How to manage the risks of entrepreneurship

Launching a tech startup — or any startup at all — is a risky venture. According to the U.S. Bureau of Labor Statistics, nearly half of new businesses fail within their first five years.¹

There is no silver bullet to prevent a new business from failing, but you can better position your startup for success by identifying and mitigating key risks. Conducting market research, writing a business plan, maintaining financial discipline, and purchasing the right insurance can all help your business survive and thrive.

Primary risks of being an entrepreneur

When you start a business, you can build confidence by picturing success. You might imagine yourself launching a great product, attracting investors, closing deals, and acquiring customers. But to help make your dream a reality, it’s also a good idea to be aware of what could go wrong. If you identify major risks, you’ll be in a better position to take preventive action. Here are some key risks to consider:
 

• Strategic and market risks — Unfortunately, not every product is embraced by the marketplace. One common cause of start-up failure is that a product or service simply doesn’t solve a problem or meet a need, and therefore fails to attract customers. Even if your core product or service finds favor with customers, your business could fail due to competition or ineffective marketing.
• Financial risks — Simply put, if your business runs out of money, you won’t be able to operate. Without sufficient cash on hand, you can’t pay employees, fund marketing, or cover your rent. You may be able to temporarily weather cash flow challenges by taking on debt, but this creates additional financial risk. 
  
• Operational risks — You might have a great product and money in the bank, but your business can flounder for a range of operational reasons, including loss of a key employee, regulatory or compliance challenges, or an accident or disaster that damages inventory, equipment, or facilities.
  
• Technology risks — Virtually every business depends on technology and therefore faces technology risks such as data breaches and ransomware. In addition, companies that manage customer data or handle payment processing also have special compliance requirements and face increased technology risks.
  

Actions that help mitigate startup risks

Once you identify your company’s most significant risks, determine which actions will help limit those risks. By focusing on risk, you may also be able to improve elements of your business’s strategy. Be realistic as well: It isn’t possible to eliminate all risks. Here are some steps to consider:
 

• Write a business plan and follow it — Creating a roadmap for your business at the outset can help you get where you want to go. Common elements of a business plan include a company description, market analysis, organizational structure, marketing and sales strategies, funding needs, and financial projections. You can use your business plan to measure where you’re on track and whether new risks are arising.
• Maintain financial discipline — It can take months or years for a business to be profitable. It’s especially important when you’re operating at a loss to maintain financial discipline, so you have a long enough runway to get your business off the ground and eventually turn a profit. Strong financial management practices include:
  
  • Establishing good record-keeping practices so you can track all parts of your financial operations.
  • Starting with sufficient funding and maintaining a cash reserve.
  • Limiting debt and accounts receivable.
  • Diversifying your business’s income.
• Create a robust cybersecurity program — Establish and enforce cybersecurity policies for your new business, such as regularly updating and patching software, backing up data, and using two-factor authentication to sign into your company’s network. Make sure your company’s website, services, and operations follow applicable data privacy regulations. Provide cybersecurity training for your employees.
  
• Protect your intellectual property (IP) — Depending on what your business does, you may want to take steps to protect your intellectual property assets, including your business name, logo, inventions, software, and even strategies and business plans. Protecting your IP helps prevent competitors, partners, and former employees from profiting from your business’s hard work and investments. Filing patents for inventions is a costly and time-consuming process, but it may be necessary to protect your business and attract investors. Other ways to protect IP include registering trademarks and copyrights, and using non-disclosure agreements with employees, partners, and contractors.
  
• Retain experts — You may be able to manage many business risks on your own, but you may also benefit from turning to experts for additional help. An accountant can help establish sound financial practices; a cybersecurity professional can help your business limit cyber risks; and an attorney can help protect your IP assets.
   

Insurable risks and coverage

Businesses can manage numerous risks by strengthening their operations and taking preventive actions. In addition, many risks can be mitigated with a strong insurance program. An independent broker or agent can help you identify insurable risks and determine what policies are right for your startup. Key policies to consider include:
 

• Business owner’s policy (BOP) — Provides commercial general liability coverage and commercial property coverage.
• General liability — Provides protection to your business and employees from claims of injury or damage by third parties.
• Commercial property — Covers loss or damage to property and potential lost income due to fire, natural disasters, and certain other causes.
• Commercial auto — Covers losses, injuries and damage resulting from accidents with vehicles used by your business.
• Workers compensation — Pays lost wages, medical expenses, and rehabilitation costs for employees who are injured or become sick at work. This type of coverage is required in nearly every state.
• Employment practices — Provides protection against claims arising from illegal employment practices, such as discrimination and harassment. 
• Directors & officers (D&O) — Protects company leaders from certain lawsuits arising from their business decisions.
  
• Professional liability — Helps cover financial losses arising when you or an employee makes a costly error or omission when providing professional services to clients.
• Cyber liability — Helps your business recover from a cyber incident, such as a data breach or ransomware.

While you may not need all these coverages, some types of insurance may be required by lenders and customers.

Learn as you go

Every business takes risks — and makes mistakes. While a detailed business plan will help keep you on track, it’s important to be flexible as well. Be ready to take quick action to respond to emerging risks. Businesses sometimes must pivot rapidly in the face of setbacks — or to seize marketplace opportunities. In some cases, a successful pivot can be as important as a strong launch for a business to achieve long-term success.

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