We know that 90 per cent of all startups fail, and failure is most common in years two to five. It is a no brainer that startups are risky businesses. But we were keen to find out what the perceptions of risks are from the people on the ground running startups.
We recently ran a poll to find out what keeps businesses owners up at night and what they are looking out for to ensure they stay on track of their plans for the year.
The results are in. Tied in first place are fundraising and execution risks. Talent risks came in third place. Let’s explore what these risks entail and what founders need to look out for.
Perhaps it was no surprise that fundraising risks topped the list. A lot of founders spend a lot of time fundraising. Fundraising usually becomes a big part of a CEO or founder’s job every one to two years and is crucial to keep the business afloat with runway in order to keep operating. Understandably, once funding runs out, the business reaches a grinding halt; a massive risk to the company.
There is so much involved with fundraising, and many areas where things can go pear shaped. Founders need to learn to anticipate the length of time it takes from fundraising to actually getting the money in the bank. That timing is crucial to take the company to the next milestone to live another day so to speak.
Founders also need to learn how to pitch to investors, how to master the art of storytelling through their pitch deck. That’s the first step to opening the conversation with potential investors.
Fundraising is a time-consuming task that can be mentally draining. Some liken it to dating where you need to cast your net far and wide and spend a lot of time getting to know the potential partner on whether it will be a good match. The 30-10-2 rule is a good example of this.
According to this rule, you need to find 30 potential investors who are willing to invest in the business. Only 10 out of the 30 investors will show interest in your business proposal, and only two out of the 10 will actually invest. It’s a numbers game and emotions will go up and down during this period. You need nerves of steel and the ability to move on to the next investor when you face rejection.
As startups move up the chain in the stages of pre-seed, seed to series A, B and beyond, the types of investors change from family and friends, angel investors, to accelerators, VCs and other institutional investors. There are different expectations and demands by investors as there becomes more at stake. Founders need to show existing and potential investors that they are proving their worth. This comes all down to execution, and perhaps interestingly why execution risk was voted in a tie at first place.
The value of a startup is an important factor in its success. The definition of success can be anything from the ability to raise more funds to continue on, creating a great product or service that addresses a market need or pain point, to having happy customers. Whatever the definition of success is to the founders, it mostly relies on the company executing on its goals.
Execution is a pretty big word as it can encompass the product strategy, the people strategy, fundraising strategy, customer service strategy and so forth. I understand execution as ‘doing-what-you-say-you-are-going-to-do’. There are many factors that can derail companies from achieving what they say they are going to do. Some of this is external and out of your control.
Take COVID-19 for example which has basically grounded international leisure travel. That would be a huge element for many companies in the travel industry in being able to execute on their strategies. Companies have had to pivot and find a new way forward to continue executing with headwinds.
I can imagine that the challenges COVID-19 has thrown at everyone might have been a factor to execution risk being ranked in the top spot. Startups don’t have the luxury to take their time to test out new ideas. If something is not working, they need to find another way.
That could mean iterating or pivoting and getting a minimum viable product out into the market to retest. The risk of not finding another way to execute your vision could be detrimental. It requires being agile, thinking on your feet and not resting on your laurels.
Talent risks were voted as the third highest risk for startup founders. This is a risk that can also be linked to execution. One can argue that if you don’t have the right talent in place you can’t execute on your strategy. Attracting talent can be difficult for startups. Whilst the proposition of addressing a big pain point and working with passionate founders can be an attractive proposition to candidates, for young startups, prospective candidates may be concerned about the long-term sustainability of the company.
Startups don’t have the luxury to get talent acquisition wrong. The cost of poor recruitment can be extremely high not only from a financial standpoint, but if the candidate is not the right fit, they can potentially slow the company down or take the company in a different route which is possibly even more detrimental. Understanding your employer value proposition and defining a clear employer branding message can help attract the right candidates.
There is also a risk associated with the founding core team. Disagreements between founders over topics such as finances or the direction of the business can be very destructive and affect the longevity of the company. Having a founders’ agreement can help minimise the probability of disputes about ownership and responsibilities and providing equity that vests over time can potentially reduce the risk of losing the founding team.
Whilst this was not brought up during our poll, I believe that the mental health risks of founders need to be taken into consideration too. There is so much riding on the shoulders of founders and there is only so many hours in the day. Not only are they overseeing business activities to ensure they stay afloat, but they are also planning for growth and have many stakeholders to manage. I think it’s important for all founders to ask themselves whether they have the support they need.
Building up a support network whether it is within the company, or looking for external help such as a mentor, coach or even an advisory board can help tremendously to provide direction on how to balance your time as the company grows. There are so many things that can go wrong and weigh down founders. It’s all about prioritising the risks and making sure you have a risk management plan in place.
At Anapi, we’re on a mission to help founders transfer some risks to insurers so that you can continue building an awesome business that transform the world around us. We collaborate with many insurers to offer innovative insurance products that are purpose built for startups.
Editor’s note: e27 aims to foster thought leadership by publishing contributions from the community. Become a thought leader in the community and share your opinions or ideas and earn a byline by submitting a post.