When most people think of business risks they think of bad things that can happen to the business that are about the business. What if we open the restaurant and everyone hates the food? What is we start a website and we can’t get any traffic?
These are internal risks and need to be addressed in the course of planning to launch a new business. Internal risks are the ones that are under the control of the founder and based on decisions that are made about how the business will work and what it will be.
If you decide to start a business selling ultra-high end costumes for cats, in Haiti, and it doesn’t work out, that’s on you. You ignored the utter lack of market demand, market size, price fit, competition and the fact that there is no way to effectively market those goods.
Plus, that’s just a really dumb idea. It was completely avoidable if you had half an ounce worth of common sense.
What is External Risk
External risk, on the other hand, comes from things you can’t control but that may tank your business.
Some external risk, although it can’t be controlled, can be foreseen. For example, if you are thinking about starting a business that takes advantage of a regulatory loophole it is foreseeable that at some point that loophole might get closed. If it does and you didn’t plan for that, it’s still on you.
It’s fine if your plan was to just exit the business as soon as the loophole closed- that is a plan. If you find yourself going bankrupt however, when the loophole closes because you just didn’t think the good times would ever end, that is on you.
For most businesses, the risks of foreseeable external risks are easily mitigated by addressing large markets with proven demand. These are not the types of markets that dry up overnight or suddenly shift in a way you won’t be able to react to if needed.
But that said, if your business in any way relies on external conditions outside your control, you need to be aware of what they are and have a viable contingency plan in place to address them.
One example of this might be relying on Google for your business sales based on a particularly good ranking in their search engine. You have no control over where they decide to rank you and they can switch you any time they want. If you don’t have a backup or alternative source of traffic that still makes economic sense for your business you could be in big trouble in a big hurry.
Another example is selling products that are similar to products that have been banned or regulated or are likely to be as soon as the legislators get around to it. This has happened to clients of ours who were selling products tangentially related to Kratom, which became the target of DEA and FDA investigations and subsequently banned from being sold in some states. This was a very foreseeable risk given the nature of the product and the controversy surrounding it.
Foreseeable external risk is something that you need to be aware of and factor into your plans if you want to have true peace of mind in launching your startup. Otherwise, even if all the other pieces fit, you could be torpedoed by an external factor you failed to take into account.
Unpredictable External Risk
External risk you can’t see coming is something that fortunately doesn’t happen very often but it can ruin an otherwise good day. Not too long ago there was a story on the news in San Diego about a business which, after working on launching for six months, had a pipe break the day of their grand opening which ruined their entire inventory and destroyed their building. Ouch.
Other examples of this kind of thing are having a key employee suddenly poached by a competitor, having a key vendor or key customer get acquired by another business and your expected deal or supply go away or change drastically or having a new technology suddenly arrive on the scene which bypasses or obsoletes your solution overnight.
There are not many defenses against this kind of bad luck except to try and have as many plan B’s and backup sources as possible for anything you can. On the other hand, if you spend all your time trying to plan for every possible contingency you will never actually get started and most of them will never come to pass anyway.
The good news is this kind of external business ruining risk is rare and generally unlikely to happen to you. The bad news is there is not much you can do about it. Which means there isn’t much point in worrying about it, right?
Plan for what you can and then go and launch your business. If you get blindsided by something that you never could have seen coming then just pick up and move on with a new idea. And if you’ve planned right and luck is with you, you are going to have a great business that will be successful from the beginning.