Early in my career I worked in investment banking and international banking. So, later on when I taught finance I reflected on the issue of risk, and the basic elements of financial risk that all business ventures should consider:

• Understanding the types of risk;
• The fundamentals of risk; and
• Managing the risk.

The fundamentals of risk management involve:

1. Identifying the risks
2. Measuring the potential impact
3. Deciding how each risk should be handled.

In a recent Harvard Business Review article on business model innovation, I noticed a commentary on marketing. This particular article contained a major section about when to make key decisions and identifying who should make those decisions. It occurred to me that the elements of risk are almost identical to the innovation model. Both focus on reducing risk in a venture.

In a past blog I discussed the garbage can model of decision-making, and focused on being novel in decisions. Today, I am looking at reducing the risk and uncertainty inherent in any startup.

Risk identification is a process that systematically and continuously identifies current and potential risks that might have an adverse affect on a startup. The impact of the risk is affected by both frequency (lots of events) and severity (potential big losses). Most companies don’t worry much about frequent small losses. Office supplies disappearing or the local candy store missing a few small low cost items are two examples of a small loss. However, with severe losses, many organizations take precautions to protect events from occurring. Examples here might include large ticket items missing in the isles of retailers or a few items being chained down so that only department managers can help you try on the expensive goods.

In decision-making, the risk inherent about when key decisions should be made is often due to the lack of sufficient information to reduce the uncertainty. Strategies to deal with this issue may include:

1. Postponing the decision. Sometimes decisions appear urgent but are not.
2. Splitting up the decision into a series of real options. Break the decision into small bite size pieces this reducing any significant investment.
3. Changing the order of decisions. Sometimes a client may ask for customization that may not benefit the strategic direction or value of the organization. In response, the startup can change the sequence to only payment upfront or with proof of performance before investing in the customization.

The CEO may not always initiate all important decision-making. Empowering employees is a very effective way to deal with every day minor decisions. If the decision is too important to delegate, then another way to manage the risk is to consult with a board member or trusted advisor. Even then, always try to find the HIPPO (the industry’s Highest Paid Person’s Opinion). Delegating up or outsourcing may be the best option when dealing with risk issues.

Managing risk and decisions can also be accomplished through insurance, or outsourcing. Startups often hire distributors and/or transportation companies to take on the logistics of moving product not only because it is less expensive but also because these outsource companies have the know-how to manage these specific operational risk.

In startups there are other types of identifiable risk that may include market risk, supplier risk, default risk by clients and others that are usually addressed in the planning process. Managing risk and managing decisions travel in lock step with similar processes. However you manage risk, make sure the process is around a strategic framework and one that allows for continuous monitoring.