Every year since 2014, CB Insights run a “postmortem” of startup failures. In their research, they have discovered that these startups tend to die about 20 months following solid financing that average at about US$1.3 million. The “causes of death” vary but an overwhelming number passed away due to poor management, insufficient capital, and/or an exaggerated notion of demand for their products/services.
Startups can mitigate the risks by first identifying what these risks are then knowing how to handle them. Here are six types of risks startups often face:
This is a big one and results from a number of factors. One is underestimating the amount needed to sustain a startup until it can bring in enough revenue to be profitable. Most venture capitalists like to see profitability before they sink their teeth into a startup.
Financial troubles can be the result of basic mismanagement of cash flow, too much debt, or pushing expansion before the time is right. Such was the case with Cha Cha, a mobile answering service, which performed much like Siri does today. It simply could not manage its debt so it had to sell off its assets and close its doors.
These are internal risks usually brought by poor decisions by the management or the founders themselves. While they may relate to other risks like security and reputation, they may also involve things like poor marketing strategies, underestimating the need to build relationships with customers, failure to form strategic partnerships that can build a stronger customer base, and poor customer service, among many others.
Blockbuster Video is a prime example of poor customer service. While many believe that the demise of this company was the result of a growing internet streaming phenomenon, this company actually died before that. It became a giant in the video rental sector but failed to keep its customers first (talk about ridiculous late fees as an example). The company put profits ahead of customer service, and it lost it all.
Failure to be aware of and comply with the law and the government’s regulations that concern businesses can kill a company, as there is the tendency to step outside the lines drawn by these restrictions. This is especially true for fintech, although it reaches into a wide field of sectors.
Consider the case of Lumosity, a brain game and training company. Last year, it paid a US$2 million fine to the FTC (US Federal Trade commission) because it made false claims about preventing dementia and other mental issues that arose from a host of diseases and treatments (e.g. chemotherapy). These claims were not backed by any scientific research and were thus in violation of FTC’s regulations. It’s a hard lesson learned.
Safety risks involve both customers’ safety in using a product or service and the safety in manufacturer’s facilities. If consumers ingest or use a product on their bodies, there could be health risks. There are also risks of fire, explosions, and others in warehouses or any other manufacturing facilities.
According to Ventiv, such risks could be minimized by having streamlined safety management procedures, regular compliance checks, and professional training programs for employees.
Nothing will kill a startup sooner than its customers’ information getting compromised by hackers. While the news highlights incidents involving the “big boys” (government agencies, banks, etc.) as targets, startups need to understand that cybercriminals find it much easier to hack into their infrastructure and are always on the lookout for opportunities to breach their systems.
The medical industry has been a target lately because patient information can be used for identity theft. Once a user’s identity is compromised, a startup can have a tough time recovering, unlike the big guys who might be more resilient. Therefore, startups that do not adequately plan for security risk and fraud might regret it later.
There is an old saying that could not be truer for startups today: “One ‘Aw sh**t!’ wipes out 100 ‘attaboys.’” This means that a business can be on track and scaling well, and then along comes an incident that horribly damages its reputation.
Consider the current issue with Uber where a former female employee is charging that she was a victim of sexual harassment and discrimination, and that the HR and the management did nothing to address her complaints. Of course, Uber has the means and the financial ability to investigate, to engage in a huge PR campaign, and to promise action. Many startups do not have this luxury.
The prevalence of social commerce means that just a few complaints can impact a reputation quickly, and it takes some major work to repair the damage. Startups, then, have to be vigilant about what their customers are saying, how their own staff is operating, and ensure that they operate in an ethical and customer-focused manner.
Startups can learn many lessons from those that have failed. And to avoid their mistakes, new businesses need to identify the potential risks in each of these six areas discussed above. Startups need to embrace risk, plan for it, and know just how to respond when the inevitable happens.