As I was discussing business with a young startup owner earlier this week, a question came up- How to identify a risky moment for the business, and what protective measures should be made to prevent its collapse?

Well, some people say this is the matter of intuition. If you have it, you’ll sense the risk, if you don’t, you’ll fail anyway sooner or later.

In my opinion, it is good to have a sensitive nose, but business should never rely on intuition or emotions. There is a number of indicators that can help you recognize when your startup might be entering a risky phase, and you’ve got to check on them quite often if you want to float smoothly in the ocean of business.

First of all, you should immediately react when you notice the symptoms of approaching problems, such as-

• difficulty in meeting payroll,
• delayed payments to suppliers, or
• rapidly depleting cash reserve.

If your cash inflows are consistently lower than your outflows, or when you’re relying heavily on short-term financing to cover operational expenses, this is a signal of a cash flow crisis.

The next series of warning signs is related to customer communication dynamics. As soon as you realize you have difficulty in acquiring new customers, or identify a sudden drop in customer satisfaction, this is a red flag.

Likewise, if you notice that customer acquisition costs are rising while customer lifetime value is stagnating or declining, or if your startup is losing customers faster than it can gain them, this is also a red flag.

Then comes another series of signals, the one related to meeting product development deadlines. The inability of a startup to meet deadlines usually leads to missed market opportunities or increased competition. The most frequent signs of problems in product development are-

• Repeated delays in launching products,
• failure to meet development milestones, or
• increased frequency of product defects.

It is also necessary to mention leadership problem and relationships within the team. The clear red flags here are-

• high turnover among key employees,
• unresolved conflicts among founders or management, or
• lack of clear leadership direction.

If internal conflicts start affecting decision-making, or if key team members are leaving, a startup may be at risk of operational disruption or loss of strategic focus.

Quite often, a rapid change of external market conditions may be ruinous for a startup. If it is slow to adapt, a sudden change in customer preferences, or emerging competitors with disruptive offerings, or a significant change in regulatory environments may be quite dangerous for the young business.

In the rough sea of business, many young or emerging companies find the task of scaling their operations quite challenging. Operational bottlenecks, quality control issues, or difficulties in maintaining service levels as the business grows are the symptoms of danger for businesses in the early stage of development. If your startup is struggling to scale effectively and maintain the quality of its offerings, this could lead to customer dissatisfaction and logically, to operational inefficiencies.

Well, it goes without saying that difficulty in acquiring and securing funding, as well as reliance on personal savings, or a quickly growing debt are clear symptoms of a problem.

When your startup is running out of capital and cannot secure additional funding, this poses a significant risk to its survival and growth.

I also must mention such factors as reliance on outdated technology, frequent technical failures, or cybersecurity breaches which could undermine customer trust and affect operational efficiency.

I have met many startups that survived through years working with only one supplier or customer: the classical case of putting all eggs in one basket. In the times of economic recessions or global crises (e.g., pandemics), such business cannot adjust its strategy to the surrounding market environment, and may face significant financial challenges. The symptoms of such processes are

• declining sales,
• disrupted supply chains,
• changes in consumer behavior due to economic factors, and
• the very fact of relying heavily on a single supplier.

Proactive Measures

• Regular Monitoring: regularly review financial statements, customer feedback, market trends, and internal reports.
• Scenario Planning: engage in scenario planning to anticipate potential risks and prepare contingency plans.
• Advisory Support: seek advice from mentors, advisors, or industry experts to gain an external perspective on potential risks.
• Agile Management: maintain an agile approach to business development, allowing for quick pivots in response to emerging risks.

Well, I hope you do not see any of these symptoms developing in your business. Still, it is good to conduct regular analysis of your business processes and take action immediately, as soon as you notice any red light coming up.

#startupbusiness, #businessdevelopment,