Entrepreneurs are risk-takers by nature. They take big risks to leave comfortable, stable jobs and launch their businesses. Although some entrepreneurs carefully calculate risks and have a clear growth plan, the risk remains. And not all are cut for it.
The risks are enormous – there is no fixed income in the future, no 401 (k), no benefits, and no fixed schedule. Your average entrepreneur doesn’t work have a 9 to 5 schedule, and there is no fixed vacation leave. At least not when you are starting out. So which are the most critical risks faced by modern entrepreneurs? Let’s take a look:
The Financial Risk
We’ll start with the apparent risk – whenever an entrepreneur launches a business, a product, a service, or anything else, they will need funds. The money can come from various sources, but it has to be there. Some entrepreneurs have access to loans from 3rd party investors, others may use their savings, while others may receive funds from their family or friends. Regardless of the situation, the entrepreneur, as the business owner, takes all the risk and has to put their skin in the game.
Ideally, the business has to have a financial plan right from its launch. The business owner and the investors must know how the money will be spent and how income will be generated. Simply put, you must have a financial plan with income projections, the expected return on investment, and other financial details. The plan should cover the first five years of activity and be as detailed as possible. Going forward without a financial plan is incredibly risky and may lead to bankruptcy. In extreme cases, the investors risk losing all of the seed money.
The Strategic Risk
A comprehensive, detailed financial plan will be very attractive to investors and may get you the funds needed to launch a business or a product, but the strategic risk may still be a concern. We live in a very competitive business environment, and strategies that may work this month may not work next month. A carefully planned strategy can be outdated in weeks, especially in a cut-throat industry, where changes happen daily. A company that may be feasible and highly profitable in a particular environment may become a financial disaster in a different environment. In some cases, the whole business idea may become completely irrelevant, thanks to a change in market conditions (a perfect example would be import bans or higher tariffs, which can be implemented suddenly without prior notice).
The Technology Risk
This is a significant issue, especially if your business is active in the tech sector. A significant shift in technology may render your business plan impossible to implement. For instance, you may invest in a specific technology – but what happens if it becomes obsolete in a few years or even months? You have to be competitive and constantly adapt to new technology. Otherwise, your competition will be able to dominate the market simply because they managed to invest in new technology. You must continuously invest in new systems, tools, and processes to stay ahead. There’s no shortcut.
The Market Risk
Your product or service may be excellent and have stellar reviews, but the market risk is still a cause for concern. The reason is simple – you can’t control what happens in the market. Most markets are not stable, they have their ups and downs, and the risks are enormous, especially for budding businesses. A product may be hugely popular this year, but not the next. For instance, when the economy slumps, luxury products will sell less. People won’t have the disposable income to spend on non-essential items.
Similarly, a significant competitor may launch a similar product at a fraction of your price, stealing your customers and market share. This may spell disaster for your business, especially if you cannot adapt quickly. Try to avoid market risks by constantly researching your market and competition and understanding your customers.
The Competitive Risk
You always have to know what your competition is doing. Pay attention to the industry leaders and study their moves – what products are they launching? What are they working on? What are they NOT doing? You’ll quickly understand what works and what doesn’t just by looking at what they are doing. Look at the market – is it saturated? Are there many competitors that are making money? Are there just a few big players? Adapt your strategy according to the competition. Also, try to protect your ideas by seeking patents.
The Reputational Risk
Your reputation is everything. It takes years to build a good reputation and seconds to lose it all. Reputation is critical for new businesses, even though there are no reviews. Clients will see you as a new player and will have preconceived expectations. Don’t disappoint them! Your initial customers are the most important, and if you disappoint them, you may never recover. Become visible, interact with customers, be open to questions, and build your reputation steadily. Be active on social media and develop close relationships with your customers. Reputational risk can be easily managed if you have an excellent communication strategy. You should communicate, be open to suggestions, and offer alternative solutions whenever something bad happens.
Economic, Political, or Environmental Risks
These risks are difficult to include in your business plan because they are entirely out of your control. Although some insurance policies may offer protection, it is minimal. You are on your own. Wars, hurricanes, earthquakes, recessions, and other events are things you must adapt to survive. These are risks that all entrepreneurs face, and you have to focus on overcoming them. Keep in mind that no matter where your business is, what industry is in, and no matter what products you sell, there are risks you cannot control. You have to adapt and move on.
