Be Ready For the Hard Q’s (Defining Risks for Investors)
Pitching to investors is not an easy feat….at least for the vast majority of entrepreneurs out there. In fact, it can be extremely daunting for many, not to mention time intensive and nuanced, especially when you are dealing with institutional investors and VCs. One of the harder questions many entrepreneurs struggle with is the questions involving the inherent risks of your business.
Time and time again I see founders trip up over this question because they are so passionate about what they have built (or are planning on creating), that they keep their blinders on. Yes, perhaps your business will produce a $100M+ exit, GREAT! However, this does not mean that there will be zero bumps and bruises along the way.
What Investors Want:
Investors want to understand what is truly happening under the hood of the car and they love it when you are absolutely transparent about what you foresee happening, and what could possibly go wrong. If you are able to articulate this in the right way, more often than not it is something that will give you real respect points and earn the trust of these investors, NOT deter them (contrary to what many people believe).
Types of Risk:
So what types of risks might your company come across? You should prepare answers to this beforehand because there are several things that can happen over the course of a few months or years that can directly impact your plan:
- Legal Risks – Do you have any agreements in place that might hinder scale, the ability to sell to specific regions or companies, unfavorable business/entity structure or ownership allocation, does a third party own the rights to particular code?, etc.
- Regulatory Risks – i.e. safety and transportation regulations for autonomous vehicles, NY State bans for Airbnb, FAA for drones, and any other political uncertainty that could impact what you are trying to accomplish
- Economic Risks – Market downturn and loss of disposable income of your target persona, real estate market downturn could impact real estate start-ups, overall uncertain economy
- Competitors – Other competitors that are moving into your space that are doing similar things as you (threat of stealing some of your market share), large well-known companies can decide to enter the space, etc.
- Market Movement – Especially in new markets like VR for instance, markets can be very volatile. At first it may appear that market demand is in one particular area but this can change drastically over short amounts of time.
- Technology – Same as for the volatility of a market, new technology is ever-changing. Maintaining your position as cutting edge can be hard to endure over long periods of time. You must find a way to continue to keep up with the latest or best technology out there or run the risk of newer better technology coming in to beat you out at a fraction of the cost (for example).
- Dilution – If you raise another round, your previous investors may get diluted. This can be worked around but it is something you might want to consider thinking through before any pitch.
All of these risks are very relevant to investors and should be in the back of your mind before having in-depth conversations about raising capital. Of course, there are many more out there! I would encourage you to think of some others outside of the ones listed here as well.
Chief Analyst @ InvestVR
COO @ ARVRUS