Sunday, July 01, 2001
Take risks, but assess those risks
By Rhonda Abrams
Gannett News Service
Every business involves risk. Businesses of every size fail. Just ask Pan Am. Or Montgomery Ward. And don't plan on buying an Oldsmobile in the future.
Take a cool, hard look at all the risks facing you in your business.
I don't mean to scare you; I mean to prepare you.
Smart companies continually assess the range of potential risks facing them. This is particularly important when you're starting out, but from time to time at whatever stage your business is in, it's wise to do a thorough risk assessment.
Many entrepreneurs fear if they describe the risks, they'll scare themselves or worse yet, scare off potential investors.
Quite the contrary. For all but the least-sophisticated investors, risk assessment is reassuring. It shows you're more likely to take steps to counter the threats you've identified.
It's not just a matter of high risk or low risk. It's also what kinds of risk. Some risks are more tolerable or more important to different investors and to you.
A few of the key types of risks facing companies include:
Competitive risk: This is the type of threat we most quickly identify when we use the word risk. It's the fear that other companies will beat us or take away our customers. Many new entrepreneurs underestimate competitive risk, because they assume the competitive situation will stay the same as they grow. You should carefully think through how other competitors might respond to your entering the market and not assume that the competitive environment will remain the same.
Market risk: This is the perhaps the scariest risk. For a new company or product, a market risk is the danger that if you build it, they won't come. Customers may not automatically flock to your product, either because there's no real market need or the market isn't ready. Market risks are the most dangerous because they're the hardest and most expensive to overcome. Do a lot of market research and product testing with potential customers before committing large sums of money.
Technology risk: If you're designing technology or dependent on new technology for your success, there's always the chance that things just won't work, or work as well as necessary. If your business faces substantial technology risks, what is your ability to quickly and effectively improve the technology or acquire different kinds of support?
Product risk: What if the new product you're designing doesn't work or doesn't work as well as intended? What if you discover it takes longer and costs more than you imagined, eliminating profit margins and potentially alienating buyers? How much of your company's success depends on products or services that haven't been made yet?
Capitalization risk: This is the one we're all afraid of: that we won't have enough money to get us through the lean years. There's no great answer for eliminating this risk if you can't raise money; but the best way to avoid problems is to budget realistically, spend frugally and raise as much money as you can from whomever you can. Look for investors who have the ability and inclination to offer additional funds as your company progresses.
Execution risk: Here's the risk we all hate facing: that we won't be able to effectively manage the roll-out and growth of the company. Perhaps the logistics of your new business are so complicated or so vulnerable that you face enormous risks that you just can't carry out the concept. Being willing to look at yourself and your management, and to recognize the real operational pitfalls, objectively gives you a great head-start on reducing execution risk.
Don't let the process of outlining your risks scare you off. It may be overwhelming to see a long list of seemingly insurmountable problems. But while there are risks, there are also substantial rewards otherwise, you wouldn't be starting a business. Would you?
Rhonda Abrams is the author of The Successful Business Plan: Secrets and Strategies. There's still time to enter Rhonda's Most Embarrassing Business Moment Contest. Send your entry to Rhonda@RhondaOnline.com or write her at 555 Bryant St, No. 180, Palo Alto, CA 94301.
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