FIVE Key Questions To Ask About RISK

I took the less risky path and became an attorney. Along the way, I developed some expertise in risk assessment.

Several of my former classmates and colleagues have become entrepreneurs. Some have succeeded, some have failed, and some have asked me why?

One observation is that far too many entrepreneurs bolt headlong into a new endeavor without properly assessing risk. With this in mind, here are Five Key Questions entrepreneurs may want to ask themselves about risk before they head out from port on a new business venture. To begin the risk assessment journey, you will find some resources here to help you to stack the odds of success in your favor.

1. Are you prepared to become an entrepreneur? 

Have you done the preparation to make your business work? Do you have strong leadership skills, achievable vision and a business model that creates revenue and sustainability? Sounds like a formidable task when your passion is sailing, right? The key is to know before you go.

Let’s say you’ve left your stressful corporate job to follow your passion, offering charter cruises on your sailboat. You’ve invested your own capital to establish “Day Dream” with the state, purchased your sailboat, had it inspected, obtained your captain’s license from the Coast Guard and obtained a charter insurance policy from your marine insurance broker.

Now, where are your customers? How will you find them and entice them to come on board and sail with you. By the way, have you noticed how many other sailboats are nearby to try to entice the same people to sail with them?

In addition, you have two voicemail messages waiting to be addressed. The first is a courtesy call from your banker reminding you that your first installment on your loan is due next week. He asked: “How are things going?” The second message is from your fiancé. She asked: “When am I going to see you this week?”

You sit back and admire your boat, and then ask yourself, “Can I do this?” “Can I make the sacrifices, do the work and keep everyone happy?” “Am I ready for this?”

Yes, if you did your homework. No, if you did not.

2. Do you have a verifiable business model with customers willing to pay your price?

Let’s assume that you are not using the “sink or swim” approach to your business. You have an MBA, so one would presume that you know how to prepare to become an entrepreneur. Isn’t it just a smaller version of the large corporation that you left?

So what is a startup? We now know what we did not know in 1908 when Harvard launched the first MBA program. Startups are not just smaller versions of large companies (at least until you grow into a large company).

Today, entrepreneurial education is about first searching for the business model and then executing it. Steve Blank, a Silicon Valley serial-entrepreneur and academician, is recognized for developing and launching the Lean Startup movement based on the customer development business model.

Steve Blank’s courses teach entrepreneurs to focus on something that is repeatable and scalable. If you go beyond the founder’s vision to determine the customers’ problems and needs, you reduce the high-statistical risk of failure. 

Rather than an organizational chart, you can use a tool such as Osterwalder’s business model canvas.

Bottom line: If you don’t’ have customers willing to pay your price and don’t make a profit, then you don’t have a workable business model. Your biggest risk is no customers. All other concerns pale in comparison.

3. How do you prioritize potential risks?

Merriam Webster defines risk as: “possibility of loss or injury: peril.”

All entrepreneurs face risks. Taking risks is the first step. Are you taking proactive steps to reduce the risks that pertain to your business model and financial situation. Each scenario is unique and should be tailored to your circumstances.

If you are financially sound, then financial risk may not be your biggest concern. If your sailboat is damaged or stolen, you may have the means to replace it rather than to insure it. If a passenger sues you for damages, are you willing to put your personal assets as risk?

If your business partner is the key player, you may feel obligated to purchase key player insurance to keep the business running upon his or her death or disability.

If you are a newlywed, then family stability could be your number one risk. Will your new spouse be willing to make the sacrifices for your new venture?

If you did not do your preparation and homework, your risk could be selecting the wrong business model. Is this your passion? Is this your area of expertise? Are you a newcomer to this industry?

Some straightforward truths apply to all startups:

• You must have customers. You must find them, acquire them, keep them, and grow them. No options.
• You must have revenue streams (beyond the pricing tactics). Interaction with customers is required to determine revenue streams. No options.

Get to know your risks, prioritize them, and then acknowledge those that need to be managed before you start.

4. How can you manage or avoid potential risks?

Your Team

Successful people have a good team around them. You might want to consider a good accountant, lawyer, licensed insurance agent, business advisor, marketer and IT guru. They can work for you on an “as needed” basis regarding business strategy and as things develop over time. In exchange, you can take them out sailing.

Your Strategy

Keep in mind that you have access to free resources from the US Small Business Administration, the national nonprofit association SCORE (including free one-to-one counseling at one of their local offices), and more.

Now, consider risk management to be your life vest. You would not sail without your life vest, right? The same applies to your business. Out of the many potential risks, here are some that you may want to assess:

• You – You do not want to learn about how you handle a crisis during the first week of launching your startup. This should be tried and true in your prior job settings. If you’ve never worked for someone else, then you know yourself pretty well in terms of personality type and stamina. If not, then an honest self-assessment could be helpful.
• Business partner – You need to know his or her strengths and weaknesses before you set up shop together. Playing tennis every Saturday morning does not give you an indication of how he or she will handle the stress that comes with launching a startup.
• Legal structure – You will want to seek your lawyer’s advice on how to protect your personal assets if you are found liable for wrongdoing in a lawsuit.
• Federal, state and local laws regarding licenses, permits, exams, and insurance obligations – rule out any obstacles that you may face.
• Property & Casualty Insurance – Beyond your charter insurance policy, State laws and regulations require that you carry certain forms of insurance coverage. For example, if you are an employer, you will likely need worker’s compensation, unemployment insurance, and in some states, disability insurance. In addition, you may want to consider a business owner’s policy (BOP), which may be a less-expensive package as well as excess or umbrella liability insurance to fully minimize risks to your assets.
• Key Person Insurance – If your business will sink with the death or disability of your business partner, or a particular employee, then you may want to consider purchasing key person life and disability insurance. 
• Damage waiver – You will want to seek your lawyer’s advice on this point if you run a business that transports passengers, like charter sailing tours.
• Beyond insurance – Strength and support, both financial and emotional, from your team is priceless.

5. What is your Plan B?

Typically, Plan B refers to what, when, where and how you intend to avoid business failure Do you have one?

Your business may fail from a lack of customers, the most common reason for failure. If you do not have a plan to rescue the sinking ship, including a realistic timeline, then it will be lost.

Startup failures are fast and furious: year one 25% fail, year two 36% fail and year three 44% fail. 

The typical new business started in the US is no longer in operation five years after being founded (according to the Bureau of Labor Statistics and the Census Bureau).

So what are the odds that your startup will succeed? The success rate of your first startup is 18%, your second 20% and your third 30%. When will you reach a 50/50 chance?

Conclusion:

Are you ready to launch your startup? Has your ship sailed away from the dock already? Preparation before you set sail will improve your likelihood of staying afloat, and may put you in the 18% of start up winners. Happy sailing!

Portions of this post originally appeared on Entrepreneur’s Questions, now amended for LinkedIn.

Disclaimer

This blog post is made available for informational purposes and is not intended to be a substitute for professional or legal advice. No attorney client relationship is formed or implied between you and the guest blog author or the blog/web site publisher.