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What is a startup? and Why Are Startups Risky? The word “startup” has taken on many meanings over the course of its existence. Today, it’s synonymous with small businesses that are growing at quick rates, and other words like “new business” or “new venture” might replace the word “startup.” This sudden change in meaning can sometimes confuse things, but a startup is a business with a high risk of failing. In other words, it’s a company that isn’t yet profitable and is still looking for growth opportunities—one that hasn’t reached into an existing market yet.
From a certain point of view, a startup might even be seen as a company that’s still in its infancy. However, from another view, this definition describes the organization’s risk of failure. And from still another point of view, it describes the company’s unpredictability and potential for growth.
In most situations, startups are established companies that have been around for a while and have become successful through conventional methods. The main difference between startups and continued companies is risk: startups are usually an attractive investment because their business opportunities are not yet proven to existing customers. They’re risky, and the chances of a startup becoming successful are low.
Why Are Startups Risky?
The first thing to consider when you’re considering a startup as a potential source of growth is that your company will have to take a risk first.
There is no reliable method for assessing the future success of an unproven company.
There is also no certain way to gain a customer base, and there’s no guarantee that the income generated by their services will be enough to cover expenses.
The startup is faced with at least three risks during this period.
Risks such as…
- The product costs money.
- It does not sell out quickly enough to cover costs and expenses.
- The business does not generate enough profit to cover all the costs and expenses and profit objectives and targets within a minimum time frame — while still having options for growth in the future .
- If a startup does not have a strong financial system that is able to support the growth of sales, sales and income can be very unpredictable. This risk may lead to serious financial losses for the business in the future.
If you invest in a startup, you will be an investor in a speculative company with high risk. In general, startups generate little or no revenue for their first few years. In addition, the product itself may be sold at a loss, but there are many other costs associated with developing and marketing it.
In short, startups are risky because they require an initial investment before any revenue is generated by a possible product or service that would be offered.
In addition, as a startup develops its strategy, it must consider four components:
- The company’s risk tolerance.
- The market’s dynamics and growth potential.
- The strength of the competition.
- An effective management team that knows how to exploit these things .
So why would a company take such a risk?
1. Chances of growth
The first reason is for growth. If a startup can make it, the rewards are high. It’s not uncommon for a startup company to become a multibillion-dollar company after just ten years or less.
2. First market entry advantage
The second reason is to enter the market before existing companies. A startup typically has an advantage by coming into an established market without any preconceived notions of what customers want, so they can use this information to design more customer-oriented solutions. Another aspect of this is that startups often have products that are more innovative than products offered by more established companies.
Because startups are new, they have less competition—and this gives them an edge over established businesses.
3. Creation of self employment
The third reason is that running a startup can offer job opportunities that are not available to regular employees.
4. Greater flexibility on many aspects
The fourth reason is that startups typically provide greater flexibility and control over how profits are distributed. A startup can often continue to operate with minimal management and allows for on-the-job training (this also varies based on the company you’re involved with) .
5. More ownership
The fifth reason is that running a startup allows business owners to exercise more “ownership” over their company and its employees—a feeling of entrepreneurship is usually more satisfying than working for an established company. For these reasons, startups present a higher level of risk than other types of businesses.
Top Common startup Risks
You have to keep in mind, however, that startups are risky on so many levels besides financial. These risks include everything from technical failures to the lack of any customer base.
1. Technological failures
The first risk is a technical failure. Many startups fail because of technological problems. For example, there are many companies that have come close to success only to have their products or services up and running for a few days before being destroyed by technology problems that can’t be overcome after they’re perfected.
2. Lack of market/consumer base
The second risk is the lack of a customer base. If there’s no one you’re selling your product to, then you will not generate revenue through your business. This is especially true when you’re running a startup because when it comes to the actual product, the “target” customer could be anyone. In other words, you may not know who your target customers are—and this can result in a lack of qualified buyers.
3. Competition
The third risk is competition. Existing companies will take notice of your startup and try to make it difficult for you to succeed by either offering their own products or services at a lower price or simply undercutting your prices and taking away all your customers. If you consider these criteria and determine that an existing market still has potential for growth and enter it with a startup, you take on even more risk.
4. Inadequate Experience
The fourth risk is the lack of management experience. If you’re working with an established company, there’s usually at least one person there who has some understanding of business and can act as a mentor. But this doesn’t always happen in startups, so you’ll have to find suitable employees yourself.
5. Lack of capital
The fifth risk is not having access to funds or capital. You may need money to start your business, especially if it’s a startup because typically the business owners are the ones who raise money for it .
Conclusion
The overall conclusion about a startup company is that it is risky with potentially fantastic returns, but always remember to do your homework and make sure you can handle the risks before investing in any business.
Read about how to write a startup pitch and what to prepare.