Startup Risk Management: Mitigate the Cost of Failure

I recently had a really nice chat with some old colleagues on the subject of the 'risk of running a startup'. This reminded me that I wanted to expand on a point that I mentioned in a previous posting on SiteMorph about advice from Richard Brandson on being an entrepreneur. One thing that came up was the concept of limiting risk by setting a maximum liability before you start. In the example from Brandson, this meant he negotiated a 'sale or return' type contract with the aeroplane company so he could return the planes after a year if it all went wrong.

The core principle of this approach is that you can limit your exposure to trying something out. This kid of risk limitation approach is seen in a few fields, including stocks and shares approaches like the ones used in Trade Your Way to Financial Freedom. The goal is to run with the successes and limit your exposure to the failures. Failing is a very common outcome for a startup. If you don't have any risk in your business plan then it is likely you either aren't building a startup (there are no unknowns and you are just executing a formula like a franchise) or you don't understand what they are.

Van Tharp's approach is to put a limit on how much you will loose on something that starts failing. In his examples he often uses the example of a 10%percent; drop. The trick is that you let the winners run and cut the losses fast. You also need to be ready to buy back in as soon as things turn around. The analogy doesn't translate precisely to investing your time in a startup as a founder as time is not as fluid as cash. Ten percent of your career is probably a little over three years. If you can find a way to keep yourself in food and shelter then the question becomes why wouldn't you try?

I was also asked what drives me to continue doing these ventures in light of the missed opportunity of earning cash as an employee. The answer is simple, right now, for me, working on start ups is the best way of pushing myself forward. Ultimately this comes down to my instinctual need to keep pushing myself to improve. One of the reasons SiteMorph appealed to me as a project is that it has the potential to scale into an international product helping hundreds of thousands of web site owners grow their business. There is a lot of talk in the media at the moment about 'thinking big'. This is usually along the lines of "you have to think, so you may as well think big". I believe that this is good advice when it comes to deciding which projects to invest your time in. At the end of the day, it is your most valuable commodity.

Bottom line: before you take the leap, write down what the limits of what you are willing to sacrifice are, as well as what you want to achieve and look back periodically. This way you can 'afford' to give something a go knowing that there is a limit on what you risk to loose if it doesn't work out.

Thanks to Jeff Kubina from the milky way galaxy (Slot Machine) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons available at wiki commons.