EnTrends

The Burst Bubble

The new economy created rapid growth
and sudden wealth for many young
companies, a great deal of which we all
know now has dissipated. As the pink
slip parties become routine, it's become
a time of introspection at many a start-
up. Was our expansion too rapid? Did
we expect results too fast? How could
we have not considered what we would
do if (and when) the bubble bursts and
the economy slumps? Did we fail to
disclose everything to investors or did
we exaggerate just a little too bit? Did
we embellish our company's
circumstances to get business? Did we
deceive employees with regard to their
expectations?

Surely entrepreneurs are pondering how
they could have done things differently,
but are they really debating whether
their ethical standards were partly or
wholly to blame for their downfall? Well,
for the most part, they're probably not.
However, many failed start-ups might
have better managed their risk with an
extra touch of integrity and a carefully
considered risk plan.

What is the risk in risk management?

Risk is one of the reasons that many
people get involved in a start-up.
Bringing that great idea to fruition is
exciting. However, many entrepreneurs
do not consider instituting measures to
manage the inherent risks that come
along with the attempt to turn that great
idea into a success story.

A risk can be defined as the possibility
of loss, injury, disadvantage or
destruction. In terms of a start-up
company the plethora of risks involved
can relate to strategic, market or credit
activities. Additionally, they can be
programmatic, technical, cost or
schedule related to name just a few. The
risks obviously vary from industry to
industry.

Entrepreneurs accentuate the positive
when courting potential investors,
customers and employees. There is a
widespread feeling among
entrepreneurs that if a new company
isn't cocky and isn't bombastically self-
assured in its launch phase, no one will
look their way. In order to give this
appearance, entrepreneurs may fall
victim to embellishing on their
company's situation. If the company is a
great success nobody gets hurt, but
plummeted stock prices and the
proliferation of dot bombs are indication
that more than a few investors/
customers/employees would have
preferred that the start-up had come
clean up front. Had they done so, the
company may have started out smaller,
with less venture capital (if at all) but
might still be around today in a small
but stable form.

An example of a small but stable start-
up, that started with no venture capital
is CMB Associates,
(CMBAssoc@aol.com), a Direct Mail
and Premium/Incentive consultancy
based in New York. The company owner
and president, Carey Berg is a former
director and V.P. of American Express.
When he started his own firm, Berg was
able to leverage his numerous contacts
in the Direct Mail and Premium industry
to get his business started with limited
start-up funds. He was able to do this
by setting up a comprehensive network
of sales agents throughout the U.S. and
Canada, that worked on a commission-
only basis. This structure also included
percentage bonuses based on achieving
pre-set sales goals.

Additionally, once CMB Associates
began showing concrete results to the
corporations they represented, they
were able to convince these companies
to help finance some of the marketing
activities that would enable CMB to
further grow their business and
consequently sell more of these
companies products. These additional
marketing activities included key
functions such as exhibiting at
important industry trade fairs,
conducting sales meetings for sales
agents around the country and making
sales trips to see their customers plus
working directly with the individual
sales reps. By creating this structure,
CMB Associates was able to gradually
grow their business and at the same
time, limit their risks as a start-up.

The basics of risk management

According to the Carnegie Melon
Institute, risk management is a practice
with processes, methods, and tools for
managing risks in a project. It provides a
disciplined environment for proactive
decision making to assess continuously
what could go wrong (risks), determine
which risks are important to deal with
and implement strategies to deal with
those risks.

Managing risk is akin to protecting a
computer from viruses, says Kirk
Walsh, a senior manager with the
consulting firm Risk International
Service Inc. in Charlotte, N.C. Just as a
PC needs the latest virus scanner to
identify malicious software bugs, Walsh
says, a company needs to "scan its
entire system" by conducting a
comprehensive audit, addressing any
quality problems or faulty risk-transfer
mechanisms and establishing a means
to monitor future events.

Providing for risk in the start-up phase

Most start-ups are not concerned with
defining their risks let alone managing
them while the company is still in the
early stages. Instead of anticipating
what might go wrong and integrating
the management of risks into their
program management, entrepreneurs are
involved with putting together a
customer base and organizing their
business structure. They are occupied
with hiring personnel and office
management. Additionally, they are
busy with getting the new company
known through advertising and
networking and obtaining the proper
financing to stay afloat until the
business is up and running. But by then
it is often too late. What results is, to
use the well-worn term, "putting out
fires" or more technically put, "crisis
management".

"If you have to rush through a job, and
cut corners to make it on time and within
budget, it ends up costing ten times as
much in the long run and you run the
risk of having your new company's
image tarnished, which is the death toll"
advised Sean McInerney of Atlanta,
Georgia in FailedStartup.com. This is the
lesson he took away from his failed start
up venture. Reflecting on the initial
stages of his start up, McInerney felt
that he could have eliminated a great
deal of risk from his business by
properly planning and pricing the
projects from the very beginning. He
claims that it is something that he
should have learned over and over
again. "After the initial hoopla and the
incoming investment money it is so
important to make sure that you're
accurately pricing your project to
coincide with your available resources
and schedule." The motto at his new
start-up is, "If you don't have the time
to do it right the first time, when will you
have time to fix it later?"

Insurance and the risks of partnership

Since each business is different , there
are different types of risk involved. An
entrepreneur can buy insurance for
tangible risks which covers common
eventualities, as well as specialized
insurance for particular risks that are
inherent to a particular field of
endeavor. The entrepreneur needs to do
some creative brainstorming in order to
provide for eventualities. For example,
Anne Koark and Uschi Pl�tz, two
businesswomen based in Munich,
Germany, tried to discuss all
eventualities during the launch phase of
their company, including what they
would do if the other one died.

The company was starting out without
venture capital. They calculated that the
costs associated with renting their
office space alone totalled DM600,000
over the five year period of the lease;
an amount that could bankrupt either
one of them if the business didn't
succeed. The possibility of failure
would be increased tenfold, they
figured, if one of them had to carry the
business on their own. Therefore, they
decided to take out a personal two-way
life insurance policy. They also decided
to take out invalidity insurance policy
for each of them. They reasoned that if
one of them contracted a long-term
sickness, they would have to hire
someone and pay them a hefty salary to
assume the responsibilities of the
incapacitated partner.

Non-Tangible Risks

Insurance is only part of the package that
an entrepreneur must consider.
Contingency planning for non-tangible
hazards is just as important as insuring
against losses. The entrepreneur needs to
be involved in an ongoing process of
analysis and communication as an
integral part of the business, be it alone
or with his or her partners.

This is where the philosophy of the
company comes into play with regard to
the integrity factor. For example, the two
partners discussed above, Anne Koark
and Uschi Pl�tz, put their philosophy on
their sleeve by naming their company
"Trust in Business". (www.trustib.com)
The company which assists international
start-ups in setting subsidiaries in
Germany decided to make the association
with "trust" a number one priority.

During their start-up phase, they entered
into negotiations with suppliers, banks
and service companies who would be of
interest to potential partners, suggesting
that volume discounts be reworked such
that the volume of their customers be
taken as a basis for offering discounts to
their customers. The idea was not to find
an additional source of income by
cashing in on commissions for referrals
but to find a direct advantage for
customers. Their customer base began to
expand based on this one action. The fact
that they were willing to forego a
commission was proof for the customers
that they were true to their name.

The effectiveness of a policy of trust

To address this idea, one needs to first
begin by considering what "trust" means
within one's own industry and culture.
For purposes of this article, I am defining
trust in terms of dealing with a business
partner or customer in a straightforward
and sincere manner and giving them the
honest feeling that they are being
listened to, taken seriously and that they
can reasonably rely on your information
and actions.

The U.S. still adheres to the old adage
that the customer is king. A customer
doesn't want to reinvent the wheel each
time it has to do business. If it comes
upon a company that it knows it can trust
(in this sense), is reliable, and addresses
it's needs, it will remain loyal. The
customer not only removes all risks
associated with doing business with a
new partner but it is also acting in a more
time efficient manner.

Managing the risk of de-motivation

All start-ups need to recruit enough
people to carry out their plans.
Designing the organizational roles and
then finding the right people to make it all
fit can be daunting. At the same time, it's
key for all start-ups that they become a
company where all employees feel
genuinely cared about. A young
company runs a potential risk of falling
apart if they don't put together a
motivated and capable staff.

The capability is in most cases not the
problem, as the company can tailor their
employee search to fit the qualifications
that it requires. If the company discovers
that an employee is really not qualified for
the job, then it can let him or her go.
Excising an employee, however, will not
solve a demoralization problem. It in fact
generally has the effect of bringing the
moral down one more notch. Motivation
runs like an undercurrent in a company
and at best is infectious. Unfortunately,
this is also the case when there is a lack
of motivation in a company.

Many a start-up brimming with venture
capital has made the mistake of assuming
that their remuneration packages would
keep the staff motivated. A pay check
alone has never been enough to keep
employee's motivation on a high wire
over an extended period of time. In
managing this risk of motivation, the
company should be realistic with its
employees about their career
opportunities. Failure to do this will
result in employee dissatisfaction and a
high turnover.

It is of crucial importance that the top
management not only cultivates the
company's level of motivation but that
they maintain it as well. Most start-ups
staff a business that hasn't even started
yet. At that stage, the motivation is high
because everyone has the sense of
pulling together for a common goal.