The strategic risks facing start-ups in the financial sector

Abstract

The majority of start-ups fail. But some succeed, and a very small number succeed spectacularly. And it is the stories of the sometimes vast wealth unlocked by the rare successes that drive entrepreneurs, with stars in their eyes, to embark on a start-up venture. Even though the odds are stacked against them, people still invest their time, effort and wealth pursuing their dreams. Start-ups are risky — very risky — and thus any efforts to reduce the enormous risks facing startup founders must increase the odds of ultimate success. Risk management, therefore, should be a key focus for entrepreneurs and their investors. One of the many types of risk facing every firm is ‘strategic risk’, although for established companies this overarching risk is somewhat mitigated by their deep knowledge of the industries in which they operate and not least by their ready access to capital to grow their business (provided of course that the firm is not already in trouble). There are very many definitions of ‘strategy’ in business, but one, from the guru of competitive strategy, Michael Porter, is simple and clear: ‘[a strategy is] a broad formula for how a business is going to compete, what its goals should be and what policies will be needed to carry out those goals.’ So, if the founders of any company do not know how and with whom the firm is going to compete, what the goals/objectives should be, and how founders plan to achieve those goals, then their venture is unlikely to succeed. This paper identifies some of these critical ‘strategic risks’ by first identifying what is ‘strategy’ and why it is important, especially for start-ups. Then, using common strategy models, key risks for any company and some of the key strategic risks facing start-ups in finance are described. In particular, one extremely important aspect of strategic risk, that of strategic positioning risk, is covered in detail. There is no ‘magic bullet’ to eradicate risks, especially strategic risks, but to illustrate how strategic risks may, to a degree, be mitigated, the paper references three case studies of start-ups in the financial sector: one that has succeeded (to date), one that has failed and one somewhere in the middle. In these cases, the paper does not claim that success or failure is a result of formalised risk management processes, more that key decisions taken along the way addressed some critical strategic risks. The purpose of this paper is not to frighten entrepreneurs with the enormous task confronting them, but to provide a rough map of some terrain to avoid along their journey. There will be many potential pitfalls for every start-up — it makes sense to try to avoid some of the more obvious.