In the creation of a new enterprise, there are five principal risks to be addressed by the entrepreneur.\u00a0 Professional investors will probe these five risk areas and make the decision to invest based upon comfort with each.\u00a0 So it is important for the entrepreneur to identify, address and mitigate each of these in order to increase valuation and decrease the risk of ultimate loss of the business.<\/p>\n
First:\u00a0 Product risk.<\/em>\u00a0 Is the product or service possible to produce at all, let alone economically enough to compete in the marketplace?\u00a0 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.<\/p>\n Second: Market risk.<\/em>\u00a0 Are you ahead or behind the market with your product or service?\u00a0 Will the public respond in numbers to buy, license or rent your offering?\u00a0 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.\u00a0 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.\u00a0 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.<\/p>\n [Email readers, continue here…]\u00a0<\/em><\/span>\u00a0 Third: Management risk.<\/em>\u00a0 A great idea often fails from the inexperience or inability of management to bring the idea to market.\u00a0 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.\u00a0 This is sometimes labeled \u201cexecution risk\u201d addressing whether management can create and run the company producing the product acceptable to the marketplace.<\/p>\n Fourth: Financial risk.<\/em>\u00a0\u00a0 Any new enterprise is at risk if there are not enough resources to get the company to breakeven, which is a proxy for stability.\u00a0 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 \u201cdown round\u201d in which the early investors are punished for taking the first risk.<\/p>\n And fifth: Competitive risk.<\/em>\u00a0 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.<\/p>\n 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.<\/p>\n","protected":false},"excerpt":{"rendered":" In the creation of a new enterprise, there are five principal risks to be addressed by the entrepreneur.\u00a0 Professional investors will probe these five risk areas and make the decision to invest based upon comfort with each.\u00a0 So it is … Continue reading