A Startup’s Guide: How To Navigate Business UncertaintyRisk Management
Table of Contents
- Table of Contents
- What Is Business Uncertainty?
- What Is Uncertainty Advantage?
- Examples of Businesses that Successfully Navigated Uncertainty
- How To Navigate Business Uncertainty
Businesses have to adapt to the changing times and the volatility of the market, especially given the events of the past year. While dealing with business uncertainty can be seen as a hurdle to clear, it can also be a growth opportunity in itself. This guide delves into the definition of business uncertainty, examples of growing startups that have thrived during economic instability, and tips on how to deal with business uncertainty.
Table of Contents
What Is Business Uncertainty?
Business uncertainty refers to situations in which businesses face risks that can’t be foreseen or measured. During these times, it may be hard for businesses to predict their performance due to unprecedented or constantly changing events. Changes in the political, technological, economic, and environmental landscape — such as technological advances, data breaches, natural disasters, or new business regulations — can cause business uncertainty.
For example, 2020 was a particularly difficult year for businesses to navigate due to unexpected shifts in the economy and industries caused by COVID-19.
Though pandemics are uncommon, businesses have always had to deal with uncertainty to some extent, especially startups. Startups often operate under financial uncertainty even when the economy is stable, since they’ve yet to solidify their business model. And since the financial security of a startup depends on investors and venture capitalists, economic disruptions could limit the amount of funding they have access to.
That being said, it’s not always possible to predict the consequences of economic fluctuations when it comes to the startup funding environment. While venture funding in the US fell 13 percent during the 2008 financial crisis, the impact of the pandemic was not as profound in terms of funding. In fact, an analysis by Crunchbase found that venture funding in January 2021 hit an all-time monthly high of $39.9 billion.
The success stories of companies and startups during the pandemic goes to show that it’s possible to endure, and even thrive, during business uncertainty if you have the right strategies and resources in place.
The Four Levels of Business Uncertainty
Business uncertainty can be categorized into four levels based on the degree of uncertainty in a given situation.
1. Level One: A Predictable Future
In level one uncertainty, predictions about key variables affecting a company’s performance can be made with a reasonable level of accuracy. Level one situations are perceived as regular business occurrences, like making investments in stable markets or deciding on franchise locations.
Since the future is predictable enough, business owners can proceed with a dominant strategy based on a single forecast and simple simulations without being too concerned about the uncertainties.
2. Level Two: Alternate Futures
In this scenario, the future consists of a set of discrete outcomes that are mutually exclusive and exhaustive. For example, changes in legislation can result in level two uncertainty, as businesses have to revise plans to ensure legal compliance. Being unable to predict competitors’ strategies also puts businesses in a level two situation.
In these scenarios, decision analysis techniques can’t predict the actual outcome, but it can be used to establish probabilities and evaluate the risks and payoffs of different strategies. Businesses can then make decisions based on their level of risk tolerance.
3. Level Three: A Range of Futures
Level three uncertainty differs from level two in that businesses can identify a range of possible outcomes, however, they cannot identify a set of discrete outcomes and assign probabilities to them. For example, a company can estimate that the consumer penetration rate could be between 10 and 50 percent, but they can’t determine the exact value. There’s also a possibility that the actual value falls outside of the range.
Sources of level three uncertainty could include customer demand for new products, new technology performance rates, or unstable economic conditions.
When facing level three uncertainty, businesses should develop a limited set of scenarios that account for the probable range of future outcomes, and create strategies that cover the range of possibilities.
4. Level Four: True Uncertainty
Level four uncertainty is rare, and tends to devolve to lower levels of uncertainty over time. In level four uncertainty, future outcomes cannot be predicted at all — even analysis cannot identify a range of possible outcomes or probability scenarios within that range.
This level of uncertainty is likely to occur in emerging markets or markets during and after major technological, economic, or social disruptions. For example, the travel industry could be facing level four uncertainty due to the impact of the pandemic.
Since it’s not possible to develop strategies based on possible outcomes when facing level four uncertainty, leaders have to work backwards and define a future scenario based on a set of assumptions that would justify a certain strategy. For instance, deciding on the level of demand that would be reasonable for an R&D investment. It may also be helpful to look at the strategies and performance of analogous markets to test which strategies are the most logical and favorable.
Risk vs. Uncertainty in Business
The difference between risk and uncertainty has to do with the level of control and predictability of a given scenario. Risk can be measured with probabilities, and thus controlled through risk management and assessment techniques. Uncertainty, on the other hand, involves situations with unknown variables and outcomes that can’t be measured, and therefore hard to predict or control.
For example, risk is when a company moves their data to the cloud, and uncertainty is when a major data breach compromises the data stored in the cloud.
Businesses have to juggle both risk and uncertainty, but with the right mindset and preparation, risk can be managed, and uncertainty can be a catalyst for new opportunities.
What Is Uncertainty Advantage?
The uncertainty advantage is a business approach in which business leaders leverage times of uncertainty to launch innovative solutions in order to discover new market opportunities. Contrary to typical risk management strategies aimed at minimizing consequences, the uncertainty advantage is a strategy to create new sustainable ways of doing business in an unstable environment.
According to Frank Knight’s book Risk, Uncertainty and Profit, business uncertainty is necessary for profit — if businesses could predict risks in advance and strategize accordingly, then your competitors could do the same. The uncertainty is advantageous in that it allows businesses to identify opportunities in the midst of disruptive times and use it to gain the upper hand on competitors.
For example, Hyundai’s car return assurance program illustrates utilizing the uncertainty advantage for revenue growth. Though the auto industry was hit hard during the recession in 2008, Hyundai’s global sales rose two percent thanks to their innovative program that allowed customers to return a car if they lost their job. This business model worked because it addressed and alleviated a financial plight that many customers faced at the time.
The uncertainty advantage isn’t only applicable to big corporations — businesses of all sizes and all industries can benefit from this advantage if the leadership team approaches uncertainty with resourcefulness and creativity.
Some of the most well-known businesses began as startups during the Great Recession in the mid-2000s, including Airbnb, Uber, and Groupon. Their success demonstrates that it’s possible for startups to achieve incredible growth, even during uncertain times.
A survey of over 200 small business owners on strategies used during the recession found that 60 percent of business owners focused on offensive moves that provided upside benefits, and 40 percent focused on defensive moves to prevent loss and minimize downside risks. The top strategies used included shifting to lean operations, pivoting, and expanding the business.
These strategies used then can also be used by the startups of today to weather uncertain times. Let’s go over some examples of startups that have successfully navigated business uncertainty and see how they applied these strategies.
3DHQ: Expanding to New Markets
3D-printing company 3DHQ identified new market opportunities during times of uncertainty. While the company mainly revolved around 3D-printing figurines, during the personal protective equipment shortage mid-pandemic, the company expanded its operations to produce masks with filters to supply to healthcare workers and hospitals. The company also bought more printing equipment to keep up with the ongoing demand.
To follow in the footsteps of this company, assess whether the technologies and equipment that your business currently uses can be repurposed to create new products to meet the needs of the ever-changing market.
Bizzy Coffee: Diversifying Sales Channels
Although financial loss is likely during periods of economic disruption, you could find ways to make up for that loss by diversifying your business to other sales channels. When business went down for local coffee chains, Bizzy Coffee was able to grow their business because they had diversified to multiple sales channels — grocery stores and Amazon. In fact, their online sales have tripled and their products have gone from being in 400 stores to about 900 stores.
As this example shows, in the face of uncertainty, diversification can act as a growth strategy and a fallback option if other sales channels are affected.
Talulah Jones: Joining the Ecommerce Industry
Owners of brick-and-mortar stores may find themselves in a bind due to business closures. Lifestyle boutique Talulah Jones took this opportunity to launch an online shop and double down on social media marketing. By thinking of innovative ways to preserve the quality of in-person shopping experiences, they found success in their customized virtual shopping experiences and drive-thru services.
With the ecommerce industry booming more than ever, now could be the time to go digital to make your products and services more accessible to customers.
Pluto: Changing Business Priorities
Since the travel industry was hit hard by the pandemic, the consequences also cascaded to travel insurance startups like Pluto.
The founders of Pluto decided to shift their focus to “cash preservation” to ensure that their business can be sustained until there are new fundraising opportunities. They’ve also expanded their business offerings by launching a “Bring Travel Home” blog series and building a new Pluto Pinboard product that allows users to share travel recommendations.
During difficult times, you may need to put a pause on investments and customer acquisition to help preserve the longevity of your startup. Alternatively, it may also be a good time to test new products or services and see how receptive the markets are.
Keep Your City Smiling: Pivoting in Uncertain Times
Many companies had to pivot during the pandemic, especially those that offered services or experiences. Due to the lack of in-person events for the business season, the team behind Snapbar, an event services company, pivoted their business to a gift box company. Within a week of conceiving the idea, they launched Keep Your City Smiling, which puts together gift boxes with products sourced from local businesses.
Like this company, you may need to make a quick pivot depending on how much your business is impacted by the current environment. Making strategic partnerships can help you find a sustainable business model.
Cloudbeds: Finding Ways to Help
Prior to the onset of the pandemic, tech startup Cloudbeds raised a huge round of funds, and now, they’re finding ways to give back to the community. The company, which provides online reservation and payment services, is using its software and database of properties to help COVID-19 patients find available rooms and beds.
When you find ways to give back to the community during tough times, not only are you making a positive impact, but you may also discover new growth opportunities along the way.
The startups in these examples took varied approaches to navigate uncertainty, some focusing on preserving cash flow, some expanding to new markets, and others pivoting entirely. Learning from startup examples can help you discover strategies that work best for you.
Running a startup involves constantly confronting uncertainty and overcoming challenges. While there’s no one-size-fits-all approach to dealing with business uncertainty, there are general tips that can help you and your team navigate difficult times with more ease.
Develop a Dynamic Business Strategy
In a volatile market, startups should prioritize maintaining steady cash flow. This means revisiting and revising your current operating plan to make it flexible and dynamic based on the current data available.
The second largest reason for startup failure is running out of funding, so it’s important to stay on top of your finances and keep track of key numbers such as your company’s number of leads, conversion rates, revenue, and profit margins. Calculate your burn rate and monitor your bank balance so that you can make preparations ahead of the “zero cash date” — the projected date when your business will run out of money.
To develop a sound plan that covers various possible outcomes in an uncertain environment, use scenario analysis to define a set of possible futures based on anticipated challenges. Then, develop strategies to respond to each scenario.
Test your revised business plan in the markets and continually monitor to gain real-time feedback. Tweak the strategy to adapt to internal and external changes while keeping an eye on your finances, and test again until you find the most effective plan.
Establishing a dynamic business strategy prepares you to deal with a range of possible scenarios while ensuring you have enough funds and resources to do so.
Stay Lean and/or Agile
Depending on the type of startup you run, adopting one of these business approaches can help streamline your operations and help you save money:
The Agile approach, originating in the IT world, allows your team to be more adaptive, creative, and resilient when facing change and uncertainty.
Being Agile involves engaging in efficient and continuous cycles of thinking and doing, which means testing products throughout the development process.
For example, to reduce your cycle times, consider shifting to quarterly cycles for planning, doing product sprints to build minimum viable products (MVP), and working in cross-functional teams.
Lean operation is a manufacturing methodology that focuses on minimizing waste while still providing quality products to customers. By streamlining systems, cutting unnecessary costs, and reducing waste, lean companies are able to quickly transition between tasks to increase efficiency, and adapt to the changing needs of customers.
With today’s technologies, you can operate lean by automating systems and standardizing processes.
3. A Lean Startup
The Lean Startup methodology, coined by entrepreneur Eric Ries, combines the best of the Agile and Lean approaches. It focuses on the question, “Should this product be built?” based on testing the product against the market.
To follow the Lean Startup approach, engage in a build-measure-learn feedback loop by first figuring out a problem that needs to be solved, then developing a MVP to test in the market. Feedback from the market will then allow you to quickly pivot to another idea, niche, or market if needed.
These methodologies can be applied across different industries, so find the approach that works best for your startup.
Prioritize Transparent Communication
In times of uncertainty, effective communication is vital in keeping your company running smoothly. It’s important to focus on both internal and external communication to ensure that customers, staff, stakeholders, and all parties in the supply chain are kept up-to-date.
Keep your team in the loop by being transparent about the current state of the company and your plan of action. Acknowledge the uncertainties so that the whole team can brainstorm solutions together.
It’s also important to focus on strengthening current relationships with customers to build brand loyalty that will help you weather the crisis. Listen to customers’ needs, and think of ways to maintain the same level of quality products or services for customers.
You also need to inform your investors and stakeholders of your operating plan and forecasts, and be prepared to address their questions. The more clearly you communicate your strategies to stakeholders, the more confidence they will have in your ability to steer the company forward.
Transparent communication is key to building trust in the team and maintaining good client relations when faced with the unknown.
Focus on What You Can Control
It may be difficult to decide where to focus your attention during uncertain times, so to avoid being overwhelmed, acknowledge the things that are outside your control and focus on what you can control — preserving cash flow, for instance.
Maintain a steady cash flow by ensuring your current client base is satisfied with your company’s products or services, and work on acquiring new customers once circumstances start improving. Find ways to reduce variable costs such as advertising, and make arrangements with suppliers and vendors to renegotiate contracts if necessary.
To prioritize supporting your current team and saving funds, consider pausing recruitment and make plans to rehire after COVID-19.
By focusing your efforts on variables within your control, you’ll be in a better position to deal with the unpredictable variables.
Establish a Risk Management Plan
It’s always better to be as prepared as possible, even when markets are stable, so having a risk management plan can help mitigate consequences when things go wrong.
To create a plan, brainstorm all the potential risks that your business may encounter, and measure their levels of risk based on likelihood and amount of impact. Then, determine ways to deal with the risks by applying one of these four common strategies:
- Avoid the risk entirely
- Reduce the level of risk by taking steps to minimize potential negative impacts or reduce the likelihood of a negative outcome
- Accept the risk as a regular business occurrence and go ahead with the plan
- Transfer part of your risk to an insurance company by buying general liability insurance or insurance plans specific to your industry
While a risk management plan can’t make your startup “disaster-proof,” having a sound plan will definitely help preserve the longevity of your business.
Be Flexible and Pivot
The upside to business uncertainty is that it can bring forth new opportunities. While in the effort to sustain your startup, also keep an eye out for growth, outreach, or marketing opportunities that arise as different industries evolve.
Once you’ve laid out a potential plan and received positive feedback from testing it in the market, commit to the pivot. For example, since the pandemic caused demands to rise in the healthcare industry, many startups found ways to diversify by producing and selling medical equipment.
Embrace the trial and error nature of business and experiment with new ideas. Along the way, you might discover a business pivot worth committing to.
Support Your Team
In times of uncertainty, your team needs a strong leader more than ever. It’s the job of a leader to balance transparency and hope by being realistic with the team while also offering hope by laying out a vision for the future. Acknowledge the challenges and define strategies that will help overcome those challenges.
It’s also important to lead with empathy and show your team members how much they are valued. Take time to check up on each team member’s wellbeing, create a flexible and supportive workplace environment, and provide staff with the tools or training they need to succeed. Building a resilient team by overcoming adversity together can bring big payoffs in the future.
Continue Looking for Funding Sources
Access to venture capital is essential to a startup’s survival in turbulent times. Continue pursuing new investments, but also keep in mind that fundraising opportunities may be limited. Reinforce current stakeholder relations by holding shareholder meetings to communicate your forecast for the next few quarters.
To ensure you have enough funds to last, consider alternate funding sources like convertible loans or short-term financing.
Uncertainty is a challenge that all startups face at some point, whether it’s due to changes in the industry, environment, or economy. Business risks can’t always be predicted, but business leaders can best prepare for them by developing strategies that can apply to a range of possible outcomes. Communication, flexibility, and transparency are also key to maintaining valuable business relationships during uncertain times.
Once you have the right mindset and strategies in place, the challenges of business uncertainty can be turned into opportunities for growth and innovation.
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