Starting up in business is an exciting prospect, but at the same time, can feel like a huge gamble. The first two years can be particularly fraught, and beyond that there are no guarantees of success. The latest ONS study into this area found that only 45% of startups survive beyond five years. The question for entrepreneurs is how do they deal with this risk?
Professor Yossi Feinberg from Stanford Graduate School of Business points out that managing risk taking is fundamental to any business. Simply founding a venture already takes a leap of faith.
He says: “It’s always going to be a risky game, but the odds are not set and the best entrepreneurs will minimise the risk they can control, and confront the risk that they can’t.”
Growing before you feel you’re ready
David Galsworthy, CEO and co-founder of Techspace, a Shoreditch-based provider of shared working spaces for technology firms, is no stranger to risky decisions. Arguably his biggest was growing the business exponentially before taking investment.
“From opening our first premises in 2012, there was growing demand for flexible working environments within the local tech community,” he says. “Several of those who’d started up in Techspace as one or two-man-bands had taken venture capital investment and were growing quickly, to up to 15 or 20 people.
“These businesses didn’t want to commit capital investment to a five-year lease term when they had no idea where their business would be so far into the future, so they looked to us to find more space to house their expanding teams.”
This level of growing demand reinforced Galsworthy’s belief that there was an under-provision of flexible working environments for growing businesses, which became a key part of Techspace’s early expansion strategy. But it felt like a big jump at the time for he and co-founder Alex Rabarts to take.
“Exposing ourselves to yet more [risk] in order to grow bigger, when we could have maintained our existing sites and paid ourselves out some sizeable dividends, at times felt a little suicidal but we went ahead and did it anyway,” says Galsworthy.
Because the business wasn’t sufficiently evolved to secure venture backing, the expansion put a significant financial strain on the co-founders, who had to commit personal capital and guarantees on bank loans to the business to secure new spaces. As operations grew, so did the headcount, requiring even more capital, management and process planning.
“It was risky, but doing it all at once pushed us to create an investable business,” says Galsworthy. “It also gave us the confidence to make more big decisions more comfortably when working under pressure as we continue to grow.”
Changing direction to chase success
Richard Anson originally founded social commerce platform Reevoo in 2005 as a business to consumer (B2C) business, but six years ago it pivoted to a business to business (B2B) enterprise. It was a high risk move but has reaped big rewards.
He says: “Five years ago, Reevoo was focused on our shopping comparison website for electrical goods. While we had great traction in the market, we were seeing an increase in calls from many retailers and brands to have the tools and services that we had built on their own websites. The external market was changing quickly and knew we’d soon be facing a deep-pocketed competitor in Google and its own shopping site. We had a very large B2B opportunity staring us in the face and the potential to build a very large business, with less risk, where competition was also lower.”
Anson went on a gut instinct that changing his business’s direction was the right thing to do to grow. Luckily several members of the senior team agreed.
He says: “We would be turning the business on its head at speed, and I needed to convince the board and our investors that it was the right course of action. The prevailing view in the market was that B2C business was where the money was. B2B businesses were considered unsexy back then, and investors were concerned about their future returns. That single decision both saved and made Reevoo, which today looks after over 300 brands in 30 languages across automotive, financial services, manufacturing, retail, and travel. I wish we’d done it a lot earlier.”
Research can help mitigate risk
Artfinder is another startup that took risky decision to pivot, this time in order to survive. Launched in 2010, Artfinder was as a sort of IMDb for art website, a catalogue of all the famous art in the world where customers could buy posters of the art they liked. The business struggled, and when CEO Jonas Almgren joined, he decided to take a huge gamble by creating a marketplace for original art from unknown artists.
Almgren says: “It involved some painful decisions, not least, discontinuing relationships with many established high-end art museums with strong brands that had been established with an enormous amount of hard work. It felt like a huge risk.”
Research was key in mitigating that risk. The company communicated directly with its users, spoke with potential consumers and artists and hosted a series of interviews to determine what their future offering would be.
“The main thing we learned was that if the average person is going to spend more money on art than on a poster, they want a painting – not a limited edition print – that was cheap and quick to produce,” he says. “They want to know something was handmade and took time to make.”
The intelligence gathered by the business not only convinced the team to take the risk, but also provided market insights that would give Artfinder a competitive edge.
Almgren says: ‘We took the risk of ending dozens of relationships with established brands in the high end art market, to create a scalable business model, but without knowing if we could attract artists when we were no longer associated with well known art brands.
“Three years on, I can say that the decision saved the business. We moved from a model that was unscalable to one that is. We’ve also been able to bring in further rounds of investment and expand globally, with plans to open a US office later this year.”
Content on this page is paid for and produced to a brief agreed with Hiscox, sponsor of the Adventures in Business hub on the Guardian Small Business Network.
