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Within the startup community, one statistic often cited is that 90% are doomed to fail. Breaking it down into years, around 20% of startups sink within the first year and 34% after two years, while only 50% make it to their fifth year and, finally, only 25% reach the 15-year milestone. These numbers illustrate the difficulty of breaking into an already-saturated startup scene, rising above competition, and building a sustainable business from scratch. That underscores the importance of doing diligent research as a way to understand and ultimately manage risk. There are a slew of factors that contribute to, and ultimately lead to, the failure of startups — knowing what they are is vital to avoiding them.
Common Startup Risks to Avoid: 1. Legal Risk Startups face many legal risks due to existing complex regulatory framework applicable to most industries. They need to comply with complicated rules on taxes, employment, and privacy among other things that are difficult to comprehend without legal expertise. One of the most effective ways to protect a company is to choose an appropriate legal structure from the get-go. Forming your own limited liability company can become advantageous for tax and ownership purposes, as well as making your business more official. This level of legitimacy looks good not just to competitors, but also to potential talent, investors, and partners. That said, any legal decision you make should be done with legal counsel even at the initial stages of founding. For example, ride share startups face a lot of regulatory hurdles in many cities where it threatens incumbent industries such as taxis. This was the case for Uber, formerly UberCab, who was originally issued a cease and desist order in California. According to the State, UberCab operated like taxis and limos without the proper licensing and insurance. The San Francisco-founded startup, now a globally renowned company, dropped the ‘Cab’ from its name to continue operating as a safe and reliable travel option after years of litigation and negotiating with municipalities. 2. Financial Risk Running out of funding is pretty much the worst-case scenario for startups. But compared to decades ago, startups today can take advantage of crowdfunding platforms like Kickstarter. Incubators and accelerator programs can also help with generating capital, as well as seeking outside financing from venture capital (VC) firms or angel investors. The financial risk and barriers to entry are even higher for fintech startups. Investors are very picky and look for people who understand and have experience within the industry. Payments, in particular, is a hard sell for investors given how saturated the market already is with other alternative payment solutions such as Apple Pay, PayPal and Google Pay. 3. Market Risk Understanding the market and your place in it is necessary to achieving success, and it can be done through market analysis. Researching a particular market provides you with insight on consumer behavior— why, where, when, and how they buy products and services — and how you can meet their demands. For example, the virtual reality game-streaming platform Vreal shut down after four years due to the slow growth of the VR industry, which was already a very niche market. A market analysis also increases your chances of acquiring funding as investors prefer to have a detailed picture of where their money is headed. 4. Technology and Operational Risk Even if your startup is not specific to technology, it’s pretty much an inescapable aspect of operating a business today. That’s why integrating the right tools should be a part of your risk management strategy, as the wrong ones can lead to operational inefficiencies, gaps and outright failures. Case in point: today’s consumers use digital platforms to purchase goods and services. It's why FreshDirect, New York City’s premier online grocer, is thriving amidst citywide lockdowns that restrict residents from shopping freely in stores. Failing to adopt such channels is a missed opportunity for your startup to tap a huge segment of the market. Having social media channels and a functional website, where consumers can access your goods, is one way to maximize operations and impact your bottom line. 5. People Risk A startup is only as good as the people who run and work in it. To build the right team, you should learn to look for people with values and a mindset that are relevant to yours instead of just highlighting their credentials. It’s also important to build a team you can motivate and retain in the long run. Don’t follow after Credit Karma’s footsteps — a fintech company that made headlines in 2018 for having the highest employee burnout. Don’t neglect your employees’ wellbeing in favor of numbers — their engagement in the work is vital to sustainable growth. Hiring people who share your vision can help you execute the steps necessary to achieve it. The bottom line is that, while startups face an extraordinary amount of risk, success is not out of their reach. Doing thorough diligence, building an agile team, outsourcing help and funding, and utilizing proper tools can help eliminate these five common risks and increase the viability of any startup.
Written exclusively for Marketplace Risk by Sally McCoy
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