In their excitement to launch their new ventures, many entrepreneurs tend to minimize the level of risk involved with their startup. But for funders and investors, new-venture risk assessment is a critical part of the evaluation and decision-making processes. In my work with entrepreneurs seeking funding for their startups or early-stage ventures, I generally find that most have not adequately factored risk into their plans. However, from both a funding and an operational perspective, it is important to not just identify the risks, but to consider how they will be overcome or minimized.
Assessing and planning for the various risks a new venture might face increases the likelihood that these challenges can be overcome with little or no impact on the business. Whether seeking external funding or for internal operations, here are some of the risks that entrepreneurs should consider:
- Business model risk: What is the risk that the business model is inherently flawed? Does the revenue model appear valid? If not, what are the assumptions required to achieve profitability?
- Financial risk: Does the startup have (or is it requesting) sufficient funding to hit its goals? Are there sufficient reserves built into the financial plan? What is the plan should the process take longer than anticipated? What are the other sources of funding the founders will tap into and what will be impact on equity or prior investors? Does the company have enough room in the cap table to take more investment if necessary?
- Team risk: Does the team have the right skills, experience and passion to reach their goals? Do the founders recognize where their skills or experience are lacking? What are the plans for addressing these skill gaps?
- Legal risk: What are the legal risks the company faces? Do the company’s products, services or technologies expose the business to lawsuits or legal challenges? If so, what are the plans for mitigating legal exposure?
- Barrier to entry risk: How strong is the company’s intellectual property or competitive advantage? What are the risks that someone else will enter the same competitive space? How will the company maintain its competitive edge should a larger or more agile competitor appear? How strong is intellectual property protected?
- Market risk: What is the risk that the market will not be interested in the product or service? What is the plan should market adoption be slower than expected? What are the plans to pivot should customer reactions differ from the initial plans?
- Technology risk: For tech startups, what is the risk that the technology will not function as expected? What are the pivot plans should this be the case? Are these pivot plans feasible and practical?
- Innovation risk: What is the risk that the startup’s product, service or technology is sufficiently innovative or different from the competition? How strong is the innovation or differentiation factor?
As founders plan to launch their startups or grow their early-stage firms, these are some of the most critical risks that they must consider. This is especially important when seeking funding from investors. Before investors will consider making an investment, they must be reassured that these risks have been analyzed and addressed. But even when investment is not being sought, entrepreneurs should always conduct an in-depth risk assessment of their startup. Doing so can exponentially increase the likelihood that the venture will be a success.
Ronald Flavin’s occupation as an organizational strategist encompasses his expertise in business growth, business grants, grant writing, ghost writing, product/revenue development, and also as an author, and a professional speaker.