MANAGING RISKHigh-Growth Entrepreneurship

Three points to consider:

• Managing risk is at least as critical to success as is the core plan

(This stuff matters)

• Most new entrepreneurs do not manage risk… they gamble on success

(Most people do it badly)

• There are simple ways to incorporate managing risk into your plan

(It’s easy to do it well)

The Revenue J Curve

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

This is why we like to build high-growth businesses!

$

time

The growth curve we expect, with costs

$

time

We know there will be extra costs:technology has to be reworkedrecruitment costs are higher than expectedmargins are lower than expectedcompliance costs are higher than expectedetc

The growth curve we get

$

time

It just takes longer!Sales take longer to closeProduct completion is lateKey team members have to be replacedetc

All too often, the extra time and extra cash required is too much, and the company flatlines… (below breakeven!)

Typical Risk Profile

Competitor sues us for infringing IP

Product fails key Beta test

Key developer leaves project

Government project gives a sudden sales

lift

Global company distributes our

product

Partner found to

share dev costs

$

time

Extreme bootstrap risk profile:

$

time

Early risk is very low because cash outflow and activity are minimalFuture risk is much higher because you don’t have the resources to:-Thoroughly scope the market opportunity-Understand competitors-Modify dysfunctional founder behaviours-Ensure product is optimally designed- Get to market quickly-Etc

Bootstrapping defers risk, and often increases it in the long runMany bootstrapped start-ups ‘fade-away’ as they get to the risky stage because they have no capability to manage that risk

Managing risk is at least as important as core strategy

Core strateg

y

Move the risk curve as high as possible

time

$

Most entrepreneurs don’t manage risk well

• We know this because:• Many young companies fail because of bad

events they could have prepared for, but didn’t; and

• few young companies ‘get lucky’ (upside preparedness); and

• few young companies achieve their profitability forecasts (core strategy)

MOST YOUNG COMPANIES WHICH SURVIVE DO SO BY WEATHERING THE STORMS OF ADVERSITY WHICH SWEEP OVER THEIR UNPREPARED BUSINESSES

Risk is variability in outcome• The goal:• Take out, or minimize all downside risk factors• Enhance the likelihood of upside risk events

occurring

• The Process:• Create your business plan• Analyse the plan’s risk factors (implied or stated)• Develop strategies to mitigate downside risk,

and enhance upside events• Add the new strategies to the plan!

Decide how active you need to be in managing each risk factor

• Determine probability of occurrence and potential impact. • If both are high, then detailed risk planning is

required.• Otherwise, broad-brush plans may suffice.

• Remember: • If you could manage out all downside risk factors, you

would automatically succeed in building your business…

• you can’t… so manage in some upside risk as well, to maximise your likelihood of success.

Sample of downside risk factorsProduct Risk Probability Impact•The technology doesn’t functionally perform as expected

•Product development is late

•Core technology becomes obsolescent

•Product failure rates are too high

Financial Risk Probability Impact•It takes longer to raise funds than expected

•Operational cash burn is higher than budgeted

•Revenues stay too long in receivables

•Core technology prices increase

Market Risk Probability Impact•Competitors release superior or earlier product

•Competitors gain control of the target customers

•Competitors claim IP infringement

Operational Risk Probability Impact•Key staff leave

•Product delivery dates are missed

•IT systems fail

Three points we considered:

• Managing risk is at least as critical to success as is the core plan.

(Success is heavily influenced by how we manage risk)

• Most new entrepreneurs do not manage risk… they gamble on success.

(Most ‘risk mitigation strategies’ are really just comments in a plan)

• There are simple ways to incorporate managing risk into your plan.

(Work out what risks are important to manage, and plan as comprehensively for them as you do for your core strategy)

Managing risk turns you from a gambler to an entrepreneur

http://www.becominganentrepreneur.biz

Dr. Norman EvansAuthor: Becoming an Entrepreneur