When you are seeking venture capital for your company, you might want to hide your risks and sweep them under the carpet, but this tack is the worst one you can take. Venture capitalists (VCs) are trained to spot risks. They’ll likely see the risks that you’ve chosen not to mention, plus a few more that you haven’t even thought of yet.
When risks are unaddressed, the VC will believe that your team may be inexperienced and unprepared to deal with bad things that happen to the company as it progresses through its plan.
Preparing a risk assessment or a risk-based valuation model is a good way for you to communicate that you understand the risks and have thought long and hard about their likelihood and severity.
Address both constants and variable risks
Your risk assessment doesn’t need to be like the ones that Fortune 500 companies perform in which teams of people assess global trends to uncover political, economic, and social risks. For the most part, these things are out of your control, and they’ll impact your company the same way they’ll impact your competition.
Getting into the weeds assessing risks at this level will only distract from your story and lead the VC to believe you are not sufficiently focused on your goals.
Other risks are ones you can control. When you discuss these risks, you want to show how your company is poised with regard to that risk. Your job when you create your strategic plan is to navigate risks and opportunities with an understanding of what you can reasonably control and what you cannot.
Therefore, when you communicate risks to a VC, accompany them with a mitigation strategy — the actions you plan to take to address the stated risk. Hearing this information, the VC gains confidence in your ability to anticipate and prepare for or prevent bad things from happening.
Outline past risks that the company has overcome
Don’t just tell the VC about the risks that you have ahead of you. Be sure to tell the stories about all the risks you have overcome on your way to where you stand today. Your past risk stories demonstrate how your team addresses risks and shows that you can accomplish significant things in a short amount of time.
If you’ve faced and overcome challenges in the past, share these stories with the VCs you’re pitching to. VCs know that bad things happen. By sharing your past experiences, you help them see how your team approaches difficulties and works together to overcome them. Showing that you’ve successfully overcome challenges in the past gives them some comfort that you’ll be able to do so in the future.
Ideally, you’ll meet with your VC several months before you’re actually ready to ask for funding. When you do, share the upcoming risks your company is facing. Then the next time you and the VC meet, you can demonstrate what you have accomplished.
Milestones and risk are tightly woven together. The more milestones you achieve, the lower your risk. Every time your company achieves milestones, you are adding value. To put your valuation conversation into context and demonstrate your ability to execute, demonstrate all the milestones you have achieved in the past as well as the milestones you’ve got ahead of you.
VCs want entrepreneurs to have skin in the game — they’ve invested their own money in the business or they’ve worked for a long time without being paid, for example. It can also mean that you have built up a lot of momentum overcoming risk before the VC comes to the table. In any case, they want to see that you are 100 percent committed to making this venture successful.