How to include risk factors in a pitch deck?
Opportunity is what drives most people to become entrepreneurs and business owners and to launch startups. A certain amount of naivety may be an asset at the start. Many now hyper-successful founders admit that they may not have started if they knew how hard it was going to be, and what it was going to take.
You cannot get bogged down in overanalyzing everything that could possibly go wrong, or you will probably never get started either. Still, successful entrepreneurs know that in order to succeed and to build something which can really work and last, they must be alert to the risks. It is relatively easy to start a small business and force it to work for a year or five.
Building something which can go really big and last 10 years requires more thought. A healthy balance of optimistic pragmatism. Investors also understand this. They love big aggressive visions and forecasts, but in order to generate real returns and to keep their capital safe, they also must analyze the risks.
The Ultimate Guide To Pitch Decks
Here is the content that we will cover in this post. Let’s get started.
- 1. What Are The Risks For Startups?
- 2. Denying There Are Risks
- 3. Financial Risk
- 4. Product Risk
- 5. Market Risk
- 6. Team Risk
- 7. Execution Risk
- 8. Competition Risk
- 9. How To Show Risk When Pitching Investors
- 10. How To Include Potential Risk Factors In A Pitch Deck
- 11. Clear Understanding Of The Problem
- 12. The Market Is Big Enough To Generate Returns
- 13. You Know Your Competition
- 14. You Have Real Financial Projections
- 15. Show That You’ve Built The Right Team
- 16. Be Sure You Are Asking For Enough Money
- 17. You Are Looking For Investors To Fill The Right Gaps
- 18. You Are Prepared For The Q&A
To ignore the risks is foolish. They obviously exist. Investors are typically putting in more capital than founders, and have more to lose. Not just their own money, but their reputations, and their investors’ money. They have a legal, if not just moral responsibility to do their due diligence.
As a startup founder seeking capital, it is your job to lay out these risks. You’ll help investors to justify their investment by showing your understanding of them. And what you have done to de-risk this venture and their investment in it.
Pretending that risks don’t exist won’t help you. So, how to include risk factors in a pitch deck?
The reality is that startups face many risks. Otherwise, they wouldn’t have such a high failure rate.
So, what are the most common risks for startup companies, especially when related to pitching investors and fundraising?
Denying There Are Risks
Perhaps the first risk that is an important prelude to all of the others is accepting and respecting that there are risks.
That isn’t a weakness or a detraction from your idea and the opportunity. It is just intelligent.
If you are serious enough about this venture and mission, then you will find a way to minimize, insulate against and overcome these risks.
Though you can’t do that unless you recognize their existence or potential first.
The number one reason that startup companies or all companies fail for that matter is financing.
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Most just run out of money. They seem most susceptible to this during the first year.
Then in the first five years. Though even the largest multi-billion dollar companies with 100 years of history can run out of money as well.
Most often this is due to underestimating cash flow needs. Though also due to failure to recognize and defend against the other risks on this list which can become financial risks.
Being sure you are raising enough money is crucial to squashing this risk.
With this in mind, it is normally wiser to build in a cushion on top of your expected need and to bring in more funds.
Including the risk factors in your pitch deck is an important facet of how to evaluate a business idea. If you would like more information about how the two are interlinked, check out this video I have created.
While it probably isn’t the right foundation for 99% of startups, most entrepreneurs go in with everything riding on their product idea.
This means their biggest area of risk can be whether or not that product works and is successful.
In some cases, for early-stage startups, this is about the risk of actually being able to build the product imagined.
That you can actually create it, and that it works, and the design is good enough.
Though all startups must have a product that is urgently needed and wanted, and that customers are willing and able to pay for, in a big enough market to make it commercially viable as a business.
Learn how to include risk factors in a pitch deck that takes into account how your product is likely to perform.
Do not overlook the importance of service either.
You not only need to be able to make the product, and get people to pay money for it, but to deliver it, and provide customer service that is good enough to retain those customers and get them to refer you to others.
The market itself can be a risk.
Is this market declining? Or is it growing, and predicted to grow for at least the next 10 plus years until you can achieve an exit?
Be sure you are alert to macro risks. This may include things like natural disasters, general cybersecurity threats, and technological innovation. As well as the risk of a new regulation.
Other significant risks here can include having a strong go-to-market plan to break into this space with real results.
Though perhaps underpinning it all is research risk. That is ensuring that you have done enough quality and quantity research to understand this market and the risks and potential threats to your venture.
Experienced investors typically consider the number one risk to their investment as being the team involved.
The startup idea comes in at a distant second, and the product an even more distant third or fourth.
They want to bet on the best possible teams. Founding teams with well-rounded skill sets that don’t overlap too much.
Too much overlap means unnecessary dilution of equity. Not enough specialization and mastery opens up too much competitive risk.
Without well-rounded coverage, there isn’t enough top talent to ensure this can succeed as an actual business versus just a new invention.
In addition to the founding team, this may also include executives, key hires, advisors, previous investors, and who the investors are leading this round.
The product idea, business model, financial projections, and intelligence of the team can all be irrelevant without great execution.
Ideas are cheap. What makes the difference in a successful startup is that they can actually make things happen.
They can achieve things and create traction. They can make the product, make sales, secure investors, and know how to focus on the most important priority tasks.
In any case, you must understand how to include risk factors in a pitch deck that considers the failure of proper execution.
Probably the most obvious risk is a competitive risk. The risk coming from competition needs to be acknowledged and respected.
Yet, ironically, it is probably more likely that either completely ignoring the fact there is a competition or unwarranted fear of competition will sink your startup, instead of the actual competition itself.
In fact, competition can be a great positive thing, and an advantage when creating a startup.
You should be suspicious when there is no competition for your idea. You should know that there will be a lot more work involved in creating a whole new market from scratch instead of just creating a 10x better solution in an existing market.
You will always eventually have competition. You should anticipate who they are, when they will arrive, and know how you are protecting against and beating them.
What you moat is, marketing edge, and positioning.
Ask how you can use competition as an advantage. Ask who else got funded, invested, needs what you are building, or have bought companies like yours in similar situations
Keep in mind that in fundraising storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
How To Show Risk When Pitching Investors
There are two main parts of risk when it comes to fundraising with startup investors.
1. To demonstrate that you understand the risks to your venture and their investment, and acknowledge them.
2. That you demonstrate how you have worked to eliminate those risks and protect against future ones.
How To Include Potential Risk Factors In A Pitch Deck
Clear Understanding Of The Problem
Your pitch deck should show a crisp, clear understanding of the problem.
This shows up in the succinct delivery of your problem description.
While your entire deck demonstrates that you’ve done your research and are matching to product-market fit. There is synergy between your brand to go to market plan, solution, and business model.
Great startups are built on strong problems and extreme clarity of what it really is. The right foundation here is key to everything else.
The Market Is Big Enough To Generate Returns
Investors must invest with the potential for supersized returns to offset the risks associated with other companies in their portfolios not playing out.
The key to de-risking their investment is showing how large this market is, and the potential share of it that your company can achieve with their investment.
Investors also want to see if you know how to include risk factors in a pitch deck.
You Know Your Competition
Your competition slide should show that you know your potential competition.
That you’ve also designed your business to stand out ahead of them. That you can even use them to position your company for the better.
Something which will not only be important for marketing to customers and attracting the best talent and vendors, but also for future fundraising rounds and achieving a great exit.
You Have Real Financial Projections
Even as an early-stage pre-revenue startup your pitch deck should have a strong financial projections slide.
These can be optimistic and aggressive projections. Though they must be believable, achievable, and based on good assumptions.
Investors are going to be looking at your predicted profit margins, sales volume, and growth to see if they have any real factual basis. If you are just winging it they are going to know, and that will steal your credibility.
They are fine with taking well-calculated risks. Just flying blind on made-up numbers plucked out of the sky isn’t doing much for protecting their capital.
Show That You’ve Built The Right Team
Use your team slide to show that you have assembled the best possible team to take on this mission, and for investors to bet on with their capital.
Include photos and brief bios highlighting their expertise. Augment this with advisors if needed.
It’s okay to acknowledge hiring gaps too. Especially if this investor can help you fill them.
Be Sure You Are Asking For Enough Money
Don’t go wildly out of the box compared to same stage startups in your space, but don’t be afraid to ask for additional funds, with a cushion to pad your company for emergencies and enough runway to navigate uncertain economic times.
Sometimes investors will want you to take more money to go even bigger, faster.
You Are Looking For Investors To Fill The Right Gaps
You probably won’t have all of the bases covered yet. At least not to get to the next big milestone.
Or you wouldn’t be pitching, right? There are plenty of places to get money from. It’s more important you find the best match.
Investors also want to invest where they can make a big difference too.
You Are Prepared For The Q&A
If you’ve kept their attention and spiked their interest enough, then they are going to want to drill in with questions after your pitch.
The most successful entrepreneurs at fundraising are going to be those who already know what questions are coming, and have thought through and prepared their answers well.
And that includes knowing how to include risk factors in a pitch deck.
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