5 Types of Risk in Entrepreneurship

Types of risk in entrepreneurship: Entrepreneurship and risk go hand in hand. There’s no entrepreneurship without risk. This article is about the types of risks you’ll encounter as a founder. The purpose of this article is to bring visibility to these types of risks so that you can prepare a mitigation strategy for them.

Types of risk in entrepreneurship

Most times, when we talk about risks in entrepreneurship, people often think about the loss of money. However, some of these risks are deep-rooted and can create long-lasting effects if you are not careful about addressing them. While we speak about these risks, the most commonly ignored one is the emotional risk, loss of confidence, bouncing back from failure etc. Although it sounds like a weak risk to talk about, it is one of the most common risks and impacts of entrepreneurship.

1. Financial Risk
2. Market and product risk
3. Legal and environmental risk
4. Operational and strategic risk
5. Emotional and personal risk

Financial Risk

This is the most common and visible type of risk. To make it simple, we have easy-to-use financial models which classify the type of investments, amount lost, gained etc. Sometimes, we tend to ignore the opportunity cost of entrepreneurship. If you are weighing your risks, I’d strongly encourage you as a founder to consider the opportunity cost of being in a job, career growth etc which will be severely impacted if the entrepreneurial venture is a failure.

Market and product risk

The market is ever-evolving. Even if we collect market feedback, it is always out of date because feedback is based on the time that we take it. Normally it takes time for us to develop a product based on that feedback. By that time, the market would have moved on and customers may not find the same thing interesting anymore. When you look at the reasons for failure of a startup, one of the most common reasons is the failure to find a product market fit which explains the market and product fit.

Legal and environmental risk

The legal and environmental aspects are always complicated. When we start a business, even with the best advice, we’ll not know the depth of these issues and there’s usually some small detail or a fine print that can destroy a business. hence, when you start, please make sure that you get the best advice possible on these aspects to be able to mitigate or raise awareness about these types of issues.

Operational and strategic risk

This refers to the day-to-day activities of being able to run a business. No matter how many business plans we construct, the reality will be different. There will be challenges such as finding resources being difficult or things becoming too expensive, not finding the right suppliers etc.

These circumstances pose both operational and strategic risks for an entrepreneur because the impact is high in such situations. If you’re a bootstrapping entrepreneur, the effect of such risks can be detrimental to the business causing it to be closed down.

Emotional and personal risk

This is the most important type of risk in entrepreneurship. The unfortunate reality is that most people talk about money and its impact. but personal health issues and mental health issues have of huge impact on an entrepreneur. A failure can have a compelling effect on our confidence and restrict us from taking further risks.

It also impacts family life because once you start a business, you’ll be completely swept away in it. Even with the best intentions, you’ll not be able to spend good quality time with your family thus compromising your mental health and creating personal issues. Please be extra aware of this type of risk while starting a business.

In conclusion: Risk in entrepreneurship is unavoidable. But instead of turning a blind eye towards it, be aware and anticipate some of these risks while running your business. It might not solve all the problems, but helps you prepare better and make a better approach to mitigating their impact. Remember, the trick is not to prevent problems but to become better at facing them.