How to Control the Risks in Your First Business Venture

Have you ever thought about starting your own business and not done anything about it?

Maybe you  came up with a revolutionary idea about how to improve the tortilla chip by making a “chip sandwich – it’s like an Oreo cookie only the cookie parts are replaced by chips and the cream center is replaced by dip.

Whatever your idea, you were probably lax getting it off the ground because you were scared of failure. In the case of your chip, maybe you were scared it wouldn’t catch on, cost too much money to launch, someone would steal your concept and do it better, or someone would choke on your sandwich and sue your pants off.  For every spectacular success story like an Apple or a Facebook, there are way more failures.

In fact, statistics show that nearly 40% of all start-ups end up losing all the money that the investors put in the company. Nearly 70% of start-ups fail to achieve the projected return on investment, and almost 95% of start-ups fail to achieve the financial results that they have projected for the initial years of operation. Pretty scary huh! Good thing you never started that venture. Wait! That’s not good advice at all! By taking care of a few important aspects, you can greatly improve your chances of success. You may not end up being the next Facebook, but you will at least not lose your shirt (or pants) while attempting to achieve your entrepreneurial dreams – which may or may not include a yacht and flying in KISS each year for your Halloween party.

A Hobby is Different from a Business

One of the biggest mistakes business aspirants make is to not appreciate the difference between a hobby and a business. You may be making great cakes for birthdays that people relish over, but to successfully run a bake house you need much more than culinary skills and a really great recipe for butter cream fondant. You need to think through and find answers for the following questions before you decide on the feasibility of converting your hobby into a business:

1. What is my product/service?
2. Will people pay for my product/service?
3. How will I market my product/service?
4. What is my competition like?
5. Do I have the funds and resources to scale my business?

Have a Compelling Business Case:

Once you are convinced that your business idea can grow from a hobby to the next Betty Crocker, the next step is to build a compelling “business case” around it. Source of funds, procurement of materials, marketing plan, and revenue projections must be arrived at before you start anything. You must also vet the business case with either local business incubation centers or other successful entrepreneurs to make sure that you are not painting a very rosy a picture without taking into consideration potential risks. FYI: those books about how to run a company are great ways to level an uneven table but not too great when compared to lessons learned from real world experience. Don’t be scared to talk to people that have failed!

Get the Structure Right

Did you know that most people start their first business venture as a proprietorship. It’s probably because it’s the easiest structure to start & you can basically do it online on the cheap. The stinky part is the proprietorship structure exposes your personal assets in the event of a business liability. Are you reading this & don’t know what a proprietorship is? Then you should probably talk to an accountant about your idea and the proper structure. It is important to look at the right structure for your business considering factors such as protection of your personal assets, ease of fund availability, amount of paperwork needed, tax optimization and so on. For example, though a limited liability partnership is a structure which is considered optimal by many, others feel that it may be easier to obtain bank loans for a private limited company rather than an LLP. Again, talk to a professional & don’t just go to Legal Zoom, check a random box, and proceed to checkout without considering the future implications of what you’re doing.

Have Knowledgeable and Trustworthy Partners

Statistics show that businesses started by a team (more than one) of founders are more likely to succeed than solo ventures. While that’s true, finding the right partners can be a mess. It is important to have partners who complement your skill sets and are trust worthy to boot. For example, if you are a savvy marketer, then you should ideally get someone who is strong in finance to partner with. If you are a tech-nerd and a horrible salesman, than you need a swarthy partner who will be able to sell your software and leave ou alone in your dark room. Clearly demarcate areas of responsibility as well as profit sharing models. Even if you are starting a business with friends or family, it is important that there is a legally binding contract between business partners – i.e. don’t trust your brother-in-law. You will be surprised by the number of businesses which have failed only because the partners could not agree on how to tide over a tough time.

Have Clearly Defined Processes and Policies

If I ask you why a car has brakes, the immediate answer would be that it helps to slow down the car. Actually, it is the brake that helps a car move faster. Don’t believe me? It is the confidence of the brake that helps you accelerate without the fear of accidents. How fast would you be going if your car didn’t have any brakes or ones that worked 50% of the time? That is the same philosophy of having a good set of processes and control mechanisms in your business operations. These may seem as if they are slowing you down, while in fact, they help you accelerate growth without stumbling and falling down en route. You must have well laid out policies with respect to what can be considered business expenses, employee leave, and so on.

Do Not Depend on a Single Client

Although every business would start with a single client, it is important to not run your business around just a single client. If you are a florist, the hotel next door may be giving you a lot of business, but you must have a plan to target the household customer and other businesses in your area as well. This will help you survive even when your biggest client stops giving you business for some reason. A rule of thumb is to never have more than 50% of your revenues coming from any single client. This is a great rule & if you have learned nothing from this blog post, please take this advice.

Be Conscious of the Price of Every Risk

You may find a lot of people advising you that risk averseness is the enemy of entrepreneurial success. However, it is important to note that you must be able to take calculated risks. This includes having a robust risk management mechanism for your business. You must be able to evaluate the worst case scenario in case a planned project or deal does not go through. You must only take those risks which will allow you to still pick up the pieces and move on with your business. Otherwise, you may end up downing your shutters faster than you expected.

Now that you know the common pitfalls to avoid committing start-up suicide, I hope you are ready to embark on your greatest adventure. If you are not, than I have done a pretty bad job writing this blog and I apologize. Do you have a successful business? Or has failure taught you some lessons?  Please drop some comments below. Remember, your failure may be another person’s success!

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