The Guide to Key Startup Risks and How to Manage Them

Launching your startup might be one of the most exciting steps you can take in your career. However, it can also be stressful due to all the unknowns and the high failure rate.

Icanpreneur is on a mission to give entrepreneurs better chances of achieving market success. We studied the most common reasons startups fail. Fortunately, many of those risks can be assessed and mitigated.

In this article, we will go through the most common risks for startups and techniques to mitigate those risks. In this way, you can feel more confident about following your dream. Let’s start!

1. Lack of Demand

Building a product that insufficient people need is one of the most frequent reasons startups fail at their earliest stage. Many early-stage companies built amazing products for which there was no need. Sadly, many companies cannot recover from that as they have already invested too much in building the wrong product.

Reasons

• The startup team is too focused on building the solution instead of validating the problem. Sometimes, we find a hammer, and everything looks like a nail. Other times, the industry generates a wave of enthusiasm that new technology will answer all our problems without considering the market demand.
• False validation from asking about people’s opinions rather than researching their underserved needs
• A valid problem that is not significant enough for potential customers to purchase.

Mitigation

• Conduct proper customer problem interviews to identify and specify the problem your potential customers are dealing with. This will inform you about the importance of the problem, the existing alternatives, and the needs of the underserved.
• Identify a customer problem that is worth solving before diving into the solution.

2. No Differentiation

You need a clear differentiating strategy when targeting existing markets with established leaders. Simply building “a better” or “a cheap” product is not enough, as customers will stick to the established solutions unless there is a compelling reason to switch.

Reasons

• Penetrating a market with a product no different from existing alternatives has a high chance of failure. Even if the product has a few delighters, customers will always prefer a more established product or just the product they are used to.
• Developing a novel product that competitors can easily copy is another recipe for disaster. If you start with a few killer features, market leaders will quickly try to catch up.

Mitigation

Developing strong and defensible differentiation means working on your unfair advantage and unique value proposition. The unfair advantage is your secret sauce, which makes the product or service unique, and nobody can replicate it. The unique value proposition is your promise to the customers that you can solve a problem for them in a way nobody else can.

3. Flawed Business Model

The most important objective for a company is to create value for customers and, through that, capture value for itself. This is exactly what a business model describes, and developing a solid business model is a critical step in building a successful product.

Reasons

• Some products solve an important problem well without proper monetization. For example, if you create an amazing product and your total addressable market is 100k customers, an ad-supported business model might not be a viable option, as you don’t have the volume to generate meaningful revenue.
• Overestimating the market size might be another reason to choose an inappropriate business model for your product. This can happen when over-relying on market research, which often ends up being too generic to be useful.
• Incorrect pricing, meaning overcharging or undercharging for your product, is another reason not to fully leverage your business's potential.

Mitigation

• Review the most appropriate business models for startups and pick one that fits your needs. Remember that no best or worst model exists; each will work in given circumstances. The right business model for you will probably combine those we listed on our blog.
• Creating your business model in isolation in your office doesn’t work. It needs to be grounded in real-world data. This is another benefit of conducting customer problem interviews with your potential customers. By exploring their existing alternatives, you will gather data points about competitors' business models and whether they should differentiate on that level or follow suit.

Business model innovation is one of the strongest ways to disrupt a market, so give it a good thought. A business model is harder to change after a while, so spending more time analyzing it is justified. Look at some business model innovation examples for inspiration.

4. Burnout

Building your startup can be mentally and physically taxing. It’s a long run with many ups and downs. Many entrepreneurs put everything into the startup, and the stakes are high.

Reasons

• People have different tolerances for how long they can stay outside their comfort zone. Beyond this individual threshold, this experience ceases to develop and becomes detrimental.
• Entrepreneurs are often spread too thin between many competing priorities. Multitasking can limit the sense of achievement and progress and reduce the positive feedback work from putting in the effort.
• A chaotic environment can be stressful for some people. Startups are often subject to big and sudden changes due to discovering new information, market shifts, industry disruptions, and others.

Mitigation

• Work on a problem you are passionate about solving. If the goal of your startup is to generate revenue, you might quickly find your motivation diminishing. If you work on something deeply connected, you have a strong reason to persevere and overcome hardships.
• Following a structured approach to entrepreneurship can reduce the psychological stress of the journey by providing clear steps and guidance at every step. We listed the best ways to validate your idea to help you pick the best one.
• Participating in entrepreneurial communities is another way to find support and motivation. You will get peer support and the opportunity to expand your network with contacts in the future.

5. Growing Too Fast or Too Slow

There are many growing pains, most of which involve growing too fast or too slow.

Reasons

• Unable to keep up with the demand. Most companies will be thrilled to have this problem, but it can cost your business success. This is a typical problem for hardware-related products like Tesla 3 that couldn’t keep up with the incoming orders. The reason is that physical production is hard to scale overnight as opposed to software products.
• Premature scaling up. Other teams start thinking big before dealing with product validation and achieving product-market fit. Investing in big support or sales teams to prepare for an upcoming customer surge often results in underutilizing talent and burning cash.

Mitigation

Lean principles have traditionally been used in manufacturing but are becoming increasingly popular in startup companies. They focus on progressing to product-market fit and scaling the product only when necessary, with minimal resources but without sacrificing speed and efficiency.

6. Overdependence on Early Customers

Are you a product or a project company? This might be a billion-dollar question for your company. Companies that offer one-off customizations in their products for customers are on a slippery slope to becoming service providers. Service providers scale significantly slower as they scale linearly with their employees.

Reasons

• Pressure from investors or ending runway to get first customers and willingness to walk the extra mile to win a new customer.
• Lack of strong product strategy for product teams to follow.

Mitigation

• Focus on homogenous customer segments with a common problem and similar needs. Getting different requirements from each customer might indicate a too-broad customer segment.
• Based on the validated business idea, develop a strong business strategy and ensure it’s communicated across the board. All people, from sales team members to customer support, must be aligned with the direction of the product.

7. Lacking the Right Team and Expertise

Building the right team for your startup is both crucial and challenging. A strong team directly influences your ability to innovate and grow. Startups with diverse and skilled teams are significantly more likely to succeed than those led by individuals alone. In the initial phases of your hiring process, it’s essential to select team members who possess a diverse set of skills. Selecting candidates who can multitask and contribute in areas outside of their core expertise is also important.

Reasons

• Many startups have difficulty finding the right candidates with the necessary experience and skills. This, in turn, usually leads to gaps in the team's core expertise.
• Hiring individuals who don’t fit the company culture can create friction and disagreements over goals and visions.
• Poor management practices can lead to employee lawsuits, adding another layer of risk to your hiring decisions.

Mitigation

• Establish effective HR practices, including thorough screening and interviews, to ensure you select the right candidates.
• Look for candidates with a proven track record in their fields. Their prior achievements can enhance your team’s overall performance.
• Ensure that all team members understand the company’s vision and goals. This alignment helps minimize conflicts and keeps everyone focused on shared objectives.
• Check out the tips for creating a winning startup team from Vesko Kolev, Founder and CEO of Icanpreneur:

8. Funding

Are you relying too much on a single funding source? This could be a critical question for your startup. Many businesses mistakenly think securing Series A funding will solve all their financial problems. However, this dependence can lead to significant risks if that funding runs out or doesn’t come through as expected.

Reasons

• Startups often start with limited capital options and minimal funding from personal savings, family, or small loans, leaving little room for financial flexibility.
• Unpredictable revenue and high expenses can create cash flow issues, making it hard to meet financial obligations.
• Many startups depend solely on venture capital or angel investments, which can be risky if those sources dry up.
• Unrealistic revenue expectations can lead to overspending and increased debt, putting additional financial pressure.

Mitigation

• Diversify your funding and explore various avenues, such as crowdfunding, grants, and loans, to reduce your reliance on one source.
• Create a solid financial plan and forecast to understand your cash flow needs and prepare for future funding rounds.
• Monitor cash flow regularly. Consider hiring an in-house accountant to help manage your books effectively.

If you want to learn more about financing your startup business, read our blog post on startup funding rounds.

Wrap-Up

At Icanpreneur, we believe that entrepreneurs can transform their ideas into successful ventures with the right strategies and insights. By equipping yourself with knowledge about potential risks and how to manage them, you can enhance your chances of achieving market success and ultimately follow your entrepreneurial dreams with confidence. Remember, every challenge presents an opportunity for growth—embrace the journey!