FREE online courses on Venture Capital Funding - Major Sections of a Business Proposal - Risk factors

 

Describe the major risks that an investor will have by investing in your company. This section spells out all the drawbacks. Do not offer positive comments, except at the end of each paragraph. Some areas you may wish to cover are as follows:

 

Limited operating history

If the company is new or has recently been organized, then the lack of operating history will be a significant item to discuss.

 

Limited resources

The company may or may not have enough resources to continue operations for a prolonged period of time if everything does not work out as planned. Mention this as a potential risk.

 

Limited experience

If management is young or new to this industry, you may need to discuss the experience level of management.

 

Market uncertainties

Describe the market uncertainties that exist with regard to sales.

 

Production uncertainties

Describe any production uncertainties that may exist. Perhaps a prototype has never been built on a production assembly line and therefore there are some uncertainties as to whether it can be built.

 

Liquidation

Here you should present a liquidation analysis of your company. That is, if the company were to get in trouble and had to be liquidated, what might it be worth on the auction block?

 

Dependence of key management

You need to explain either on paper or directly to the Venture Capitalist later, what changes you expect when any of the key managers die. Who will step into his place? Who could be designated to run the company if the top person died? If you do not cover the subject here, you can expect the Venture Capitalist to ask you the favorite question, “What happens if you are run over by a truck tomorrow?” Some entrepreneurs write a corporate “will”. In it they describe what is to be done with the company when they die.

 

What could go wrong?

Here the Venture Capitalist wants you to put on his hat and try to look at the business as an investment. He expects you to address the question, “What could go wrong?” The related question to answer here is, “How could the Venture Capitalist lose his money?” In other words, the Venture Capitalist wants you to use your objective, analytical skills to analyze your own business situation. He wants you to point them out; you must indicate how you are going to solve them.

 

Other items

You should mention such items as your estimated financial reserves, the lack of a public market for the shares, economic controls or other government regulations, control of the company by non-investor stockholders and the lack of dividends. Don't forget these items if they are material, rather than wait for the Venture Capitalist to bring them up.