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14 Risks to identify before launching a start-up

Accelerate SME


A bleak truth to think about when considering life as an entrepreneur is that nine out of 10 start-ups fail. Even more disheartening is the fact that in many cases, start-ups go belly up after their owners committed a lot of time, effort and cash to their ventures and, sometimes, that of their friends and family as well.

Some potential entrepreneurs may consider a 10% success rate as reason enough to spend their time in other ways. But others see that meager success rate as nothing more than a reason to work smarter and harder. Working smarter requires careful planning before founding a start-up, which requires a careful assessment of associated risks, such as the failure to obtain needed financing and a lack of requisite skills among entrepreneurs.

1.      Failure to meet an actual customer need 

A successful start-up creates a product or service that addresses a customer's pain point, or fills a market need. If a company makes a product or provides a service that no one wants, the start-up will be unable to close sales, earn revenue and pay operating costs. Eventually the company will operate at a loss and be forced to close its doors.

2.      Lack of a feasible business plan 

The failure to create a business plan to prove an idea is a profit-making one makes it difficult for a start-up to attract investors. Without investors, a company may lack the capital it needs to operate and be productive. Consequently, the business may grow at a slower-than-expected rate, if it grows at all.

3.      Unable to obtain financing or attract investors 

A company must attract investor interest at the seed stage or later to obtain financing. Otherwise, it might lack the necessary cash to hire employees, rent or buy facilities, conduct the research and development needed to create market-worthy products, let alone operate a production line.

4.      Premature product release 

A product that's released before it is market-ready can mean it will be of mediocre quality, at best. At worst, customers will purchase the product, become dissatisfied and fail to make subsequent purchases. Also, dissatisfied customers might convey negative comments using a social media platform that will discourage product purchases by others.

5.      Ineffective change in business plan 

A business plan can become obsolete for a number of reasons, such as a change in a target market or new government regulations. But growth hacking - creating a minimally viable business plan - can be nothing more than a haphazard process that creates a half-baked plan that reflects neither consumer demand nor a company's operating realities. As a result, a company's operating, financial and marketing projections can be incorrect, which might mean the company is unable to meet its financing obligations and the company will fail.

6.      Legal challenges 

Depending on the product a start-up manufactures or the service it provides, company leadership might face legal complexities they lack the expertise to deal with. As a result, the company might incur enormous costs to hire a legal team to deal with those challenges or operate in ways that aren't compliant with regulations. In the latter case, the government might force the company to cease operations.

7.      Loss of focus and lack of skills 

Start-ups often begin life with a small staff that lacks all the needed skills, a fact that can slow a company's progress. As the founders become sidetracked with the issues of starting a company, the focus can move from creating an exceptional product to hiring, finding a location, and seeking funding. 

8.      Discord between founder and investors 

Getting a start-up off the ground is a stressful process that is complicated by a lack of human, operating and financial resources. The result can be discord between co-founders and investors that may be a fatal issue for the company in terms of acquiring needed financing.

9.      Lack of passion for company or product 

An entrepreneur can come up with a good idea, although he has no interest in the product or service to be provided. But a start-up requires the commitment of personal and financial resources, which a person who lacks an interest in a product may be unwilling to make.

10.  Quickly exhaust cash reserves 

Without the needed capital, a company is unable to produce a marketable product. But most founders can deplete their personal cash reserves relatively quickly. So unless they're able to raise additional funding, they're left with no options but to shut down operations.

11.  Lack of the needed expertise 

In some cases, to gain expertise, a company's founders must offer part ownership of their start-up to gain the needed personnel. But if they're not willing to offer equity and take on additional partners, they may attempt to resolve business and technical issues themselves. Doing so can cause financial, operational and marketing disasters.

12.  Inappropriate marketing campaign 

Although start-up leaders may understand their target market, it does not mean they possess the marketing expertise necessary to generate leads or convert leads to customers. Getting the attention of potential customers is a critical skill that each start-up requires.

13.  Excessive competition 

After a start-up's product obtains market validation, the market can be flooded with competing products. In some cases, competitor products will be of greater quality than those of the start-up. When this is the case, the start-up's share of the market will decrease, as will their revenue stream.

14.  Inappropriate pricing 

Because a start-up may offer new products or services, it can be difficult to identify appropriate prices.  If the company picks a price that's too high, product sales may be lackluster. If the price is too low, the company may be unable to meet expenses and investor expectations.

The 10% start-up success rate illustrates the need for entrepreneurs to plan their business carefully, before any people are hired, supplies purchased or offices located. 

But some entrepreneurs work harder, not smarter, which means they might fail to appropriately identify and manage the risks that threaten company operations, such as creating a product that fails to meet customer needs and the inability to borrow money or attract investors.
© Zawya BusinessPulse QATAR 2016

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