Everyone would agree that innovation involves risk. Yet how often have you observed an entrepreneur who underestimates or fails to properly identify and communicate the risks for successfully developing and commercializing their innovations? It’s therefore not surprising that many startups fail. According to a Bureau of Labor Statistics report, more than 50 percent of small business startups fail within a few years.[1]
Many of these failures occur because management did not have an adequate risk management plan. Simply stated, a risk management plan is the process of identifying, assessing and controlling what can go wrong. These threats, or risks, could stem from a wide variety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents and natural disasters. Every entrepreneur starting a new business should develop a plan to first identify all of the known risks and then specific mitigations.
Identify Frameworks for Risk Management
At IOI Partners, we like to use simple, visual tools for identifying and assessing risks. As outlined in a Harvard Business Review article on managing risk, different approaches are used depending on the type of risks.[2]
Minor Risks: Low Probability — Low Impact
Risks that have a low probability to occur and low potential impact are not worth spending much, if any, time on. An example of this type of risk is getting the flu and missing a meeting with an investor. Sure, it may be painful at the time, but a simple apology and rescheduling the meeting is an appropriate countermeasure.
Insurable Risks: Low Probability — High Impact
Risks that have a high potential impact but a low probability can often be mitigated through insurance. For example, companies typically buy insurance for disasters such as fire and flood, and for errors and omissions.
Preventable Risks: High Probability — Low Impact
These types of risks are the nuisances in life. Your hard drive crashes, causing the loss of critical data. Your printer crashes the day before the milestone for an FDA submission. With a little planning, these types of risks can be easily averted.
Company Killers: High Probability — High Impact
These are the risks every company needs to identify, analyze, develop and execute plans for, and monitor. Otherwise, a company should just throw in the towel. If not addressed, these risks will kill your company.
Take Countermeasures to Manage, Monitor Risk
Risks can be classified by various categories:
- Market Risks
- Competitive Risks
- Technology and Operational Risks
- Execution Risks
- Financial Risks
- People Risks
- Legal and Regulatory Risks
At IOI Partners, we recommend developing and implementing visual management tools, such as risk registers, to actively manage and monitor these risks. It does no one any good to keep company risks hidden on your computer. Make them visible, discuss the issues openly, and review the action plans and progress at management meetings. Score each risk on probability and impact. We use a scale of 1 to 5. We then multiply probability and impact to obtain a severity score. The resulting analysis can then be sorted via a risk management scorecard.
The bottom line: Don’t let risk paralyze you. Entrepreneurs need to learn the difference between taking and managing risks. This can make all the difference between winning and dying.
[1] SBA Office of Advocacy, “Do economic or industry factors affect business survival?” Small Business Facts, June 2012.
[2] Kaplan, Robert S. and Mikes, Anette. “Managing Risks: A New Framework,” Harvard Business Review, June 2012.
