Starting a business has never been easier. The startup economy is full of opportunities, potential, and innovation. A rewarding venture both financially and personally. However, at the same time, the stakes are pretty high. According to statistics, many startups are subject to a quick and short-lived tenure.
To help you figure out whether your investment will be worth your while, we are going to look at 6 quick tips for risk assessment.
Effective Tips for Risk Assessment
1# A Realistic and Well Thought Out Valuation
If a valuation is outrageous, it could be a recipe for disaster in a far as risk goes. It is not only a sign that the entrepreneur has overvalued their startup but also an indicator that they lack business acumen. Therefore, your decisions should be swayed more by how realistic the valuation is rather than the size of the valuation.
However, determining the value or worth of a startup is always a catch 22 kind of situation. Unlike mature companies that have everything figured out from financial projections and quantitative analysis, with startups it’s a bit different.
Without quantitative data and financial projections to back up the entrepreneur’s claims, it is practically impossible to determine the value of the startup so as to decide the kind of investment you’ll make. You have to use more creative techniques to determine the value of the startup so that you get the most out of your investment.
2# The Startups Revenue Stream
Determining the value of the startup is not the only task. The second most important tip for risk assessment is the revenue and clear earnings predictability consideration.
Anyone will tell you that revenue is a pretty interesting discussion. And as far as risk assessment goes, investors should focus more on startups who can not only show where their money is coming from but that this money will continue coming in consistently.
And according to statistics, there’s a significantly lower risk with businesses that have solid business models and have put in place contingency plans to minimize risk in case something goes wrong.
3# Software Escrow
Here’s the brutal truth about investing in a startup. There are way too many founders who will back out as soon as they get the money and up and leave with the code created at the startup. They start second-guessing their decision of seeking an investment maybe two, four or six months down the line and decide that it’s not worth all the trouble.
If you’re serious about investing in a startup, you need to tread very carefully. Otherwise, you’re taking a risk of losing all your investment. And one way to ensure your safety is by using the software escrow.
The software escrow helps protect you (the investor) when the founder decides to up and leave and take the code with them to another startup or company. Once the code is in escrow, you can legally challenge the founder if they decide to leave the startup with the code.
You can actually see this happening in the case of Uber. Long story short, Otto, which is a brainchild of Google was stolen from Google and purchased by Uber. However, Google is now suing Uber because of the stolen IP.
4# Market Opportunity
Probably the most important factor after you have evaluated the product, market analysis is a factor that you don’t want to go wrong with. You can have all your bases covered in as far as risk assessment goes but one of the most imminent risks is whether people will buy the product in the first place.
A good place to start would be with the startup’s customer acquisition model. With the customer acquisition model, you can: Identify
- Customers who are profitable to your business.
- Customers who have little or nothing to offer.
- The attributes of profitable customers.
With this intel, you can easily determine just how receptible the product will be when rolled out on the market. The People Behind the Startup.
This can be quite the pickle. Unlike mature companies, startups may hardly even have a big team leave alone a great average return on equity that speaks for them. Therefore, the only thing you have to go by is the background of the team.
If you’re dealing with experienced entrepreneurs, there’s a higher chance that you’re going to succeed. What’s more, if the team possesses ingenuity, capability, and integrity, there are higher chances that it will be a success and a worthy investment too.
5# Market Barriers to Entry
Barriers to entry are quite expensive across a variety of industries. For instance, it seems as you can launch an AI startup to disrupt any industry right now but in reality all big players invest heavily in their own platforms and solutions.
Even if a startup company plans to develop a product no one else is working on, you still need to make sure competitors will not develop their own solution to problem you are solving. Being first to market does not guarantee you success as long as competitors face low market entry barriers.
One more thing to evaluate is how easy someone can replicate your concept.
6# Is the concept scalable?
Even if you are growing a niche business, you need to assess the scalability of the overall business concept.
If everything goes smoothly, your business will grow. But how big it could become and how profitable the business could be once it scales to a next level and then expand further. Can you expand as fast internationally as on a national scale and can you really grow overseas?
These are all tough questions to ask because many business that are successful on local level fail once they try to set foot on regional and international markets.
These effective risk assessment tips have been tried and tested by some of the industry’s top players. Of course, some are no doubt more effective than others but combined they are a force to be reckoned with and a surefire way of ensuring you’re investing in the real deal.
About the author: Jorge Sagastume is a Vice President at EscrowTech International, Inc. with 12 years of experience protecting IP and earning the trust of the greatest companies in the world. Jorge has been invited to speak on IP issues by foreign governments and international agencies. You can connect with Jorge on LinkedIn.