Although they must evaluate and sometimes embrace them, investors disfavor the risks that put their investment in jeopardy of not earning their desired return, i.e., the return that justifies taking a chance on your venture.
In an investor’s dream world, they earn an amazing return on a sure thing, i.e., a proven market, an experienced and smoothly functioning team, an innovative and well-protected product that will be the single best solution for resolving its target customers’ pain points, etc.
But generally, that is an investor’s fantasy rather than the typical reality, which involves embracing substantial risks that their investment will fail or disappoint.
Still, you can make your startup more attractive to potential investors by reducing as many risks as reasonably possible. In fact, that might even be your number one job – reducing risks for current and potential investors.
What sorts of risks? Well, many of the biggest business risks are directed to how well the innovation fits the market’s needs. Along those lines, another business risk is whether your startup can bring the innovation to market at a price customers will find attractive, and at quantities sufficient to meet the demand. Reducing business risks typically requires appropriate investments in market research, marketing, distribution, customer relationship-building, and customer education and support.
Shifting gears, the next biggest category of risks are the technical risks. These include whether your innovative concept is technically feasible, whether the innovative product’s current design is buildable, whether needed components are readily available, whether the product meets all basic technical requirements, whether it safely, effectively, and reliably works, whether excess costs have been sufficiently removed, etc.
A portion of the technical risks can be eliminated by prototyping (but substantial prototyping expenditures should be delayed pending sufficient market research to learn what customers need from the product’s design).
Other technical risks will require talking with experts, interviewing potential suppliers and manufacturers, and analyzing detailed aspects of competitor’s current and anticipated solutions. You might even need to contract or hire specialized technical talent to overcome formidable engineering challenges.
Often, while reducing technical risks, you will solve technical problems never before solved by anyone else. Such solutions might be good candidates for patenting, provided they truly resolve a customer problem in a manner that is better (from the customer’s perspective!) than every alternative way of addressing that problem. Remember, a concept simply isn’t worth patenting if delivering it to the market won’t be profitable, e.g., for your business, its licensees, and/or its acquirer.And that transitions us to the next category, legal risks. There are many types of legal risks related to innovations, including risks involving ownership, securing and maintaining legal rights, discouraging and stopping infringers, avoiding infringing other’s rights, overcoming regulatory hurdles, etc. For startups, these risks tend to be greater, if for no other reasons than the startup might not be as familiar with them as a company that’s been around longer, might not be able to afford as much legal counseling as needed, and/or might not feel like they can dedicate the time to learning what’s needed to reduce these risks.