Risk is the dark matter of your startup universe: you know it’s there, but you can’t see it. And despite your detailed business plan (and constant anxiety), it exerts a steady pull that biases your decision making and impacts your outcomes.
As a small company whose mission is already inherently risky, it’s easy to throw up your hands and say “that’s what we signed up for”. But that’s like ignoring your cash needs because “startups are always run on a shoestring” — maybe so, but you still have to figure out how to make payroll. In both cases, you need to address the basics now, and you can add more sophistication as you scale.
Every established industry has its own standards and processes around risk management, and the literature is vast (and pretty dry if you’re not a risk nerd). Rather than attempt to summarize the entire space here, I’ll suggest a few interesting links: a nice overview from HBR of various considerations and approaches; the FAA Risk Management Handbook, which is usefully tactical, specifically addresses emergent situations, and highlights the importance of human factors; and a DoD Risk Management Guide, with some good examples of simple, formal tools for quantifying risks.
The references above can be discouraging, however. Your small team may not have the bandwidth for a deep dive across all the different sources of risk you face, and the frequent twists and turns of an early stage company can quickly render a carefully constructed risk analysis spreadsheet irrelevant. But like many other things that your team deals with at this stage, some common-sense practices can go a long way towards making your company more risk-resilient. Below are six tactical, low-friction approaches to start incorporating risk into your thinking.
To paraphrase Steve Blank’s observation, a startup is an experiment. Especially at the early stages, you’re confronted with a large open-ended set of problems. Not just the solutions, but even the means to reaching the solutions can be unclear. As you formulate a roadmap, it makes no sense to assign a date to a milestone that you don’t yet know how to reach. The simplistic approach of adding contingency time actually makes the situation worse — you’ll take longer to realize that you can’t meet the deadline, but you’ve given yourself a false sense of security at the outset.
You can only truly assign a timeline to milestones that are actionable. “Develop New Technology A — 18 months” is not actionable. Instead, formulate the task in terms of proving or refuting a testable hypothesis: “Determine whether use of Material B with Manufacturing Process C can improve product efficiency by at least 35%”. The technical team now has a clear, actionable directive to design and carry out an experiment. And the risk involved (that the technology may not live up to its promise) is clearly stated on the roadmap rather than being papered over with 3 months of contingency time. And of course this applies to all departments, not just engineering.
Structure your roadmap around a logical sequence of these experimental milestones based on your highest priority open-ended questions, and you will drive the company in the direction of lower risk.
It is common in developing company-level plans to assign each department head or team lead the responsibility for planning her own group’s activity. These sub-plans are often then aggregated with cursory adjustments to synchronize schedules, and memorialized as the plan of record. But different managers may have different appetites for risk, and — more importantly — this process can easily miss interactions in risk across departments.
Start at the top, and define clear company objectives. Propagate these down to a logical, consistent set of second tier goals for each department or team, and do a gut check. Is anyone queasy about the timing, or budget, or headcount that they’ll own? Now is the time to sort out any differences, and see where one department can help de-risk another. Compare knowns and unknowns, and areas of high and low confidence across teams.
Look for a global rather than just a local optimum. Can the product roadmap be reordered to help business development with price discovery? Can operations add a local contract manufacturing option to simplify the first product release? Rinse and repeat until all stakeholders are satisfied.
Your company requires internal processes at every stage, and an ongoing challenge as you scale is to constantly evaluate whether you’ve outgrown the ways you’re accustomed to doing things. A simple spreadsheet is fine to plan activities and track progress for three people, but a disaster for thirty. (My team migrated to Wrike to manage many of our workflows a few years ago and never looked back.)
The best process — whether it’s for bug tracking, purchase approvals, or ordering office supplies — is the one that fits your needs right now. But simply having the discipline to define one and stick to it puts you on a track towards reducing risk. There are a few basic features a process needs to have to avoid dropping the ball:
Nobody sets out to create silos in their company, and when the entire company can fit in one small conference room it’s easy to assume it won’t happen to you. But each member of a small team likely has a broad area of responsibility, and may not prioritize communicating or documenting what they’re doing. Furthermore, among a team of peers it can feel nosy to dig too deep into someone else’s domain.
But an explicit policy of transparency makes everyone’s actions auditable, reducing the risk of miscommunication or serious blunders. High-performing teams find a way to check their egos at the door, create a cultural expectation that plans and work products are documented and visible to others, and understand that questions from coworkers provide a valuable review function.
There is a growing recognition that hiring diverse teams is not just good for society, but also creates measurably better business outcomes. Monocultures are prone to blind spots that result in unexpected failures — everything from soap dispensers that don’t recognize dark skin, to seatbelts that are unsafe for women, to pharmaceuticals that have different side effects on different ethnicities.
As hiring managers know, it can require more effort to get diverse candidates into your hiring funnel. But it’s abundantly clear that the effort is worthwhile.
When you’re developing a new technology (and the business around it), there’s enormous pressure to live up to claims that it will be “disruptive” or “revolutionary”. It’s probably been pitched that way to investors, the employees you’ve recruited, and the customers who have placed pre-orders.
So it’s understandable that the first time your prototype demonstrates its true potential — twice as good as the next closest competitor! — there’s a temptation to start framing your commercial plans around your “breakthrough”. Customers will pay a premium for this performance! This opens up whole new market segments for us! We’ll grab 20% market share in the first year!
Leave the champagne in the office mini-fridge for now, and ask yourself the following questions:
Suppose you learn that you need to decrease the maximum power to operate in high ambient temperature (-10% performance); the housing needs to be thicker to survive accidental drops (-5% performance); the manufacturing cost estimates were too optimistic (+25% cost), and you need to use cheaper materials (-15% performance); UL is requiring a thicker insulator that hurts your thermal management (-10% performance); and wow, it sure is easy to damage a product in shipping (+10% cost).
At the end of this litany of downside surprises, you have a product that performs only 10% better than your competition, and at 35% higher cost than you expected. Your value proposition is weak at best. You mistook the multiple rosy assumptions you made about the practical details of your product, and the significant downside risks they masked, for superior technology.
Consider stress-testing your assumptions about costs, product performance and market conditions to see if your business model makes sense under real world conditions. And be a fanatic about validating your assumptions early on.
The suggestions above shouldn’t add much to your workload — they’re mostly about bringing an explicit risk-reduction mindset to things you need to do anyway. They can reduce the chaos that drives reactive thinking, freeing you up to plan your next phase of growth.
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