What any Startup Founder should know about Risk
Taking Risks in Startup World
Building a startup is not easy. Everybody knows that. Everybody may not know of all the untrue myths related to starting up. One of the persistent ones is that entrepreneurs like taking risks.
Indeed, being an entrepreneur means that you have a different approach to taking risks. That said, the distinction between a successful entrepreneur and an average/failing one often lies in the way he/she handles risk.
For example, taking on a big project in your fledgling startup might be a great idea: it will allow you to build a team, bring in needed cash, and help you build a solid portfolio. On the other hand, it could also result in cashflow problems. You might have bitten off more than you could chew, or your people might just not be the A-team you had hoped for.
In this article, I will outline a methodology that we use at OneBonsai to lower (or at least manage) the risks in our activities. By “activities”, I mean executing projects, receptionning goods from across the world, hiring team members, and taking on investment.
The Risk Matrix
For me, the single most convenient tool to list and categorise risks is the Risk Matrix. Coming from the Petrochemics industry, I was exposed to risk management on a daily basis. I later realised that sector’s basic risk management principles can be drafted onto smaller and more agile startup environments easily.
What is a Risk Matrix?
Let’s analyse its structure :
The Risk Matrix consists of 25 cells, in 5 rows and 5 columns. In the vertical rows, you can place an event according to its probability of happening. In the columns, the event’s consequence is depicted.
Thus, if a something is “Likely to happen”, and has a consequence of “Significant”, it would fall in cell B2, orange. This is indicates that such event should be followed up closely, as it is not unthinkable that this bad something would happen.
How to assess probability?
Typically, such assessment is the result of a thorough probability analysis of the concerned event. For example, by building a probability tree for each speculated event :
To calculate the probability of an event happening, you need to multiply the values of each phase of the scenario. In the above example, there is 40% chance that Alex will answer the question. Then there is a 30% chance that he will say Yes. So the combined probability for this event “Alex will say Yes” would be 40% * 30% = 12%.
Now, this analysis is not easy. And, in many cases, it does not result in a significant added “accuracy” to your speculation, when compared to your gut feeling. After all, most of what we do here is reasoned conjecture. We assume, based on experience and the limited data at hand, that we are able to “guess” the probability of something happening. That said, the probability is very useful for detailed analysis of complex projects, such as startups.
Otherwise, the following simple rule of thumb can be used for assessing an event’s probability:
A - Very likely
Chances that (part of) the event will occur are big (let’s say +90% sure).
B - Likely
There is a chance that the event will happen, but it is partly mitigated. Because there are structures, actions or people in place that will (try to) prevent the event from happening.
C - Possible
There is a chance that the event will happen, but strong mitigations are in place.
D - Unlikely
Almost not possible that the event will happen, due to strong mitigations, or low risk in first place.
E - Very Unlikely
The event will most likely not happen, only to a very limited extent or Act of God. Typically this means that the event does not happen.
How to assess consequence?
Consequence depends strongly on your own specific situation. A “big” consequence (e.g. financial impact of >1 Million $) could be acceptable for a multi-national; while for a startup, this would basically mean financial ruin.
As such, the consequence determination will have to be built individually. For OneBonsai, we basically look at the following points :
- What is the financial impact of the event (e.g. >40.000$ would be high consequence)
- What is the potential impact on the cash flow of OneBonsai (the financial hit might come at just the wrong time)?
- Would we have to spend a lot of time to fix it, if it would happen?
- Would we be able to cope with our current team, if it would happen?
These are a few of the aspects we take into account to assess the consequence of an event.
Now, How to use the Risk Matrix?
As said above, I do not agree that an entrepreneur is an irresponsible risk taker.
I agree more with the statement that an entrepreneur should rather be a Risk Manager. Basically, we will determine, based on analysis of the situation and listing out all the possible scenarios, if the risk is worth taking.
Things can still go wrong, but at least we have:
- A chance to already have mitigations in place to lower the consequences of such event.
- Tried to list the risks involved in the project, and as such, we are aware of the risks that could happen.
- Minimized the overall risk of the project exploding in your face.
Do note however that your risk list will most likely be incomplete. You will always have stuff going wrong that you did not anticipate. However, thinking ahead about the eventual slips would already lower that risk significantly.
What does this mean, practically?
Make a Risk List
You start with listing out the risks. Think worst case scenario. Think about what can go wrong, how can it go wrong, what are the reasons for it going wrong. Don’t limit yourself. Even risks that are far-fetched can sometimes still lead to very real consequences. See it as a kind of gloomy doomsday brainstorming.
Do not get depressed or chicken out of your project.
You will see a lot of sh*t coming up, but that’s normal. We will start mitigating these risks in the next step.
Simply make a list like the following. (The items in it are imaginary :-) )
As you can see, we list both internal (senior developer) as external (cloud provider, website hacked) risks. Also note that while the cloud provider downtime is perceived to be less likely to happen compared to the website hack, both are similar in real risk. Because the consequence of the website hack is found to be higher.
Once this is done, you will quickly get a draft on how risky your project really is. If you have a lot of bright red or orange in your list, better start mitigating these ticking-bombs!
Find mitigations to your risks
The next step is to go through the entire Risk List and to find mitigations for each event. Sometimes the solutions are obvious, other times not or too costly. List here the mitigations that you can conceivably do. If you find that some events cannot be mitigated further, you would have reached the residual risk for that event. It is the risk that remains, after all the possible prevention factors have been applied. It will be up to you to decide if you can live with that remaining risk or not.
Naturally, the above mitigations are not exhaustive. It is wise to come back to this list every once in a while, and reassess if there are additional mitigations in place, if all listed mitigations are still active, if there are new mitigations that can be done.
You can see now that mitigations may have an effect on the probability (how likely is this event to happen), on the consequence (how big is the impact) or both. The risk that remains is the residual risk. Again, it is up to you to decide if you can continue business with these risks in the back of your mind.
I hope that you liked this rather dry article :-) It may not be the most innovative or interesting subject to talk about, yet I feel it to be integral to a successful startup or entrepreneurship venture. After all, why step into a beehive blind and unprepared if you can at least know its dangers or try to mitigate its consequences?
Who are we?
We at OneBonsai transform your industry by creating & delivering technology-driven solutions. Using Virtual Reality, Augmented Reality, Artificial Intelligence and other emerging technologies, we creatively solve high stakes business challenges that drive sales, lower costs and reduce risks.