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3 Types of Business Risk for Startups

No one starts a business only for it to fizzle out and die, but starting a business is always risky.

Startups fail for a variety of reasons, from a failure to execute on their vision properly, to external forces that entrepreneurs and operators have no control over. Let’s take a look at the major types of business risk for startups and how to overcome these challenges.

Examining the Types of Business Risk

There are three major types of startup risks as companies scale: execution, technology and the market. I’ve experienced all three, and with each comes its own challenges and opportunities.

Execution Risk

The biggest business risk for startups is failure to execute.

How does your business align with your vision, measure up against core key performance indicators and execute on its mission by bringing product to customers? The answer to this question is what makes or breaks your company. The process of scaling a startup is hard and tumultuous. Scaling fast makes it even harder, but scaling slowly is worse, and sitting still is a death trap — especially in technology.

How fast should you grow? How much money will it take? How many management layers do you need? How do you battle churn? How do you innovate against juggernauts and ankle biters alike? The quickest, most iterative part of your business needs to be the part where strategy meets execution.

But if you overcorrect, you’re doomed. It’s a delicate balancing act, and only you can figure it out for your business. Pay attention to expenses and gross margins. Make sure your investment ratios are comfortable — for you, not based on some random comparison to like companies. Is your research and development investment right? Is your go-to-market investment at the correct pace?

It’s important for startups to nail their foundational execution, but also to continually expose what I call growth levers. These ensure that when one bet fails, or a hiccup happens, you’ve got other plays well drafted and in the lab. You need to always be innovating your business model and approach to avoid these inevitable types of business risk.

Technology Risk

Technology risk for startups cuts both ways. There can be internal issues — missed deadlines, broken roadmaps, haywire API scripts, cyberattacks, staff departures, etc. There can also be external problems caused by dependencies on programming languages, integrations and open source technology, or by innovations that disrupt the technology markets you rely on.

It’s tricky to use technology to meet customer demand, deliver a value proposition that has staying power and stay true to your differentiation all at the same time. That’s why this is such a big business risk for startups.

The keys to hedging against technology risk are to innovate, bite off what you can chew and over-deliver on your product roadmap. It’s also important to ensure your dependencies are limited. If you use open source technology, be sure it’s here to stay. Don’t customize it so much that it prevents you from taking advantage of future innovations. Be sure you have resourced appropriately, and don’t get complacent when your technology superiority and engineering excellence are challenged.

Market Risk

This one takes many forms, and it is the business risk for startups that you have the least control over. On the macro side, stock market performance, currency values, job growth rates, global pandemics and other factors can threaten your business. On the micro side, it could be about market moves by competitors, mergers and acquisitions, investments and new products or innovations. Crisis always happens. Either way, the market never sits still, and you need to prepare your business to succeed in both the good times and the bad. The ball won’t always bounce your way. Will you be ready?

When it comes to growing a business, there is nothing more important than having your head on a swivel in the market and being the most prepared you can be. All entrepreneurs should become encyclopedias on their markets, technologies, customers, competitors and trends. Do you know your competitors better than they know themselves? Are you participants in a market or making one? Are you doubling down when the market is ripe and holding the front when the market is bear? In an ever-changing and volatile economic climate, the companies that win are those that get a little lucky, but also those that take very seriously how the markets can influence their short- and long-term visions.

When Business Risk for Startups Pays Off

In my career, the ultimate convergence of these three types of business risk came when, at Dyn, we were considering testing the market for fundraising, an initial public offering or an acquisition. We eventually sold to Oracle, where we learned a ton about these heightened risks everyday on a Fortune 100 scale.

This right here is why we’re building our York IE Fuel Platform to enable and unlock world-class market research and expertise for all. We’ve also productized York IE advisory services modules to lean in and be an extension of your startup’s operating team. You’re not at this alone.

A version of this blog was originally written while working at Oracle as a vice president and general manager after being acquired with Dyn. Lessons learned and applied to York IE.

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