Risks Of Investing In Risk Capital

The article gives an analysis of Risks Of Investing In Risk Capital. Risk Capital is used to invest in startups which have potential of growth. As an investor, you can make lot of money by investing in startups and then taking them public. If you have decided to work as a venture capitalist alone or with a firm, you will see that this is a high risk and high gain game. Before you invest your capital in a new company as risk capital, you should know about risks of investing in such a preposition.

Risks Of Investing In Risk Capital

There are few pure risks that you must consider while evaluating various companies. Given below is a small discussion on such risks. If you misevaluate any of these risks you will have trouble in getting returns from your investment in risk capital.

Some risks that may threaten a company are:

* Market Risk : Market risks are divided in two parts, Dependent Risk and Independent Risks. When the company you are considering has a new product, independent risks involve non acceptance in market while dependent risks will involve markets share, attack by competition etc. Since you will be investing a good sum of money as risk capital, do your own due diligence very well. The business owner and management team may show you their research but your independent survey in the intended market will give more confidence. You should know the sales cycle, customer behavior and other factors.

* Technical Risks : If you are investing in a technology business, a separate set of questions comes up. Things like theoretical background of the technology, market readiness are crucial to understand if there is any risk that business may not deliver intended profits. These questions also help you plan the time for which you will need to stay invested in the company.

* Operational Risks : Business logistics can make or mar a business. Wall Mart has been so successful because of its excellent logistics. As a investor with Risk Capital, you will have to see if projected logistical arrangement has been correctly executed. You will need to asses whether legal, mechanical viability for the company exists on ground. A good management team needs to be very detailed oriented. It is up to you to analyze past projects executed by the team.

* Financial Risks : Projections made by the entrepreneur should be studied very well. Capital markets are in very tough shape. A wrong projection of capital requirements can cause lot of trouble. Capital governance is also an issue. A company that wishes to go for an IPO or sell stake to larger firms must have clear accounting practices. Any doubt on the credibility will destroy any decent valuation that you might hope for. Also going for sale or IPO when market is weak and sentiment low can be very risky.

As an investor any of the above risks can wreck your best laid plans, to make profits from Risk Capital. A savvy Venture Capitalist will analyze all these risks before parting from his/ her Risk Capital.

Leave a Reply

Your email address will not be published. Required fields are marked *