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Can you overcome five risks and create wealth?

Of course, we are speaking of increased valuation of your company when we speak of “wealth.”  Especially if you are in the early stage of growing a business, these five risks can and often do derail entrepreneurs before realizing the riches of a great exit.

So, let’s examine them and mitigate them.  Make you wealthy someday.

The carrot and the stick

In the creation of your enterprise, there are five principal risks you’ll need to navigate

around. Professional investors will probe these five risk areas and make the decision to invest based upon their comfort with each.  So, it is important for you to identify, address and mitigate each of these in order to increase valuation and decrease the risk of ultimate loss of the business.

First:  Product risk. 

Is the product or service possible to produce at all, let alone economically enough to compete in the marketplace?  One way to mitigate this is by using early money to create a prototype, to perform market research, to complete the first generation of the product, or to deliver the service to a satisfied customer.

Second: Market risk. 

[Email readers, continue here…]  Are you ahead or behind the market with your product or service?  Will the public respond in 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 demonstration of overcoming market risk is by holding controlled focus groups and gathering information from unbiased potential customers supporting the acceptance of the product or service.

Third: Management risk. 

A great idea often fails from the inexperience or inability of management to bring the idea to market.  Similarly, great management 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.  This is sometimes labeled “execution risk” addressing whether management can create and run the company producing the product acceptable to the marketplace.

Fourth: Financial risk.  

Any new enterprise is at risk if there are not enough resources to get the company to breakeven, which is a proxy for stability.  If a company truly needs five million dollars to get to breakeven, investors that provide the first million are greatly at risk of the company failing to raise the remaining capital or of subsequent investors valuing the company at a lower price than the first investors, causing a “down round” in which the early investors are punished for taking the first risk.

And fifth: Competitive risk. 

If there are high barriers to entry with such protections as patents, long development time already spent or contracts with the major potential customers, then the risk of a competitor with more resources jumping into the frothy pool and taking advantage of the demand created by the company is minimized.

The lesson: Reduction or elimination of one or more of these risks increases the valuation of the company and certainly improves its chances of survival and growth.

  • The entrepreneur’s risk of founding a business which becomes successful is the dilution risk of reduced ownership caused by equity financing. In most cases, the founders of successful businesses end up with but a small percentage of the ownership and never have the benefit of the perks which can be created by proprietors.

    Funding through selling a share of revenues (a royalty) is better if the business is going to be successful and create wealth for the founders. If the success of the business is believed by the founders to be questionable then it is better for the founders to sell ownership interests. Unfortunately, it is reasonable for investors to ask themselves why they are so lucky as to have the opportunity of investing in a new venture?

  • With ” Managing Risk ” being very important to achieving success, your insights should resonate with aspiring entrepreneurs and those doing venture investing. Interestingly having seen numerous examples of founders and investors not being aware of the risks nor having good look ahead skills, this leads to unintended consequences. And why the returns from early stage investing need to be high – if supporting entrepreneurship is to be sustainable and rewarding.

  • William Fisher

    Nice, crisp summary. Thanks, Dave.

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