Starting a business appeals more than ever as the proverbial “iron rice bowl” and stable lifelong employment no longer exist. For many millennials who eschew a 9-6 schedule in favour of flexibility, a freer culture and the opportunity to pursue their business dreams, the world of startups calls out to them. We examine the risks that startups experience.
When it comes to technology, Silicon Valley with its billionaires-in-sneakers-and-jeans image has popularised the lifestyle of tech startups. These startups require less capital to set up, are often managed from home offices and yet promise great global influence in the event of success – think Facebook and Instagram.
Asia is also not immune to the startup wave. Cities like Seoul, Singapore, Beijing and Shenzhen are all competing for a slice of the tech startup pie, with governments pulling their weight to fund hackathons and incubation programmes to develop programming talent and nurture promising innovations.
Large corporations are establishing their own labs and partnerships with startups. However, as these small tech firms mushroom, they are seeing their share of failures – it is estimated that only 1 out of 10 succeed.
Teething woes
For an early stage startup, it is vital to identify a product market fit as soon as possible, and it often takes a while and a lot of tests to find out what exactly customers need. Mr Yujun Chean, Co-founder of P2P car insurance firm insbee notes that in contrast to corporates which have achieved product market fit and face the risks of startup disruption, tech startups need to identify and create a minimum viable product that addresses and solves an existing problem or need that is economically substantial to justify raising funds or capturing market share.
Ms Val Yap, a founder at mobile insurance marketplace PolicyPal, said technology itself could be a key risk for a tech startup, given the myriad of available platforms to choose from. “Although planning a detailed tech roadmap at the start is essential, one should remain open to changes as the startup grows. This is to ensure that your tech development is constantly able to meet the demands from your rate of growth, be it users or data,” she noted.
Human resources issues are a major concern highlighted across startup founders. Mr Chean notes that given how small startups are at the beginning, a wrong hire has a disproportional impact on success compared to large corporations, with bad team dynamics often cited as a key cause for a startup’s
failure.
“Getting the founding team aligned on core values and practices is very crucial from the onset, as it will set the foundation for the company’s culture in years to come, which will directly impact the success of the company,” he said.
The HR problem can essentially be a “key-man risk” in the case of startups – because the founder/co-founder is in charge of everything – and the firm could be out of business if that one person is ill or in an accident, said Mr Jianggan Li, a founder & CEO of early-stage investor and accelerator Momentum Works. Larger companies tend to have established procedures to mitigate such risks with processes that are better documented and distributed – not so for startups.
Mr Li also cited other examples like intellectual property risk and product liability. Startups work on specific IP, which is sometimes the only thing they have of real value, and when it comes to new products, they run trials where things can go awry. With stolen IP, startups often find it hard to recover from such events, and tend not to have the strong legal background to deal with liabilities.
The funding issue
Earlier this year, a survey conducted by online LetsVenture, an Indian site which connects startups with potential investors, and startup accelerator Axilor Ventures revealed that funding is the primary challenge for three out of four early-stage startups in India, resulting in too much focus on fundraising instead of building their business.
Not just funding amount – the question of which investor to work with is also tricky. Ms Yap said that when one is a pioneer in a niche market, the ideal investor may neither be the person who provides the highest funding, nor the first one who approaches you. “It is of utmost importance that each investment philosophy is fully understood before agreeing to any offer,” she said.
As a startup expands, which means the product market fit has been achieved, cash-flow continues to be an issue to keep a tight rein on, given that most tech startups are still hardly profitable and dependable on venture capital funding, said Mr Chean.
“Without a strong financial controller in place, it is easy to overstretch in hiring in order to pursue opportunities which results in a high burn-rate and a real crisis if the opportunities don’t pan out. It is also important not to raise excessive funds (more than you need), as it can breed ill-discipline in spending and can lead to lack of focus because you are not at risk of ‘collapsing’ anytime soon,” he said. He warned that once a prudent culture is lost, it is difficult to be restored.
Risk management on tight resources
With a small setup, it is understandably difficult that tech startups will find it hard to devote sufficient resources to risk management.
Ms Yap is a firm believer that the entire team should embody risk reduction in each of their areas or collectively, and holds tough discussions with her team on key risk areas. People risks, one of the key risks across all startups, are reduced in her case by pushing the team to know each other outside of work, to encourage them to build team spirit.
When it comes to investors, she notes that it is key to understand their philosophy while being open to ideas but maintaining alignment between the startup and investors’ vision for the startup.
Watch it while expanding
As the startup grows, it may find that it allocated all its equity to co-founders (who may then leave) at the birth of the business and then lacked the equity to give to key hires and investors later, which severely hinders growth.
This is one of the top three reasons for failure, according to Mr Mike Cagney, CEO of an online personal company that provides student loan refinancing, in an article on Inc. magazine. “You should allocate 10% among each of three co-founders initially and leave the other 70% unallocated. If you have a big pool, you can give it out based on value creation,” he said.
Nonetheless, as startups get larger and wider-reaching, there comes a point where the startup has to find an ideal sweet spot for steady state success as some competition cannot be beaten. Even the best have limits.
Uber has decided to sell its China operations to Didi Chuxing, the local ride-sharing company while Google and Facebook have yet to dominate in markets like China, Russia and Korea, where the local incumbents still have an unassailable presence.
Mr Li said: “Strike a balance between the risks you want to take and those you want to mitigate – the truth is it is impossible to mitigate all risks when things are so uncertain; it is also stupid to not do anything more as you do not want your company to fail.”