Understanding Risks from an Investors’ perspective

Ultimately no venture will ever be risk free. The key is to understand what can go wrong and then be on top of whatever you can do to take care of that risk. Control the controllables and leave the rest to luck, destiny or higher power, whatever you believe in!

[Editorial notes: When pitching for funding, one of the most important question for any investor is to understand how the startup is going to manage risk. And risk has multiple meanings for a venture – it’s a combination of several factors.This article brings a perspective on risk vis-à-vis fund raising activity.]

Recently I conducted workshops for entrepreneurs on “How to pitch to Investors”. Many discussions happened but a slide on Risks evoked especially special interest. clip_image002

First let us see what Risk actually means.

According to Wikipedia

Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). The notion implies that a choice having an influence on the outcome exists (or existed).

An interesting definition, isn’t it? Like it says – risks do not mean that things will go wrong – it means there is a probability of some things going wrong and more importantly, your action plan towards it can make a difference to the outcome.

Ay venture will always be exposed to some Risks – I guess that’s the reason it is called a venture! In this context, let us discuss the different risks a venture faces, especially from an investor’s perspective and what you, as an entrepreneur, can do to mitigate them

1. Market Risk

Every business serves a need. Evolution of technology, lifestyles and changing environment constantly changes & shapes our needs. As a result, the need a business is serving can shrink or disappear completely. Take for example landline phones, at one point customers had to wait for years to get one. Now with the advent of mobile phones, they no longer command a compelling market share. You actually get it free with a broadband connection.

What can one do: At first glance it may seem as if this risk is beyond our control, but we can tackle it by shaping our startup in line with the evolving market. Keep an eye on how the market is shaping up, is it on an expansion trend or a declining one. Be Nimble in pivoting & adapting to the changing market.

2. Customer Adaption Risk

Every customer has the choice of picking a competitors’ offering or simply not using your product / service. In the customer adaption risk the market exists, but one is unable to make their place in it because of competition, partial fulfillment of customer delivery promise or even pricing. Tata Nano for example was positioned right, but is still struggling to get traction with the intended customer base.

What can one do: Work closely with the customers as early in your venture as possible. Develop a good beta plan. Work with early adaptors to find and address the pain points of your product as well as discover pricing. Build clear differentiation from existing products in the market and price it appropriately.

3. Execution Risk

Finally it all comes down to execution! Execution Risk is the risk of whether the team can execute the business plan in all its different dimensions – developing the product / service, managing operations & finances, selling to customers, building a team etc.

What can one do: Understand your key challenges in the execution and continuously plan to make it work. Break down your journey into achievable milestones and then show traction on that path. Hire right!

4. Team Risk

People come together for a cause. They separate because of everything else – chemistry and all the multiple minute details that go on into a relationship. Team Risk from an investors’ perspective is the risk of the right team not coming together or more importantly not staying together!

What can one do: Work / invest (time) on the relationships between core members proactively rather than firefighting later. Define roles & professional boundaries. Respect those. Work out salary & equity distribution upfront.

5. Exit Risk

The only time an investor makes money is when he/she exits from your venture. Not having a reasonably clear exit plan can switch off the investor.

What can one do: For a lifestyle business (typically no exits), look for non-equity financing for your venture. Typically angels exit in 2nd round of VC funding and VCs exit on an M&A or IPO. Clarity on these aspects during discussions with investors helps you in taking care of their needs.

Ultimately no venture will ever be risk free. The key is to understand what can go wrong and then be on top of whatever you can do to take care of that risk. Control the controllables and leave the rest to luck, destiny or higher power, whatever you believe in! All the best!

[About the author: Manish Singhal helps start-ups get established & started-ups scale as Chief Saarthi @ Saarthi. He also invests as an angel investor in innovative start-ups.  Manish serves on the board for companies ranging from technology businesses, consumer businesses, e-commerce to employability. He is a charter member of TiE Bangalore and has been a mentor for many entrepreneurs & executives. Manish holds a B.Tech from IIT Kanpur.]

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