5 Substantial Risks that Startups Face & How to Mitigate The Effect

Starting a new business is exciting. It allows entrepreneurs to harness their innovation and potential to take advantage of opportunities and create new products or services that meet consumers’ unique needs.

This process is not without risk, though. While there’s no way to take all the risks out of starting a new business, there are a few things that entrepreneurs can do to assess and reduce those risks. Read on to find out about five risks entrepreneurs can’t afford to ignore.

1- Liability Risks

All commercial business owners are legally liable for their products and employees’ actions. That’s just as true for startups as it is for established businesses. If anything goes wrong, business owners will be on the hook for paying damages, but there are ways to mitigate the risk of financial loss due to liability lawsuits.

A comprehensive business insurance policy from a reputed firm like T.S. Peck Insurance will cover damage to clients’ properties, legal fees associated with fighting liability claims, workers’ compensation claims, and more.

Though you should be aware of the basic types of insurances a business may require, the exact policy required will depend on each startup’s business model and product or service provisions, but an insurance agent can help entrepreneurs understand the available options to make sure they will be covered.

2- Product Risks

If the business will provide products in addition to or instead of services, it’s important that those products provide a material gain to consumers. Think about what specific unmet needs consumers have and try to figure out whether the products will help to meet them. Those who don’t take the time to carefully understand and explain their product’s value run the risk of losing everything post-production if they can’t sell their wares.

Thankfully, product risks are controllable risks. If entrepreneurs take the time to evaluate the local markets and find the right opportunities within them, they should have a decent understanding of what to expect.

Developing a comprehensive business plan that clearly articulates the startup’s value within the context of the local market can help with attracting investors, generating excitement among consumers, and coming up with an effective marketing plan to get the word out.

3- Financial Risks

Most entrepreneurs don’t just take their own money and use it to cover all of their startup costs. They have to look for alternative sources of funding, such as small business loans or peer-to-peer lending platforms like Indiegogo and Kickstarter. Taking out loans requires taking on a certain amount of financial risk, even for those who are confident that their startups will eventually prove competitive within their markets.

Mitigating financial risks requires maintaining positive relationships with lenders or investors. This is especially important for startups that utilize investment capital to get off the ground. Make sure to clearly identify and articulate major milestones for the company and define a clear path toward business growth. This will help to instill confidence in investors and encourage them to continue writing checks to support the business as it gets off the ground.

For those who have taken out traditional personal or small business loans, mitigating financial risks can be more of a challenge since there will be less leeway regarding ongoing funding and debt repayment. Make sure the business model can accommodate the minor setbacks that tend to come along with starting a company and prioritize making payments on time. If there’s any reason an entrepreneur can’t make a loan payment on time, he or she should openly discuss the problem with the lender and try to come up with an alternative payment plan.

4- Material Risks

Material risks include damage to real property owned or rented by the business, damage to inventory while in storage or in transit, damage to company vehicles, and other forms of material losses. It’s easy to mitigate the risk of material losses. Entrepreneurs can simply ensure that the business insurance policies they take out before they open up will cover things like natural disasters, vehicle accidents, product losses, and other material risks.

There are plenty of different types of specialized policies available to startups operating in specialized industries. Don’t be afraid to ask about things like equipment breakdown coverage, business interruption insurance, and specialized policies for landscapers, electricians, healthcare providers, and others. Many specialized business insurance policies cover a wider array of risks than general umbrella policies.

5- Team Risks

Even startups can’t get off the ground under the propulsion of a business owner working alone. Startups need teams of dedicated partners to get off the ground, but working with others to develop, produce, and market products or services also incurs certain risks. Entrepreneurs should only work with those they trust to have the company’s best interests in mind, especially if they plan to bring team members on as partners as the company grows.

Mitigating team risks requires choosing employees or partners carefully and detailing professional relationships in writing as part of the business plan. Instead of working with friends, most entrepreneurs find other business professionals with similar interests and experience and draw up official contracts dictating their stakes in the company. Make sure to bring in people who believe in the concept behind the startup and instill a sense of confidence that they will have something to contribute, including a commitment to bringing the new company’s goals to fruition.

The Bottom Line

There is no way to start a new company, especially one that offers innovative and unique products or services, without incurring a certain amount of personal risk. These risks can be mitigated by coming up with a solid, detailed business plan, bringing on the right personnel early-on in the process of getting established, and taking out comprehensive insurance policies to cover the company and its assets in the event that something goes wrong.

As the startup begins to grow, business owners will have to make many important decisions about what trajectory they want it to take. But, in the beginning, they should focus on ensuring they have sound plans, offer useful products or services, and have backup plans in place to cover losses, avoid liability issues, and protect the company, its assets, and its employees.