Starting a business is an exhilarating journey filled with excitement, passion, and dreams of success. While every entrepreneur hopes for smooth sailing on this adventure, the reality is that risks are a constant presence in the world of start-ups. The recent SVB crisis has highlighted the importance of risk management for founders seeking to safeguard their businesses against unforeseen events. In this blog post, we’ll explore key lessons learned from the SVB crisis and how start-up founders can apply them to rethink their own risk management strategies. Join us as we delve into essential insights that will help you navigate your entrepreneurial voyage with greater confidence and resilience!
The SVB Crisis: What Happened and Why It Matters
The Swiss bank, Societe Generale (SVB), has been reeling from a banking crisis that began in 2015. This crisis has had far-reaching consequences for the bank and its customers, and it has led to significant rethinking of risk management practices across industries.
What caused the SVB Crisis?
The root cause of the crisis was a mix of risky bets made by the bank’s traders and poor decision-making on the part of management. The traders were betting on high-risk investments such as mortgage-backed securities (MBSs), which they believed would continue to rise in value. However, this turned out not to be the case, and as a result, the value of these assets plummeted. Management at SVB did not properly react to this unfolding situation, allowing the bank’s balance sheet to become dangerously overstretched.
What are some lessons that start-up founders can learn from the SVB Crisis?
1. Risk identification is key – When assessing risks, start by understanding your business’ core strengths and weaknesses. Recognize what you are good at and what you need to focus on improving. Also be aware of any potential threats or risks that may be outside your control or that could have a negative impact on your business.
2. Continuously assess risk – It is important to keep an eye on risk levels throughout your company’s lifespan, making regular adjustments as needed based on changing circumstances
The Start-Up Founder’s Risk Management Framework
When thinking about risk management for start-ups, it is important to keep in mind that the risks faced by these businesses are often unique. Start-ups typically operate in a much more volatile environment than larger companies and are less likely to have the same resources or infrastructure to fall back on.
Below is a framework for start-up risk management that was developed based on lessons learned from the SVB crisis.
1. Define your core business model.
start-ups must be able to clearly articulate their business model so that they can properly asses the risks involved. This includes identifying which activities are essential to their core business and which ones can be eliminated or reduced in order to minimize potential damage in case of a failure.
2. Assess your key risks.
start-ups need to identify the most pressing risks facing their business, as well as any potential mitigations or countermeasures they can take in case of a threat. This will help them prioritize resources and ensure that they are taking all necessary precautions against potential threats.
3. Mitigate identified risks effectively.
If a risk proves too serious for a startup to manage effectively, then it may be best to eliminate or reduce it altogether. This may require significant resource investments and planning, but it is ultimately worth it if it saves the company from extinction.
How to Address Risk in a Start-Up
There is no one-size-fits-all answer to this question, as the best way to address risk in a start-up will vary depending on the specific circumstances and goals of the company. However, some tips on how to think about and manage risk in a start-up include:
1. Understand your business’ potential risks. Start by identifying which key areas of your business are most vulnerable to risk, and brainstorm ways to reduce or eliminate those risks. For example, if your start-up relies heavily on third-party services or customer data, make sure you have strong protections in place for both of these areas.
2. Build a solid foundation for financial stability. Make sure your business has a solid cash flow (or other sources of liquidity) so that you’re not forced into risky investment choices or bankruptcy proceedings in the event of trouble. Also make sure you have sound accounting practices in place so you can track your company’s finances accurately and identify any red flags early on.
3. Establish clear shared goals and communication channels. It’s important that everyone involved with a start-up understands its mission and goals, as well as the risks associated with pursuing those goals.establishing clear lines of communication also enables you to quickly identify any problems and work together to fix them before they become bigger problems.
4. Have an “exit strategy” in place. Just because a company is starting off without traditional investors doesn’t mean it can’t still
Conclusion
When it comes to risk management, start-up founders should remember the lessons learned from the SVB crisis. In essence, when faced with a risky investment, always ask yourself the following questions: What is the potential upside? What is the potential downside? Can I afford to lose money on this investment? If the answer to any of these questions is no or you cannot stomach losing money on an investment, then you should not pursue it. Founders who take risks without assessing their ability to lose may end up regretting it later on.
