Investments & Investor Risks

investment risksInvestment risks can be defined as the probability or likelihood of occurrence of losses relative to the expected return on any particular investment.

Principal Risk

Investing in any business puts the entire amount of an investment at risk. There are many situations in which a company may fail completely or may not be able to sell its stock. In these situations, an investor may lose the entire amount of investment. For investments in startups, total loss of capital is a highly likely outcome. Investing in startups involves a high level of risk and investors will not invest any funds unless they are able to bear the entire loss of the investment.

Returns Risk

The amount of return on investment, if any, is highly variable and not guaranteed. Some companies may be successful and generate significant returns, but many will only generate small returns, if any at all. Any returns that may be received will be variable in amount, frequency, and timing. Investors will not invest any funds which do not provide a regular, predictable and / or stable return.

Returns Delay

Returns may take several years to materialize. For example, most startups take five to seven years to generate any investment return, if any at all. Investors will not invest any funds which do not show a return within a certain timeframe.

Failure Risk

Investments are speculative. Unlike an investment in a mature business where there is a track record of revenue and income, the success of a startup often relies on the development of a new product or service that may or may not find a market.

Revenue Risk

There can be no assurance that any company will operate profitably. The likelihood of achieving profitability is considered in light of the problems, expenses, difficulties, complications and delays usually encountered by companies. A company may not be successful in attaining the objectives necessary for it to overcome these risks and uncertainties.

Funding Risk

A company may require funds in excess of its existing cash resources to fund operating expenses, develop new products, expand its marketing capabilities, and finance general and administrative activities. Due to market conditions at the time the company needs additional funding, it is possible that the company will be unable to obtain additional funding when it needs it, or the terms of any available funding may be unfavorable. If the company is unable to obtain additional funding, it may not be able to repay debts when they are due or the new funding may excessively dilute existing investors. If the company is unable to obtain additional funding as and when needed, it could be forced to delay its development, marketing and expansion efforts and, if it continues to experience losses, potentially cease operations.

Disclosure Risks

A company is obligated to provide information regarding its business and financial affairs to investors. When a company is at an early stage it may only be able to provide limited information about its business plan and operations because it does not have fully developed operations or a long trading history.

Personnel Risks

An investment in a startup is also an investment in the management of the company. Being able to execute on the business plan is often an important factor in whether the business is viable and successful. Investors are aware that a portion of their investment may fund the compensation of the company’s employees, including its management.

Fraud Risks

It is possible that certain people involved in the company may commit fraud or mislead investors. If fraud or misleading conduct occurs, the investment may be lost. Investors carefully review disclosures regarding the company’s management team and make an assessment of the likelihood of any potential fraud.

Growth Risk

There can be no assurance that a company will achieve expansion. Expansion may place a significant strain on the company’s management, operational and financial resources. To manage growth, a company is required to implement operational and financial systems, procedures and controls. It also will be required to expand its finance, administrative and operations staff. There can be no assurance that the company’s current and planned personnel, systems, procedures and controls will be adequate to support its future operations. The company’s failure to manage growth effectively could have a material adverse effect on its business, results of operations, and financial condition.

Competition Risk

Businesses face competition from other companies. One or more of a company’s competitors could offer services similar to those offered by the company requesting an investment at significantly lower prices, which would cause downward pressure on the prices a company could charge for its services. If a company is not able to charge the prices it anticipates charging for its services, there may be a material adverse effect on the company’s results of operations and financial condition.

Market Demand Risk

While a company believes there will be customer demand for its products, there is no assurance that there will be broad market acceptance of the company’s offerings. There also may not be broad market acceptance of the company’s offerings if its competitors offer products which are preferred by prospective customers. In such event the company may not be able to achieve its goals.

Control Risks

Because a company’s founders, directors and executive officers may be among the company’s largest stockholders, they can exert significant control over the company’s business and affairs and have actual or potential interests that may depart from the investor’s. The company’s founders, directors and executive officers may own or control a significant percentage of the company. In addition to their board seats, such persons have significant influence over corporate actions requiring stockholder approval, irrespective of how the company’s other stockholders may vote. Such persons’ ownership may also discourage an investor.

Summary

Investment risks are measure of the level of uncertainty of achieving the returns as per the expectations of the investor. They are the extent of unexpected results to be realized. Investment risks are an important component in assessment of the prospects of an investment. Most investors making an investment consider less risk as favorable. The lesser the investment risks, more lucrative is the investment. However, the thumb rule is the higher the investment risks, the better the returns.

 


 

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