Use A Risk Management Plan In Your Startup Funding

When starting a new business or company, it’s easy to focus more on the positives of securing funding and growing it, but what about mitigating risks in financing and for the future?

Whether you are a fledgling startup, a growing SME, or even a booming multinational, you should have a risk management plan. It will help you continually figure out how to identify, react, and adjust to whatever curveballs come in your direction.

Unfortunately, one of the areas that business owners continuously dismiss in their business plan is the articulation of potential business risks. It either suggests one of three things:

  • That you have not thought through about all the risks inherent in your startup venture
  • You don’t believe any risks are facing your business (untrue)
  • You are intentionally avoiding disclosing risks

Failure to disclose potential risks is not the best way to secure funding for your business. In fact, it makes the job of a potential investor or lender that much more difficult.

What Is The Risk Management Plan?

The risk management plan is a document detailing an organization’s risk management process or approach. Risk management refers to the process of identifying and assessing risks and taking steps to reduce them to acceptable levels. The risk management approach determines all the processes, tools, techniques, and team roles and responsibilities in a startup or project.

As a new business proprietor, you must prepare a risk management plan to address risks, their potential impact on your startup, and how to reduce them.

You should structure your risk management plan to identify, assess, and mitigate potential risks that can impact the overall business life-cycle funding, scheduling, and performance.   

You start the risk management process by creating a stakeholder team across your startup to review potential risks. The team should consist of all senior management, compliance officers, and department managers. If you are developing software, then you must include a project manager from each team to review the project management and respond to risks.

The risk management process must include a review of business objectives as well as risk identification, assessment, analysis, tolerance, and mitigation.

Applying Risk Management To Tackle Risks Of Growing A Startup

Business funding involves both risk and reward. So whether it’s a lender or investor, their primary concern is balancing the risks inherent in your startup against the likelihood of a reward – usually increasing business value.

An imbalance occurs when you talk or focus solely on the opportunities inherent in your startup but ignore the risks. The fact is, funders understand that risks always exist in every business – with your team, products, customers, and suppliers. Therefore, from a funding perspective, it is imperative to understand the size and nature of these risks and how to mitigate them.

Your startup funders want to understand your business risks for two main reasons:

  1. They want to know whether the key risks associated with your business are fundamental enough to the investment proposition to prevent them from funding the venture. Sometimes, startups have not reached the right stage for external funding or placate funder concerns. Such startups are best off dealing with critical risk factors before they seek funding.
  2. The second reason is that funders need to understand your business model to enable them to structure the best funding package that works for you, despite the risks. This reason is more of an opportunity for you to use to prevent future risk eventualities from crippling your startup.

The primary reason why business owners fail to highlight the risks associated with their startups is the fear of underlining the weaknesses in their business. While it’s a legitimate concern, the only solution to get ahead of it is focusing on how you mitigate these risks, which is where a risk management plan comes into play.

Remember that funders back your leadership team first, and then your business second. The reason is that they realize that as the management team, you are ultimately responsible for delivering value and growing the startup for the benefit for all. For this reason, highlighting the risks in your business and coming up with a risk management plan gives you credibility in the eyes of your funders.

The fact is, most funders have enough experience in startups and business plans to instinctively know the risks to expect. Therefore, it is more telling when they hear everything from you first.

Non-Monetary Risks Of Building A Startup

When looking to finance the growth of your startup cost-effectively, you need to consider the real cost of capital associated with all your funding options. You need to figure out what is more important to you, whether it’s staying in control or protecting your assets. Some of the non-monetary risks associated with startup funding include:

  • Time spent seeking funding
  • Lost opportunities during your fundraising quest
  • The amount of personal risk you take
  • Your professional reputation
  • You put your personal relationships at stake
  • Emotional stress

Your risk management plan should consider the above non-monetary risks.

The Bottom Line

A proactive business risk management plan is the only sure way to future-proof your startup success. When done correctly, it may help drive revenue, secure new funding and markets, attract new clients, and secure your reputation and credibility. This “risk register” is never finished. It’s an active document that you update and consult regularly.

Want to learn more about risk management planning? Get your free 30-minute financial consultation today.

Adam Hansen