Navigating risk in startups to secure investor buy-in is one of the most crucial skills entrepreneurs must learn. Setting up, scaling, and sustaining a new business is super challenging.
Recognizing the key risk factors and instituting effective risk management solutions could make the ultimate difference between success and failure. Should you read any blog or article referring to startups across all industries, there’s one underlying factor standing out.
Only 50% of new ventures are likely to make it beyond the initial five years. And, 90% of new ventures will eventually fail for several reasons. The high failure risk percentage is hardly a deterrent to new ideas emerging and entrepreneurs being enthusiastic about starting businesses.
The Ultimate Guide To Pitch Decks
Statistics indicate that 543,000 startups made their debut in the USA in the first two quarters of 2023. At least 78% of founders report that their business is generating profits. Interestingly, despite the high failure percentage, venture capitalists and angel investors continue to back them. And their buy-ins continued all through the pandemic.
At least 75% of venture capital-funded businesses never return the investment. Even so, investors are open to funding new business concepts but will conduct due diligence and examine the risk factors.
This is why entrepreneurs should understand how navigating risk in startups to secure investor buy-in works. Identify the main pitfalls your business is likely to face and devise a detailed risk management strategy to overcome them.
Navigating Risk in Startups to Secure Investor Buy-In
Whatever the sector in which you’re establishing a business, make sure to address these risks in your pitch deck. Demonstrate that you’re aware of the potential snags in the venture’s success and that you’re on top of them. Here are more details about the core areas to focus on with risk planning.
Non-Viable Product or Service
The cornerstone of every new startup is a viable business idea. But transforming ideas into a product design that customers will want to pay for is a whole different ball game. Remember that misreading customer needs and demand leads to 14% of startups going under.
Being able to create a product design that actually works is one of the biggest risks the startup faces. Address this risk by conducting detailed research into the potential buyers. Identify the particular problem the product can solve and ensure that it is economical enough to make sense to customers.
Describe these details in your pitch deck. Demonstrate the target customer base with compelling statistics to show how the product is likely to perform. Also, talk about how you intend to minimize churn rates with efficient after-sales customer service.
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Poor Product-Market Fit
The inability to identify the correct product-market fit is a significant pitfall for startups. At least 42% of them fold because of not being able to predict the market, demand, and future buying trends.
Study the market carefully and compile statistics that indicate whether the market is growing or likely to decline in the next few years. Understand the potential barriers you’re likely to encounter and how you intend to break through.
Your pitch deck should include metrics that denote market demand, estimated Customer Acquisition Costs (CAC), and go-to-market strategy. Also, offer information about the advertising channels you’ll target and the budget allocated toward harnessing them. Don’t forget that inefficient marketing strategies result in 22% of businesses failing.
Prudent founders factor in the time lag between when they initiate advertising and the time when the actual revenues start to roll in. They also plan for natural disasters similar to the global pandemic.
Factor in unexpected or macro risks like tech innovations that can render the product redundant. If you have contingency plans for a strategic pivot, the product-market fit slide is where you’ll mention it.
Viewers like to see how well-prepped you are for navigating risks in startups to secure investor buy-in.
Competition – Saturation With Similar Products
In an intensely competitive business landscape, founders should be prepared for the possibility of the industry crowded with similar products. Before taking the dive, you’ll study existing products and services available in the industry.
Understand how well they solve the existing problems or if there are underserved niches you can target. If multinational corporations dominate the sector, carving out a spot for your venture might not be that easy.
If you think you can take on the competition, work out your product’s USP and why customers will prefer your brand over others.
You’ll also want to explore acquiring patents and copyrights to secure the business concept before releasing it in the market. That’s how you’ll maintain your edge. Remember that patents, copyrights, and secure Intellectual Property are valuable draws for attracting investors.
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.
Human Resources Concerns
The core talent and top-notch skills are the dynamic resources that ultimately drive the business. Without it, close to 18% of startups eventually close their doors. The team slide is of special interest to potential investors because experienced human resources can determine the startup’s success.
Relying on expert mentors and advisors to assist you with recruiting and onboarding is a smart move. You’ll ensure that you avoid overlapping but with the ideal blend of essential skills. Institute a robust vision, goals, mission, and startup culture that new employees know to follow.
If needed, hire an HR consultancy to direct your hiring procedures at the minimum cost. Build a core team that is enthusiastic about your project and willing to go the extra mile. You’ll design appropriate compensation packages that include equity and salary packages that offer just the right amount of motivation to perform well.
Don’t hesitate to outline how you plan to minimize dilution even after offering equity to your investors to pay for funding. Aside from efficient screening processes, you’ll talk about the failsafe measures you have in place for dealing with employee lawsuits. Also, outline the agreements you have with engineers for securing the IP they develop for the startup.
Financial Issues Like Sluggish Cash Flows
Financial problems like sluggish cash flow and running out of money too soon result in 16% of new ventures closing doors. Small businesses typically get seed funding from bootstrapping or advances from friends and family.
This factor does not leave much room for errors, and entrepreneurs need to be diligent about every penny they spend. At this point, they need efficient financial management and, preferably, an expert professional to record their expenses and revenues.
Although acquiring investment can resolve cash crunches, investors providing funding need to see that you’ve budgeted finances efficiently. You’ll demonstrate the asking amount and how you intend to allocate the resources.
Also, indicate the potential returns you can earn and your planning for the next funding round. The money you raise should not just resolve cash flow issues but streamline the way for incoming profits and revenues.
The risks we’ve talked about above are the most common pitfalls facing industries across the board. However, the rapidly evolving business landscape that now technology and the internet has additional risks founders should be aware of. Here’s some detailed information you should have.
Investors evaluating your startup are likely to have several questions centered around the potential risks. Here’s a video explaining more in detail what to expect during the Q&A.
Organizations need to integrate technology into their operations to stay relevant to the tech-savvy audience. By 2040, 95% of customer purchases will be made on eCommerce sites. However, offering conveniences like eCommerce and online payments also opens them up to cybersecurity risks.
Without taking the necessary measures to protect customers’ Personally Identifiable Information (PII), you risk cybercrimes, data breaches, and hacking incidents. These hazards can damage the company’s reputation irreparably.
You risk heavy fines because of regulatory non-compliance that can wreck the startup’s finances. You could also end up paying heavy compensation packages to customers who have been affected. Not to mention the costs of managing lawsuits.
Malware, phishing scams, data leaks, and the costs of restoring and reinstating hacked security systems can be devastating enough. Investors examining your business model and pitch deck will want to know more about how you intend to secure the startup from such risks.
You’ll prep the startup carefully for such setbacks with cybersecurity policies that employees must follow. These may include password and device security and firewall protocols. Also, establish a robust cybersecurity infrastructure by allocating the necessary budget.
If needed, retain external agencies to keep your networks and systems protected. Investing in adequate insurance to secure cyber security liability is also a smart move. Make sure to include clauses that provide coverage for legal costs, forensics, managing complaints from affected entities, and more.
You’ll also need coverage for expenses related to notifying customers and vendors and assisting them with damage control. Be aware that 6% of new ventures fail because of cybersecurity issues.
Founders who are efficient in navigating risk in startups to secure investor buy-in have a higher chance of being successful.
Lawsuits and Claims
Lawsuits have the potential to destroy a small business with limited resources. New ventures face close to 12 million contract lawsuits every year. Among the many claim categories are accidents and injuries because of negligence and contract breaches.
Employees bringing lawsuits is also common for issues such as harassment and discrimination. This can be on the basis of gender, race, pregnancy, religion, and even age. Workers not happy with their salary and compensation or perceived unfair termination can also sue.
Almost every sector is at risk of being taken to court, including real estate agents, accountants, lawyers, insurance brokers, and consultants. Professionals providing services onsite or offsite from remote locations may also face lawsuits if customers are not satisfied.
Entrepreneurs should prepare for such risks by acquiring the necessary insurance coverage. You’ll buy insurance to protect the company against worker injuries in the workplace. Insurance will cover costs related to medical treatment, rehab, lost wages, emotional distress, and any other.
Entering into binding contracts with employees is an excellent strategy to prevent discontent later. Clearly mention the expected compensation and option pool, job descriptions, and any other clauses. If you work with Intellectual Property, don’t forget to get NDAs signed by any entities with whom you share the information. These entities can include employees and third-party consultants you hire.
Founders running a conventional brick-and-mortar establishment should invest in insurance for protection against slip-and-injuries on their premises. And the potential lawsuits arising from them.
Include this information in the data you provide to investors for their due diligence. Also, outline the agreements and contracts you have with employees and business partners. Investors will appreciate your commitment to securing your startup.
Surprisingly, at least 2% of new ventures go under because of legal hassles. You’ll want to hire expert legal assistance to navigate regulations relevant to licensing for the business. For example, cafes and restaurants need different kinds of permits like a Food Service License, Building Health Permit, Sign permit, and more.
You’ll also need help with determining the startup’s legal structure, such as a sole proprietorship or partnership and company registration. Incorporating the business involves several legal processes and intricacies. Not addressing them can result in legal issues you absolutely want to avoid.
Startups should be ready with accountants to manage their finances and bookkeeping tasks to avoid the possibility of tax audits.
Secure Your Fledgling Company By Being Aware of Risks
Startups face several risks at every step of their founding, scaling, and funding. Staying on top of potential pitfalls is not just a prudent move for founders. But it also indicates the company’s stability to its stakeholders.
Employees, customers, vendors, and, most of all, investors are likely to do their due diligence before entering into partnerships. Your risk management planning is an incentive to build long-term collaborations.
Investors see that their money is secure with the potential for getting rich returns. They also estimate the equity appreciating without any possible pitfalls, making the startup an attractive investment opportunity.
For all these reasons, navigating risk in startups to secure investor buy-in is an excellent skill for founders to learn. Tick off the boxes and prep your venture for long-term stability and funding.
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