Given the high risks with young companies, there is a need for Founders and Investors to be proactive at recognizing and mitigating risk.
Being good at managing risk is important to improve the probability of venture success, have more options to move forward, increase business valuation, negotiate better investment terms, be a more appealing organization to attract and retain top talent, etc.
For this to occur, ensure you are minimizing –
1. Product Risk
By being able to produce the product or service that has high appeal that delivers – meaningful value and benefits, a great User Experience, competitive advantage, etc. with a lucrative business model.
A way to mitigate product risk is by using early investment money to – validate the opportunity with good market research, create a prototype, complete the first generation of the product, do demos and get paying Customers (revenue), etc.
2. Market Risk
Know if you are ahead or behind the market with your product or service. Will the people respond in meaningful numbers to buy, license or rent your offering ?
This risk can be mitigated by finding a customer willing to purchase as soon as a proven model is completed, and willing to state this in writing. Another is to gain the support of a core vendor who is willing to offer special extended terms to the company as its investment in creating the product in a finished state. A third way of overcoming market risk is by holding controlled focus groups and gathering information from unbiased potential customers interested or intending to buy your product or service.
3. Execution Risk
Be realistic in assessing if Founders – can create and run the company and achieve the desired results by producing a product having high appeal and value, making good on the opportunity by generating sales, having a lucrative business model + are very entrepreneurial, determined, resourceful and good at strategic thinking, etc.
To be better able to perform (execute), realize a great idea often fails from the inexperience or inability of venture personnel to bring the idea to market. Similarly, great founders often can manipulate an original idea or business plan into one much more attuned to the market – adding tremendous value that might have been lost sticking to the original plan.
4. Financial Risk
Any new company is at risk if there are not enough resources to get to breakeven – which is needed for stability. If a company truly needs $1M or $5M, investors that provide the initial money are at risk of losing their investment if the company fails to realize meaningful sales, or is unable to raise additional capital, or if follow on investors value the company at a lower price (a “ down round ” whereby early investors are punished).
5. Competitive Risk
If there are high barriers to entry due to patents, long product development time frames, a lengthy sales cycle, challenging legal / regulatory / contractual / business issues – then the risk of a competitor with more resources getting the business is a major risk that needs to be mitigated.
Summary
Reduction or elimination of one or more of these risks meaningfully improves the probability of venture survival, a higher valuation, more opportunities for the business to grow and create value, and an incentive for Founders interested in having a meaningful ownership % of the business.
Nov 8, 2024 by Dave Berkus / CAIL info@cail.com www.cail.com 905-940-9000