The 3 Biggest Startup Risks and How to Manage Them
Only one in 10,000 funded startups hits it big. To learn how yours can avoid being one of the 9,999 startups that fail, I spoke to Mike Cagney, the CEO and co-founder of SoFi, which offers student loan refinancing to college graduates. It has issued more than $500 million in loans so far.
Here's what Cagney has to say about how to manage the three biggest startup risks facing entrepreneurs.
1. The Founders
Founders of many failed startups can't handle the challenges that come with rapid growth.
According to Cagney, "If you grow a business fast, there is a danger of outstripping the founding team's capabilities. When you start a company, you might expect to spend two years to prove the concept, then you raise capital and operate the business. But as the business grows, many of the co-founders could lack the expertise needed to manage it."
Founders who run winning startups adapt nicely to changing needs. They manage weak people out of the company and bring in strong ones that can handle the next stage of growth; they invest in products that customers are buying and kill the ones they don't; and they monitor the competition to discover new strategies that are setting the market on fire.
2. The Copycats
Even startups with great new products and a capable founding team face competitors, which often copy their best features. Winners build defenses to these copycats.
"If you enjoy fast growth, you may attract competitors," says Cagney. SoFi's defense mechanism? "For example, we compete with First Republic on products, but it has higher costs and needs to charge higher prices to cover them while meeting its profit goals. They can't match our lower prices unless they want to lose money. And as we've grown, our costs have dropped--which deepens our competitive advantage."
3. The Equity
Startups often fail because they allocate all their equity to their co-founders at the birth of the business. They give out too much equity to someone who leaves the business and has not worked for the company. Then they lack equity to give to key hires and investors later in the startup's lifecycle, which severely hinders growth.
But this risk can also be managed. Noted Cagney, "You should allocate 10 percent among each of three co-founders initially and leave the other 70 percent unallocated. If you have a big pool, you can give it out based on value creation."
Strategy consultant, startup investor, teacher, corporate speaker, pundit, and author of 11 books, Peter Cohan has invested in six startups, three of which were sold for a total of $2 billion. Before founding Peter S. Cohan & Associates in 1994, he worked with HBS strategy guru Michael E. Porter.