some people define a “true” entrepreneur as someone who conceives, organises and leads a new, independent commercial venture at significant personal cost and risk – both financial and emotional. One entrepreneur doesn’t believe that an entrepreneur is someone who does only part of that set of jobs. He believes that someone who opens a new coffee shop or buys a car wash franchise while being a risk taker is not a complete entrepreneur. Why? Because he or she has not fully conceived organised the venture. If you dream up a business, he says, put it together, run it and depend on it financially, you are an entrepreneur.

While there are many definitions of entrepreneurs, the one important thing that we can take away from any definition is that an entrepreneur must deal with managing risk. Risk comes in many forms including market risk, demand risk, financial risk, key employee risk, over-estimating potential demand and even product or service failure.

Coming up with a new idea for a business based on a product or service is a risky business. It’s no wonder that a large percentage of new businesses fail within the first year. Yet there are those start-ups that have found a way to manage risk, get through their first year and reach scale after two to three years. But such success doesn’t come out of the blue. These canny entrepreneurs work out a way to minimise or reduce risk.

Some business commentators have a different view of the risk bearing behaviour of entrepreneurs. They point out that many entrepreneurs have succeeded by avoiding risk where possible and seeking out others to bear their risk. One successful entrepreneur said: “My idea of risk and reward is for me to get the reward and others to take the risks”. Such a comment might come across cynically but it does show how entrepreneurs are driven to avoid potential harmful or dangerous risks that may cause them financial and emotional loss.

One way of looking at risks is to see the four types of risks that entrepreneurs take. They include: financial risk, job risk, social and family risk and mental risk. Some say that the biggest risk that an entrepreneur takes is the risk to their mental health. Mental tensions, stress, anxiety and other mental problems can have destructive consequences.

To avoid a new promising idea becoming something closer to resembling gambling, a start-up founder or small business owner needs to understand the risks involved in any new business idea and to balance those risks against potential return. Smart entrepreneurs can reduce risk if they develop their business gradually, keep their day job and only go into whatever they want to do full-time when it seems like a safe bet. This would be when customers are paying for your product or service.

Find out how you can minimise risk in your entrepreneurial idea by early testing of your product or service and gradual refinement and development, in my new book called “Breakthrough Ideas”. You’ll learn how to place small bets to reduce risks, work with tight finances and do your homework before each move.

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