The value of risk management in a young startup

Abstract

We have performed a case study of a young venture capital backed startup based in Sweden. By having full access to the company’s management and insight into all internally gathered data and projections, we have had a unique opportunity to gain deeper understanding of how the entrepreneurs of the case company manage risk and uncertainty within their business. To find out what value these practices add to the company, real option valuations were conducted where the company was valued with and without risk management. Our findings go against previous literature, which states that entrepreneurs are risk lovers who knowingly and willfully embrace risk taking. Instead, we found that the entrepreneurs are diligently managing both risk and uncertainty by dividing all internal projects into two-week “sprints”, where the performance of each project is continually evaluated and monitored to minimize the risk of spending time and money on unsuccessful ideas. Furthermore, our valuations indicate that the risk management practice of the case company may increase its value with a factor of 4.17x.