Let's Talk About Risk It's the least sexy part of your biz plan, but risk presentation know-how can help deliver the funding you need.
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When writing a business plan, do you need to include a riskanalysis? Any startup idea will have enough risk to fill a dozenbusiness plans. No investor expects a risk-free plan. Angels andVCs know startups are incredibly risky. If they don't,don't take their money-they don't know what they'redoing! Most projects fail for reasons that could have been (andsometimes were) predicted far in advance. Since entrepreneurs areoptimistic folks by nature: They tend to brush off predictions ofdoom and charge ahead assuming they will find a way to overcome.You can often avoid the most dire scenarios with intelligentupfront risk planning.
The risk analysis in your plan is to show that you'vethought through risks, that you know how to plan for probablerisks, and that your plan can survive when things go wrong.
Your plan can address several kinds of risk. You don't needto address every kind of risk in the book, but pick the riskcategories that are most relevant to your company and include aparagraph or two about each:
- Product risk is the risk that the product can't be created.Biotech firms often have a high degree of product risk. They neverknow for sure they can produce the drug they are hoping toproduce.
- Market risk is the risk that the market will developdifferently than expected. Sometimes markets take too long todevelop, and cash runs out while a company is waiting forcustomers.
- People risk is big in companies that depend on having certainemployees or certain kinds of employees. I was with a company thathad hired one of the world experts in a certain type of 3-Dmodeling. It was possible that without this man on board and happy,the company wouldn't be able to create their product.
- Financial risk is the risk that a company will run out of moneyor mismanage their money in some way. Finance companies may havehuge financial risk, since bad lending policies combined with poorinvestment policies can sink them.
- Competitive risk is the risk that a competing product orservice will be able to win. Many web-based businesses have highcompetitive risk since they can be started with little money andhave no way of locking in customers.
What investors want is to know that you are prepared to respondto risks. To the extent possible, outline what your response is tothe risk you anticipate. After all, assuming you get funding, thoserisks may really come to pass. And you will really have to dosomething about it. By showing investors some of the alternativesyou've thought through, you raise their confidence thatyou'll be able to deal if things don't go according toplan.
For example, consider the risk to a restaurant that peoplewon't come back. What are the reasons you believe that wouldhappen? What can you do to keep that from happening in the firstplace? It amazes me how many restaurants have a lousy menuselection or bad food and go under without ever asking customers,"Did you enjoy your meal? What could we do to make itbetter?" An at-the-table survey may be how you propose toavoid having the wrong menu. If things go wrong, you may decide toproactively invite critics to the restaurant for specific feedbackon how to make the experience better.
The key is acknowledging that things can go wrong anddemonstrating some creativity in finding a solution. You certainlyneedn't respond to every risk imaginable. Your goal is toprovide enough to help your investors feel secure that you haveanticipated and dealt with major risks, and they can count on youto handle things that come up once the business is under way.
Stever Robbins is a venture coach, helping entrepreneurs andearly-stage companies develop the attitudes, skills andcapabilities needed to succeed. He brings to bear skills as anentrepreneur, teacher and technologist in helping others createsuccessful ventures.
The opinions expressed in this column are thoseof the author, not of Entrepreneur.com. All answers are intended tobe general in nature, without regard to specific geographical areasor circumstances, and should only be relied upon after consultingan appropriate expert, such as an attorney oraccountant.
