Back in December I started a brief series on the four categories of new
venture risk. Somehow I got sidetracked after writing about management, market, and technology risk types. So today I thought I would close out the series with a brief discussion of funding or financial risk.
Funding risk is the likelihood that a startup will fail to raise sufficient
capital financing to get the venture to a self-sustaining cash flow
positive state (or to the point where it is acquired). Funding risk
manifests itself in two forms
First, many companies fail because they do not understand the amount of money that it will take to successfully grow their business. Good well thought through business models that contain solid assumptions based on strong research into the business drivers are needed. The operations levers that make a particular business go need to be known and understood. If you don’t know how to make one of these models it is well worth your money to invest in someone to help you. And no matter how well you do this is it going to take a longer period or time and more money than you forecast.
Second, many companies lack a funding strategy. It is quite common that
entrepreneurs do not know what their companies need to look like from
an angel investor or venture capitalist’s perspective in order to
garner investment. They thus set inapropriate milestones and are unable
to secure the next round of funding.
From an early stage investor’s perspective, regardless if they state it or not, all startup milestones should be focused on reducing technology, management, and market risk. You solve for those three, do your homework on business modeling, understand the profile you need to show to investors, and you reduce funding risk.