Just how risky is it to start your own business? In the next few posts, I’ll discuss the various types of risk startups face, and explore some ways to mitigate those risks.

Financial risk. The prospect of losing money is the most obvious type of risk startups encounter. Of course, not all money is created equal in the eyes of a founder. It’s always tough to lose your own money. The only silver lining is that when you lose your own money, you don’t impact relationships with investors (relationships with husbands / wives / kids is another story…). Losing money for investors who are friends or family members may be the roughest of all. There’s nothing quite like the joy of attending a family or college reunion and making small talk with an investor who bet on you and lost. Here are some ways to mitigate financial risk:

• Build the business in phases, with budgets and milestones. For example, tell yourself and your investors that you’ll spend 3 months and $50K to build your prototype, and stick to those goals.
• Track expenses. One simple way to do this is to use a separate bank account and credit / debit card.
• Make sure everyone involved is aware of the risks, and can afford to lose the money they’ve put up. That includes spouses and kids, as well as investors[1].
• Keep investors up to date on progress and setbacks so there are no surprises. Try sending a monthly email report, with information about each important area of the business.
• If things are going to hell in a handbasket, consider exit options that will return at least some of investors’ money, like selling off assets, or closing down the business while there’s still some cash in the bank.

 

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[1] Startups typically demand that investors are “Accredited”, which means they are aware of the risks, have a minimum level of income / net worth, and are investing an amount that won’t put them out on the street if its lost.