The Downside of a Wrong Turn
Strategic Risk Management at Startups
“If trouble comes when you least expect it then maybe the thing to do is to always expect it.”
― Cormac McCarthy
Do you know your risk tolerance? Try taking a hike on one of the most dangerous trails in North America. Angel’s Landing in Zion National Park is notorious for the treacherous route it takes on the knife’s edge between two cliffs. Nine people have fallen to their deaths on this route. I hiked Angel’s Landing in 2019. A scary and exhilarating trek, I found myself thinking about the risk of mistakes, which invariably led me to think about startups.
How should startups consider the downside of a wrong turn? Startups should create a risk mitigation strategy as a component of their core business plan — before a crisis hits. Proactive risk management driven through leadership goals improves the chances of the upside that all startups seek.
My Wrong Turn Startup
I joined one of my previous startups to build the product and engineering teams. We were angel funded and had just enough cash to hire a bare bones product development team. Once we got our first product to market, the “upside plan” imagined, we’d certainly close a Series A funding round. We went from a clean sheet of paper to a first customer in six months and had about three months of cash left. We spent the better part of that time iterating with customer number one and beating the bushes for proof we could attract more customers. We talked to every VC that might have interest in our space. Nobody ponied up. Running on fumes, we did a layoff and gave ourselves a pay cut.
Startups fuel themselves on capital. First from investors, then customer revenue, which opens the door to more investment. We had failed to manage downside when these things didn’t happen. Within a year most of the executives had left the company.
Let’s sort through the risks to see where we took a wrong turn, in sequence:
- Failure to identify a value proposition that resonates with the market
- Failure to get funding
- Inability to grow staff to operating scale
- Key employee retention risk
The real story is more complicated than this, but this is generally the set of risks we didn’t manage well. We focused on #2 but didn’t get #1 right. Rather than change the product to fit the market, we worked to find investors who would invest in what we had built. This reveals a bias called escalation of commitment and it is a startup challenge that I’ll likely talk about in a future article.
We Love to Focus on the Upside
Startup leaders are in sell mode from the beginning, working to help other people imagine the upside potential of their vision. Their focus is creating and articulating a strategy and plan for success. Getting momentum off the starting blocks requires selling in investor conversations, customer pitches, and recruiting calls. Coffee chats with network connections are frothy with the potential of the idea, the plan, the upside!
Getting Punched in the Mouth
But things so often go sideways. Startup leadership teams should have an aligned perspective of the risks they face, their probability, and actively manage them with the same probing tenacity they do their product development plans. If they do, they will be more likely to predict and duck a risk.
“Everyone has a plan ’til they get punched in the mouth.” — Mike Tyson
I’ve always loved this quote. I’ve been deeply involved in teaching and participating in fight sports for decades. New students to the mats are understandably apprehensive about their safety. They know there are risks but want to participate. Most of them ask if they will get injured. Yes. If you train long enough and hard enough you will get injured. We seek to reduce the downside of this guaranteed risk by mitigating with some basic steps.
Wearing your Startup Mouthpiece: Downside Planning
Startups have business and financial plans that assume positive outcomes like percent of TAM they can attract, customer willingness to pay, why their special sauce is somehow untouchable by competition, ability to clear regulatory hurdles, or reduced costs over time. They review, dissect, and pivot as they imagine upside. Having a plan for downside is as important as your upside plan.
Proactively managing your downside strategy allows you to be more ambitious about your upside strategy.
You can be a lot more aggressive on the mats when you don’t have to worry about losing your teeth.
Leaders play a key role in setting the tone and approach. The tone of the big idea should be positive and motivational, but must leave open the probability that the big idea will evolve as the team learns, discovers, and stumbles over obstacles. Often overplaying their confidence, leaders may come across as utterly convinced that the big idea is perfect in its inception. This can have a chilling effect on debate and discovery of risk.
Imagining the risks that can sink your startup requires you to accept that your plan is not infallible.
Attack the Risk Before it Attacks You
Plan a quarterly risk bash with your leadership team. Keep a list of your risks, prioritize them based on probability and impact, and assign the biggest ones to those leaders who have incentives aligned to correct them. People focus on incentives. Set goals specifically targeting those risks your functional leaders should be managing.
The Risk Bash
- Invite your leadership team to a risk brainstorming session
- List the risks
- Give out five votes to each participant and vote on those you individually consider most significant to the business
- Sort the risks based on votes to see how aligned you are
- Debate where you see disagreement on priorities. Adjust as you learn.
- Go through the risks and estimate severity of loss potential. This is the downside to the business.
- Estimate the probability. This is the chance you guess the risk will emerge.
- Score the risk. Risk = probability * severity of loss
- Assign the biggest risks to the most relevant org leaders.
Here is a shared Google Sheet you can use as a template for your risk matrix.
Leadership Goals: Upside and Downside
Goals are generally focused on upside. People focus on incentives. By adding risk management into goals, you’ll get focus there too.
So, when you are selling your next candidate and they ask you about risks, don’t pivot back to your sales pitch. Tell them about your risk management strategy. You’ll build trust and confidence. And you’ll gear them up to fight hard without worrying about losing their teeth.