Venture Risks
CORRE CONSIDERATIONS IN
Risks In Entrepreneurial Ventures Lie On A Spectrum.
The risks in any entrepreneurial venture sit on a spectrum and they vary from the firm-specific risk to the market-related risks. In most of the MBA programs, the risks are taught from the perspective of investors, in which they invest in a portfolio and they try to figure out what kind of risks may affect the performance of the portfolio. But as entrepreneurs, it is really important to understand risks from a fundamental point of view and from a first-principles basis, and they should be looked at from both directions: inside out and outside in.
This is important because the ventures are a part of an ecosystem in which there are other ventures trying to provide similar services or products. They are part of an economy within the economic bounds of a region or country.
One of the valuation books by Professor Damodaran, recommended by you, has presented the risks in the form of a spectrum. If we start from form-specific risks, they may pertain to:
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risks in projects
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risks related to competition
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risks related to the entire sector
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risks related to exchange rates and political points of view
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risks related to interest rates, inflation, and news about the economy
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risks related to natural phenomena
The link to this book is given here.
In addition to the above point of view, we also need to look at the risks from Porter's Five Forces model. This will be discussed in detail in one of the other essays. But the main trick is that any product or service that is produced helps in solving the problem statement for the end customers because they perform the monetary transactions to acquire the product or services, to be able to meet certain goals, and to get some job done. Thus, two of the key forces from this model are the forces by the competitors and the forces of alternatives. Competitors come into play because there are going to be multiple players trying to provide the same product or service in the market. Alternatives come into the picture because the same job can be done by different methods or by different tools.
For Investors
For Investors, the risks are looked at from the point of view of a portfolio. The VC and PE funds invest in a portfolio of companies with a certain investment thesis and conviction factors that can affect the performance of a particular company, or a particular sector, or a particular economy come into play to affect the returns on the investments that they do.
While the above diagram is used to discuss the risks in market securities, in principle, if we look at individual companies, all of these risks come into play. Thus, for the early-stage investors, they have to really look at the company's specific risks and how they are going to pan out when the company achieves scale. And also, in a 5- to 10- or 15-year horizon, how the market dynamics are going to change and affect the profitability of the company
Image: Breakdown Of Risk (Ref - Valuations By Damodaran)