Risk Management in a Start-up

So you thought of a great idea and have decided to start a new venture. There are almost a million articles on the internet about how to start up, launch your product, acquire customer, raise money etc. I know, because I have been thinking about doing something on my own for about 6 months or more and have read enough of these articles.

Being an auditor, I was interested to learn about things that can go wrong and found this one articles (5 Common Startup Mistakes That WIll Sink You Later) on mistakes that start-ups make. Except for the last point about building the right processes and controls all other topics are have been covered to death by most other articles that I read.

Ensuring you have the right processes and controls is key and should be tackled as soon as the start-up moves ahead with the idea and starts to invest money into the venture. I know its not something everyone has time to focus on. Especially when, you have to focus on developing the product, building the website, marketing the product, looking for customers and investors, hiring people and million others things that need to be done for your venture to succeed. Also, why should you think about boring things like processes and controls? Especially when starting something on your own was about breaking free and not worrying about them in the first case! Well, having controls and good processes are as important as having a good foundation for your house. If the foundation is not right you would have problems in future which will be very expensive to fix or may take the whole house down.

When I was thinking of writing on this topic I wanted to find out the reasons start-ups fail, but didn’t get too much information about that other than they had something which the market did not want. Exploring this more, in most established companies there are lots of controls around launching new products to ensure the company does not lose money on a new product. If some of the start-ups had similar controls maybe the success rates could have been higher.

Another factor to consider is management of money, not everyone is good at managing it. Well ask Madoff if you don’t believe me.

So as a start-up when you have limited funds, management of money becomes even more important, you may not have funds to hire a CFO (and you don’t need to), but you need to have good processes and controls to know where money is being spent and who can spend the money.

Similarly there are others areas where good processes and controls can help to ensure the foundation for the business is solid are :-

  1. There is no revenue leakage i.e. you are making sure all the work/product/services done for the customer is getting converted into rupees or seen as a value add by the customer. This is one of the most important control in even the most mature organisations who struggle to ensure customers are being billed for everything. For a start-up this is even more important as in the initial phases we are struggling for every rupee.

  2. Structuring the company, looking at regulatory requirements, taxes etc. For example there is recent news that Flipkart maybe in breach of Rs. 1400 on FEMA (Refer http://articles.economictimes.indiatimes.com/2014-04-30/news/49523491_1_accel-partners-flipkart-online-services-cedar-support-services). Something like this if upheld can cause real problems when you want to sell your stake or go in for an IPO.

  3. Controlling the vendors

  4. Ensuring compliance’s are met on an ongoing basis

  5. Controls on information and customer data

  6. Working Capital Management

  7. etc. etc.

I hope I have been able to give some insight about why it is important to ensure you have the right foundation for your venture by putting in a good structure and control principals as soon as possible. These can then be expanded/evolved as the company grows.

The best option is to think about these and try and implement it yourself. You feel you need help you could work with any number of consulting firms to help you with these if you are well funded and able to spend big dollars or you could with freelance consultants like me to help you navigate these risks.

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