Most people think starting a business is about taking risks. But really, it's about mitigating risks to the best of your ability. The best founders understand the risks their business will face, and turn them into opportunities. There are four key risks every founder must navigate: 

1. Demand risk: Is there a real market for your idea? 

2. Market risk: Can you compete sustainably? 

3. Financial risk: Will your business be profitable? 

4. Operational risk: Do you have the right skills to execute?

Let's dive in...

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Demand Risk:

‍Are People Willing to Pay for Your Idea? Ask yourself these three questions: 

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1. Is the problem worth solving?

There should be a reason that someone wants to buy something. And that’s typically driven by a need or want. Think Uber (getting from A to B reliably and affordably), Canva (creating pro designs without a designer), or Airtable (building a database without coding). Each of these solutions are excellent but not for everyone. Which leads us to ask… 

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2. Are enough people facing the problem? 

If the problem is worth solving, you also need to ask whether enough people face the problem. Essentially, you’re working out your market size. The best space to play in for a startup is finding a small enough niche where there is a customer need, too small for a major player to think worthwhile to pursue. Solving a problem that millions of people face will likely be solved by a large company and at scale that you may not be able to compete with. If you are building a product, try not to solve every problem for everyone. Find the niche problem you solve and solve it well. 

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3. Are those people willing to pay for a solution?

Just because there's a problem, and enough people face it, doesn't mean they are willing to pay for it. A good example of this is putting together flat-pack furniture. Lots of people hate it, lots of people face the problem, but not many would be willing to pay someone else to construct it for them. 

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Market Risk:

This is best summarised as your ability to compete sustainably with other players targeting the same persona. Consider Porter’s Five Forces: 

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1. Supplier power: the number and competitiveness of suppliers. The greater number of suppliers who are competitive, the easier it is for you to get better pricing. 

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2. Buyer power: how easy it is for your customers to push down prices or expect better quality. If a consumer sees lots of options and there is no pull to a particular brand, they have lots of power. 

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3. Threat of substitutions: too often, founders rush the competition analysis process. To do this properly, you need to go through the process of buying and using your competitor’s product. Understand how they find and acquire customers, how they have built their customer experience and what persona they’re going after. 

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4. Threat of new entrants: if your business is hard to get into, it means you’ll have a high barrier to entry. But the greater difficulty you experience starting your business, the harder it is for new entrants to enter the space too.

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5. Competitive rivalry: the interaction of buyer power, supplier power, threat of substitution and new entrants Ideally, you want to build a business where you have an advantage on at least one front. Don’t be swept up being in love with your idea - do the analysis upfront. 

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Financial Risk:

This regards the sustainability of your business. The best way to do this is bottom-up: start with your costs and build yourself a small financial model. The three most important equations to work out are: 

1. Gross profit: (sale price per unit x units sold) - customer acquisition cost - cost of goods sold

2. Net profit: gross profit - fixed expenses

3. Net profit per hour: gross profit / profit producing hours

Gross profit is the most important equation and should be informed by your analysis of demand and market risk. This number needs to be positive otherwise you’ll lose money as you grow. If you don’t have a good reason to be losing money as you grow, your business may have a short lifespan. You also want your net profit to be positive. If your gross profit is positive but your net is negative, then you may still have a business, but you need to figure out how to reduce your fixed costs in a way that doesn’t compromise your customer acquisition cost or cost of goods sold.

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Operational Risk:

The last risk to consider is determining whether you have the skills to start and run the business. We can break this down into: 

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‍Passion risk: you should be passionate enough about the business that you start and intend to run. There are lots of great founders who run great businesses because they love running the business, not necessarily running in the industry. Also, too often, founders fall in love with their solution and not with solving the problem. There will be times especially early on when you need to consider pivoting in order to solve the problem in a sustainable manner. 

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‍Skill risk: just because you can manage all the risks you see, doesn’t necessarily mean you're the right person for the job. You also need to be incredibly detail-oriented, especially when it comes to operations and finance. Your bright idea may fall over if you don't build systems, standard operating procedures, build budgets and instil discipline in making and spending money. 

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‍Productivity risk: this comes back to having the skills to run the business, and the ability to implement automation to make the business as efficient as possible. The best businesses automate the most time-consuming tasks that don’t add obvious customer value. They also understand where the best leverage is when it comes to making and spending money, and spend as much time as possible optimising the business so that it’s as profitable as possible. 

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Are you ready to start your company?

Having the right financial tools from day one is crucial. Emerge gives you a smarter way to manage your business money—set up an NZ account, issue debit cards, and give your team the power to spend, all in just 10 minutes. It’s everything you’d expect from a bank—only faster, smarter, and built for businesses like yours.

If you are interested to learn more, book a call with our sales team, or sign up for free.