When starting a business, there are many risks that need to be considered. One way to think about the various risks an entrepreneur is faced with -- or, for that matter, an investor in an entrepreneurial venture is faced with -- is to break them down into several categories.
Let's start with the first category, the company. Here, the biggest sources of risk are the founders. Do they have more than just being able to start the company, ie. to grow the company? Experience has shown that the prevalence of individuals such as Bill Gates or Michael Dell, Steve Jobs, that can not only start companies, but also manage its growth -- the prevalence of such individuals is relatively limited.
A second source of risk is technology risk. To the extent that your company employs technology, there are obviously issues of, how long will this technology be the leading edge? Secondly, are there any intellectual property issues that need to be addressed? Lastly, there exists the product risk. If you haven't developed a product yet, can you manufacture it? Will it work? All these issues are under the category of company risk.
A second one for the sources of risk is the market for the product. You need to be aware of two big uncertainties. First, what is the customer's willingness to buy? And second, what is the pace, if you're successful, at which competitors will be able to imitate you? One of the things you have to think about when you enter that market is how you can create barriers to imitation, so that if you're successful, the competition won't be able to imitate you very quickly.
A third category consists of risks associated with the industry. Are there any factors in that industry that relate to availability of supply? In some cases, you need to have certain raw materials that are in limited supply, and that some suppliers might be able to take advantage of that. Barriers to entry might change. Regulations might change, and adversely or positively affect your business.
Lastly, there are financial risks. And here, the question is, will you be able to raise the money early on? At what valuation will you be able to do it? Will you be able to raise follow-up money?
And then, from the investor's standpoint, obviously there's a risk that if the company is very successful -- and I can tell you that most early stage companies don't work out, but for the few that do, when it is time for, say, a public offering, will the public market be open?
At the time you make the investment, you don't know what the state of the capital market will be in five to seven years from the date you make the investment. That's a big risk the investor is assuming. Obviously, it's a big risk for the entrepreneur to be able to have some liquidity, and perhaps realize the fruits of her investment, of her time, talent, and in some cases some of the money she puts into that venture.
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