Guide to Operations Risk Management

There is no entrepreneurship without risk. To run a startup is to engage in an ongoing exercise in anticipating, managing, and being prepared to respond to risk. The most successful founders do this well, viewing entrepreneurship not as a business of taking on risk, but instead a journey of risk-mitigating. For a startup to grow into a long-term sustainable business, the decisions made in the earliest years to minimize risk are incredibly important, certainly when focusing on the day-to-day. Prudent founders often prepare to manage the most controllable risk factors in the company. To help founders best execute early on operational excellence, we mapped out an extensive guide focused on the value of adopting risk management strategies for internal operations.

The Importance of Operations Risk Management

Before detailing any strategy in particular, it’s worth identifying why operations risk management is so important integral. For almost every startup in existence, there are systematic risks that apply universally, which include geopolitical decisions and macro or microeconomic trends. Though any risk that falls into this category shares some variation of severity for each company, the risks are beyond the founders’ control. By contrast, operations risk is a form of unsystematic risk that varies in severity between each company and is almost entirely dependent on each founder's approach to arranging internal practices. If the company is sound operationally, less effort is diverted away from executing the core product and scaling customer acquisitions or partnerships.

Prioritizing operations risk management is also an attractive attribute for investors. Many investors hesitate to commit to companies that don’t have a firm grasp on operations. Being careful about the go-to-market, team dynamics and cash management, and enabling technology innovation, all lead to improved chances of securing funding.

Operations Risk Management Strategies

1. Conducting Thorough Market Research

Founders need to find a market. After the initial phases of ideation, market research is foundational to building lasting products with a unique product-market fit. Too often, entrepreneurs expect that creating something new automatically leads to high adoption, failing to account for the actual needs of customers.

The first and arguably most important part of market research is timing. If founders ignore the timing of a launch into a new market, the likelihood of entering too early, where nobody is yet asking for such a product or isn’t ready to adopt, or too late, where many other entrants exist, the difference between products becomes negligible and the markets are saturated, is high. To properly gauge the timing of a new startup, start by identifying macro and industry trends. For example, the CHIPS and Science Act, a US statute signed into law in 2022, incentivizes semiconductor enterprises to reshore operations from China within the next few years. There is now a strong demand for software to help automate manufacturing processes to achieve cost parity.

Next, determine and list available competitors, whom they sell to, and what each product or service entails. Do this at each stage of the company, from concept and early development to launch and scale. Founders that are highly aware of what competitors are doing can focus on a solution for the things they’re not doing. This leads to businesses that lead with differentiation, creating high barriers to entry with available talent, technology or connections, and sustainability, where the company is able to establish a new market standard or create a moat that has incremental value for customers.

The last measure, which is part market research and part sales, is validation of the product or service. At the earliest stages of development, getting open and honest feedback from potential customers, partners and investors validates the assumptions made after conducting market research. For startups developing more advanced technologies, the request for feedback extends to academics, researchers and long-time industry experts, as there is more to weigh when developing a highly specialized product that might not be commercially available for some time.

2. Fostering World-Class Team Dynamics

Though many early-stage venture investors stress the importance of the founders and hires, some skip attempting to fully comprehend the dynamics at play, preferring to judge on attributes that bode well on paper like titles and education. The founders might be each excellent in their own right, but startup success is largely determined by collective agility and collaboration. Founders that wish to assemble and maintain a team with resilient dynamics are best to assess the following.

Experience

In determining the best talent to onboard, be it other company leaders or early hires, familiarity is always top of mind. Most investors gain confidence in the potential success of a startup when he or she comes across founders that had founded one or multiple startups prior to the current venture, or share past experience working together. Founders that show familiarity with running a startup, are capable of measuring the extent of responsibilities, challenges and outlook to successfully scale, and choose to work with one another on multiple occasions, demonstrate a preparedness not seen with less experienced teams.

Commitment

Next, founders that show commitment are more resilient. If a founder is full-time, foregoing a high salary elsewhere, and comfortable with assuming many responsibilities simultaneously, those expectations then extend to other co-founders or early hires. An equal commitment from all personnel results in improved decision-making, execution on target milestones, and internal culture.

Alignment

Another important consideration towards fostering world-class team dynamics is to gauge alignment between founders and early hires. That is, determining if everyone is similarly motivated and can share in the long-term vision of the company. Most startups fail. Those that don’t are sometimes sold prematurely. And others underperform, where disagreements between founders result in the loss of focus on the right path forward. The startup journey is tough, more so when the founders share too many conflicts on the direction of the company. If leadership isn’t aligned properly on the solution, go-to-market strategy or performance targets, investors are likely to pass due to the lack of cohesion, and employees might question their role.

Talent Management

To truly set lasting appreciable team dynamics, the founders must also properly manage existing and new talent. Though startups are more susceptible to above-average rates of attrition, focusing on job satisfaction, aptitude and well-being helps to create a culture of appreciation felt between founders and employees.

An example of how a startup can strengthen its talent management practices comes from a close connection, Samuel Ekpe, the founder of Grupa, a platform that connects FAANG tech experts to early-stage startups. Sam leads with the promise of going the extra mile for his startup clients, believing that access to vetted talent is essential to any startup wants to grow consistently. His company maintains high standards for talent referrals, allows clients to explore custom payments that mix cash and equity, and ensures legal compliance throughout the contract lifecycle. Founders can worry less about attrition, reduce overhead costs, and execute on growth with less interruptions.

In a recent discussion, Sam stressed treating the causes of issues with talent management, not the effects. Founders who anticipate problems in advance are more prepared to handle the potential headwinds that might arise. Not only does this approach apply to maintaining exceptional team dynamics, but also towards all internal operations.

3. Handling Intellectual Property

In our previous article, Unlocking IP-Driven SaaS, we discussed how tech founders manage to create defensible growth: if possible, apply the subscription model to a solution for mass appeal, but integrate something largely inimitable that leads to reliable product stickiness. Founders from all disciplines, but certainly in tech, need to get a handle on everything belonging to them that meets the definition of intellectual property, be it talent, technology, or certain processes.

IP can exist from inception, an example being a financial technology startup consisting of software engineers with years of experience designing trading algorithms for a quant hedge fund. The expertise brought into the new company, and presumably, the approach to the technology used, exists in the beginning, before any customers are acquired. IP can also be introduced following the release of an initial product to customers, where it may be used to enhance its functionality.

To handle IP, a preferable strategy involves being equally on the defense and offense. First, a startup can be defensively tailored to employ as much available IP from the start. For example, suppose a founder wants to explore disrupting the robotics markets. The founder has many years of experience in robotics design, engineering or manufacturing, hires personnel with comparable talent that also has access to a large network, and proposes a novel solution that introduces new uses of software or hardware. Next is the offensive, where the company is quick to adopt new IP where appropriate. Together, the duality of a simultaneous defensive and offensive IP strategy yields companies that are highly differentiated early on, capable of maintaining that differentiation as it grows and responds to changing industry demands.

Protecting IP when applicable can’t be understated. Ensuring the company has quality legal representation that understands the nature of a startup, the industry in question, and has a capable stellar track record when it comes to filing patent applications, arranging employee and industry partner agreements, and monitoring the market for instances where the IP is challenged or infringed.

4. Disciplined Cash Management Practices

The main focus for any startup is execution: product development, partnerships and customer acquisitions. Its financial position is sometimes less of a concern, resulting in negligence to the burn rate that accompanies more aggressive customer growth. Entering the startup ecosystem with cash discipline is necessary to company longevity.

First, all cash inflows and outflows differ in priority. It helps to identify the most urgent cash needs throughout each stage of the company, communicating those needs to everyone involved, and limit access to available funds to avoid spending imprudently.  

After handling essential business cash flows, payroll is next. Though it goes without saying, compensation is a big draw for attracting talent. Setting compensation expectations for new hires immediately, and timing the payroll to ensure minimal conflicts with other expenses ensures that employees are a priority while maintaining responsibility when it comes to managing remaining cash flows.

 For selling a product or service, if appropriate, a recurring revenue basis amongst other revenue-generating options is helpful to model internally and externally, as its more predictable than assumptions on transaction percentages or long-cycle contract renewals.