How do you manage risk in a venture?

What are the types of risk that one can encounter in a startup? How can you manage or cope with uncertainty? How can you minimize risk?

In our startup at SEOmoz, one of the ways we lowered risk was to have a secondary business model on which we built our more aggressive, more risky venture. We started with consulting, which, while relatively low margin, can generate income and give free cash flow while we worked to build the software model. This enabled us to, over time, scale consulting work up and down with need. In 2006, it was nearly 100% of revenue. In 2007, consulting was only 40% of revenue and this year, it's on track to be about 18%.

If you can find business models that can bring in even small amounts of revenue that will help to keep things afloat (and prevent you from having to go through the fund raising process in a "desperation" mode), I believe it's a huge positive.

Risk comes in every form possible. If it's a variable, it's a potential risk. Someone with experience growing a startup past the ramen profitable stage can give more insight, but here are some things I've experienced myself:

• Spreading yourself too thin -- It's easy to bite off more than you can chew, and if you're visible this can very dangerous. If you're taking on additional projects as a company, be sure that they can be handled no matter what happens. This is especially true when giving large projects to new employees; if your company will be badly damaged by them dropping the ball and you don't have to take it on, don't.
• Be sure everyone involved is on the same page -- This can burn you in many ways. Be sure that you've discussed plans for what you'll do if the company doesn't go the way you've planned, what you'll do in the case of an acquisition or potential partnership, etc. Major events, both bad and good, can stress a startup (and all of the relationships inside it) to the breaking point. You can mitigate risk by having these discussions early on and preferably writing them into some sort of agreement.
• Change directions in private -- Most startups will change directions many times, especially in the early days. Don't be too trigger-happy with press releases and getting the word out before you know what you're doing. This is especially important if you already have paying customers, as this can very easily damage your reputation and hinder further business.

There are plenty of other risks out there, and for most of them you'll only have to deal with once, but by thinking things through and planning very carefully with your cofounders (if you have any), you can mitigate the risk.

Good luck,
- Cody

There are lots of different types of risk in a startup, but they fall into one of the following categories:

1) Market Risk: Is there a need for the product? Will they pay enough for it to make profits?

2) Financial Risk: Will you have sufficient capital to pursue the idea?

3) Execution Risk: Will you be able to build a business?

Consult with an attorney to verify that you have fulfilled all requirements for disclosure, contracts are in order, copyrights, trademarks and make sure releases are signed (for photos).

Consult with an HR person to verify that you have followed employment law for your contractors/employees.

Consult with an accountant to verify that you have a balance sheet, determined your assets and liabilites, and have a padding for unforeseen needs.

Consult with an Insurance specialist about the health, liability and accidental coverage requirements for your particular business.

Lower the threshold for what is required for you to get to the point where you know if the business is going to be viable. A complicated way of launch quickly and keep your costs low.