19 Strategies for Managing Risk in a Startup
In this article, we explore nineteen different strategies for managing risk in startups, shared by founders, CEOs, and other industry professionals. From adopting the “Fire Bullets, Then Cannonballs” strategy to avoiding risky investments, these insights offer a wealth of knowledge for any entrepreneur looking to navigate the uncertain waters of startup success.
- Adopt the “Fire Bullets, Then Cannonballs” Strategy
- Utilize a Hypothesis-Driven Framework
- Diversify Product Launches and Customers
- Ensure Profitability from Day One
- Embrace Uncertainty for Growth
- Employ a Lean-Experimentation Approach
- Develop a Detailed Business Plan
- Work with Diverse Markets
- Prioritize Comprehensive Insurance Coverage
- Explore Your Niche
- Play the “Game of Pennies”
- Approach Your Expansion Rate Strategically
- Try the Lean Startup Methodology
- Find Trustworthy Investors
- Manage Cash Flow Effectively
- Scale Your Business Slowly
- Split Up Digital Marketing Efforts
- Proactively Monitor and Audit Data
- Avoid Risky Investments
Adopt the “Fire Bullets, Then Cannonballs” Strategy
I first came across the strategy “fire bullets, then cannonballs” in Jim Collins’s book, Good to Great. It basically talks about how, instead of betting everything on one big idea and risking it all, you need to start by firing small “bullets”—testing out various ideas on a smaller scale.
This allowed us to explore different verticals and find what worked best for us. It gave us room to experiment without committing too many resources upfront. Once we had some data and identified promising opportunities, we then fired the “cannonballs,” focusing our resources on the ideas that showed the most potential. This way, we made more informed decisions and reduced the risk of failure.
Ewen Finser, Founder, The Digital Merchant
Utilize a Hypothesis-Driven Framework
One essential strategy that we’ve utilized to manage risks in our startup journey is the adoption of a hypothesis-driven framework. Recognizing the unpredictable nature of the startup environment, especially in the manufacturing and semiconductor industry, we’ve found that formulating and rigorously testing hypotheses allows us to make more informed decisions.
This approach involves identifying key assumptions underlying our business model, product development, market entry, and other critical areas. We then develop specific hypotheses around these assumptions and design targeted experiments to validate or refute them as early as possible.
Fabian Pelzl, CEO, KNOWRON
Diversify Product Launches and Customers
One strategy I found most effective for managing risk in my startup was diversification. If I was launching a product, I would launch two or three simultaneously. Similarly, when serving customers, I ensured no single client accounted for most of my business.
This approach was born out of the recognition that, particularly in the early stages, anything that could potentially go wrong with those entities you heavily depend on could make or break the business. While the downside of this strategy is that you might not grow as rapidly as you could by focusing all your resources in one area, the trade-off is a more predictable and less risky trajectory.
When I launched my e-commerce business, I had limited funds for purchasing inventory. Instead of going all-in on one product, I launched a few different products, buying a limited quantity of units for each. While this capped my sales to the number of units I had, it mitigated my risk and, ultimately, proved successful.
Zakhar Ivanisov, Founder and General Manager, Soul & Lane
Ensure Profitability from Day One
Always be profitable from day one. Burning through other people’s money (VCs, etc.) is for a very specific type of company. You’re most likely not that. Even if your profit is $1,000 per week or $1,000 per month, always be cash-flow positive. This may mean adding consulting on top of a product line. All money is green. Achieving this can be done by having one foot in products and one foot in services. Services should always be profitable. Products take time.
Christopher Falvey, Co-Founder, Unique NOLA Tours
Embrace Uncertainty for Growth
One strategy my startup used to effectively manage risk was embracing uncertainty. This involved viewing the unexpected and unknown as opportunities for growth rather than threats. Even in the face of adversity, we looked at each decision with a long-term mindset, understanding that sometimes taking bigger risks can generate greater rewards down the road.
By being open-minded and looking for new ways to solve problems, we could move through difficult situations faster and with greater success. We recognized that no decision is perfect, but by being willing to take calculated risks, we could find better solutions more quickly. This allowed us to reframe our business objectives and remain focused on our goals despite the shifting landscape.
Shaun Martin, Founder and CEO, We Buy Houses In Denver
Employ a Lean-Experimentation Approach
In my startup journey, a key strategy I employed to effectively manage risk was embracing a lean-experimentation approach. By conducting small-scale trials and prototypes before committing to larger initiatives, we could assess potential outcomes and identify possible pitfalls early on.
This iterative process allowed us to fine-tune our strategies, reduce uncertainties, and allocate resources more efficiently. This approach not only minimized the impact of potential failures but also fostered a culture of continuous improvement. This led to more informed decision-making, accelerated innovation, and ultimately contributed to our startup’s success.
Jay Toy, General Manager, 88stacks
Develop a Detailed Business Plan
A fundamental aspect of responsible entrepreneurship is developing a detailed business plan that thoroughly assesses potential risks and outlines mitigation strategies. By adopting a proactive approach, startups can gain comprehensive insights into the risks they may encounter.
This includes evaluating market uncertainties, competition, financial constraints, and operational challenges. By identifying vulnerabilities early on, entrepreneurs can implement appropriate contingency plans to address potential roadblocks effectively. This level of preparedness instills confidence in stakeholders, including investors and partners, and empowers startups to make well-informed decisions.
A robust business plan with risk assessment and mitigation strategies is a roadmap for navigating obstacles, steering the business toward success and sustainability in an ever-evolving marketplace.
Sacha Ferrandi, Founder and Principal, Source Capital
Work with Diverse Markets
One strategy we used to manage risk effectively in our marketing agency startup was working with diverse markets and not becoming too niche. By working with companies across various markets, including the EU (with a focus on the Nordics), UK, US, Canada, Israel, China, and more, we balanced market instability and recession risks. Our approach involved conducting targeted campaigns in different regions to generate leads.
This tactic had a significant impact on our success. As markets fluctuated, we remained resilient by having a customer base spread across diverse regions. When one market experienced a downturn, another would be on the upswing, helping us maintain stable monthly recurring revenue (MRR). This strategy allowed us to navigate through challenging times while continuing to grow our business steadily.
Adriana Stein, CEO and Founder, AS Marketing
Prioritize Comprehensive Insurance Coverage
In the early stages of our startup, we prioritized comprehensive insurance coverage as a critical risk-management strategy. Recognizing the unpredictable nature of business, we understood unexpected events could pose severe financial threats.
By investing in insurance that covered various aspects, such as property, liability, and employee-related risks, we created a safety net that provided peace of mind. This approach shielded us from potential financial setbacks and instilled a sense of security among our team and stakeholders.
The impact was significant; we could focus more on innovation and growth without worrying about unforeseen liabilities. We overcame challenges more confidently because of this strategy, positioning our startup for sustainable success in a highly competitive environment.
Peter Reagan, Financial Market Strategist, Birch Gold Group
Explore Your Niche
At Spivo, our video editing company, we’ve managed risk effectively through diversification within our niche. Instead of solely focusing on video editing services or only selling camera gear and equipment, we branched out and merged these aspects of our market.
We started with selling high-quality camera gear and equipment, enabling us to reach a broader customer base, and then we branched into video editing. Our flagship product, the Spivo 360, started it all, attracting new customers and allowing us to gain traction to generate additional revenue streams.
By diversifying during the initial stages, we minimized the risk of relying solely on one aspect of our business, which significantly contributed to our success. It allowed us to adapt to market shifts, capture different customer segments, and ensure sustainable growth in a dynamic industry.
Marc Bjerring, Co-Founder, Spivo
Play the “Game of Pennies”
In our startup, we embraced the “game of pennies,” a phrase coined by Elon Musk. We were meticulously focusing on keeping costs super low. By pinpointing where every penny was spent and only investing in what was truly essential, we reduced our overhead by 40%.
A study by CB Insights reveals that 29% of startups fail because they run out of cash. By playing this “game of pennies,” we sidestepped a common startup failure point, strategically minimizing risk and positioning ourselves for success.
Oliver Hudson, Director, BlindsByPost
Approach Your Expansion Rate Strategically
One practical approach to mitigating risk in our startup involved a strategic focus on managing the expansion rate.
By maintaining a measured and deliberate pace of growth, we could navigate potential pitfalls more effectively. This approach allowed us to allocate resources judiciously and maintain a firm foundation while adapting to changing market conditions. The impact of this strategy was significant; it enabled us to avoid overextending ourselves and spreading our resources too thin. It bolstered our ability to respond to unexpected challenges and seize emerging opportunities.
As a result, we were better positioned to sustain steady progress without succumbing to the pressures that can accompany rapid growth.
Travis Willis, Director of Customer Success, Aspire
Try the Lean Startup Methodology
In my startup, we adopted the Lean Startup Methodology, and it was the best decision which proved to be highly effective for managing risk and achieving success.
This approach focuses on validating our assumptions and testing ideas rapidly, even with limited resources. Instead of developing a complete product or service and launching it all at once, we started with a minimal viable product (MVP). This MVP contained the essential features needed to address the core problem we aimed to solve.
David Bui, Director and Business Specialist, Schmicko
Find Trustworthy Investors
According to Dr. Salamon at Harvard University, having access to cash is essential when starting a new business venture. It’s important to find trustworthy investors who believe in your vision, rather than relying on collateral-based loans that could result in losing your possessions if the business fails.
If someone is willing to become a share partner in your venture, it’s a good sign that you have potential for great success.
Tammy Sons, CEO, TN Nursery
Manage Cash Flow Effectively
In the early stages of a startup, an excellent strategy to manage cash flow is to list every inflow and outflow of funds. You can invest in a tool like QuickBooks that will help you track your income and expenses, or you can do this manually using the good old pen and paper. Documenting them is critical to providing you with data for your cash flow analysis.
To ensure that your business has enough cash on hand, a thorough financial plan, including a contingency plan, is necessary. Having a sound financial plan will guarantee that you have enough money to run your business and lead you in the right direction.
It is also good to be prepared for the unexpected; hence, your contingency plan. A contingency plan should include a provision for an extra 10-15% of your projected spending.
Allan Bossel, Owner Operator, Michigan Bed Bug Specialists
Scale Your Business Slowly
Scale slowly. Many entrepreneurs, including myself, scale too fast. For example, I invested most of my budget in creating long-form blog content that would take months to recoup costs. It didn’t take long to realize I wouldn’t have money left to reinvest in my business with little cash flow coming in.
Instead, I should’ve brainstormed the fastest way to get a return on my investment. I’ve practiced understanding processes before delegating to reduce cash-flow issues for my business. If I understand a technique well enough, I can offer better training and understand how quickly I can recoup my costs.
Now that I’ve practiced this method, I can scale my business with the profits I’ve earned from a working process.
Chris Alarcon, Journalist/Owner, Financially Well Off
Split Up Digital Marketing Efforts
In managing risk effectively for my sticker-printing startup, one strategy was diversifying our digital marketing efforts. Rather than relying on a single platform or channel for all our marketing initiatives, we spread our campaigns across multiple channels. This way, if one didn’t perform as expected, it wouldn’t have a huge negative impact on the overall success of the business.
I learned this lesson the hard way. Initially, we focused a lot of our efforts on Google Ads, but after a few months, the cost per acquisition was too high and not worth pursuing further. If we had concentrated all of our digital marketing solely on Google Ads, we would have seen little to no return from our efforts.
However, because we had diversified our efforts by also utilizing SEO and content marketing, we could maintain our momentum despite the setback. This diversification of our digital marketing strategy allowed us
David Rubie-Todd, Co-Founder and Marketing Head, Sticker It
Proactively Monitor and Audit Data
In my experience, the most effective way to manage risk is to be proactive.
For example, when I was working on my start-up, a big part of my job was figuring out how to make sense of all the data we were collecting. With so many different sources of data, it was hard to know which information was accurate and which wasn’t.
One thing I did was set up a system for constantly monitoring and auditing our data sources. That way, if there was ever a question about whether or not something was accurate, it would be easy for me to find out if it was true or not. It also helped me keep track of how often we were getting new information from each source—which ones were updating more frequently than others? Which ones were more reliable? This helped me decide how much weight each source deserved when making decisions about what would go into our products.
Rengie Wisper, Marketing Manager, SupplyGem
Avoid Risky Investments
As a seasoned professional, I’ve encountered situations where corporations might choose to avoid undertaking tasks that carry unacceptable risks.
Our organization carefully considers options, such as a former chemical manufacturer’s site for a foreign subsidiary. Even though alternatives were scarce, we declined because of environmental dangers and cleanup liabilities.
However, avoidance isn’t always possible. We’ve had to suspend business travel because of hijackings. International trade may be lost if risks are avoided.
From my experience, risk avoidance involves intentionally avoiding losses by refusing certain actions. In-depth risk evaluations have shown considerable investment concerns in my experience.Our business advisors advised against it, noting the risk-management benefits of not investing. This strategy emphasizes our company’s stability and future.
Tim De Visser, Founder, Karpatia Trucks
