Tackling risks head-on in a rapidly evolving business landscape might mean the difference between making a fortune from your investment, or not. If you're considering investing in a business opportunity but are unsure of the risks involved, read on to learn about risks and how to mitigate them.
Risks Involved in Investing
Whereas individual risks can vary depending on the type of business and specific industry, there are common risks that all investors face.
Shifting Customer Preferences
As an investor, predicting customer interest in a product isn't an exact science. Today, everyone may be fascinated about a product, until a competitor comes up with a substitute that slices a chunk of the market share, leaving the business you've invested in struggling.
Regardless of the depth of market research, customers' tastes remain unpredictable.
Therefore, the entrepreneurs you invest in need to keep abreast of industry trends and proactively update their offerings to match changing market demands.
Disruptive Technologies
When investing, check out whether the business you intend to fund is technologically agile and well-positioned to stay ahead of disruptive technologies.
Innovations that are booming in the tech space, can be pretty disruptive. They can potentially throw established business models into a spin, leaving firms to play catch-up with industry pacesetters.
To remain competitive in a marketplace that's vulnerable to technological changes, those companies need to invest in updated technology to meet customer expectations. What was deemed revolutionary yesterday becomes standard practice today, and customers expect to find it when they come calling.
Product Risk
There is a risk that the business may be unable to create and distribute the product within the projected budget and time. A startup may create an excellent prototype but fail to produce and distribute products of similar quality en masse within a prescribed timeline and budget.
This is particularly crucial for a business that deals with time-sensitive products like summer clothing, items for a specific holiday season, and so forth. It must produce and roll out its products to customers on time, or risk retaining dead stock.
Financial Risk
Before you can inject capital into any business, ensure they have a solid plan to monitor and manage common financial risks. They must demonstrate a sound financial plan that cushions their companies against possible monetary pitfalls.
- Common financial risks that businesses face include:
- Inability to source adequate financing for business operations.
- Rising prices of raw materials.
- Cash shortfalls due to poor sales or late payments and defaults by customers.
- Rising interest rates.
- Fluctuations in foreign exchange rates can affect cross-border businesses.
Other Risks
Several other risks that may affect a business and your stake in it:
- The human risk: The ability of business owners and employees to run a business and return a profit.
- Can they attract and retain competent employees within your budget
- Can they trust employees with organizational resources?
- Reputational risks impact how customers perceive a business.
- Environmental risks - natural disasters like earthquakes, flooding, and hurricanes.
- Political risk can make access to markets unsafe.
The Risks of Accepting Investment Into Your Business
Accepting investments can massively boost your business by enhancing access to capital, business advice, networks, investor expertise, and more. However, you need to know the risks involved before you can sign the dotted line.
- It can take away control as investors often ask for a stake in your business.
- Investors share in the profits of your business.
- Some legal clauses may jeopardise your future partnerships with other investors.
- Investors may want to rearrange your business processes and structures.
Mitigating Investment Risks
Even with the best planning, you can only minimize and not eliminate risk. Here are some tips for lessening the impact of investment risks:
- Invest in businesses that have a sound management board.
- Insure your business against risks.
- Manage reputational risk by working with Public Relations consultancies or agencies.
- Invest in impactful marketing strategies to drive sales.
- Diversify your suppliers and markets to limit over-dependence on particular stakeholders.
Key Takeaway
For investors and entrepreneurs, investing in business opportunities can be a risky affair. Nonetheless, the benefits of investing far outweigh the risks, if you’re clever about sourcing the right investment for your situation, and have a clear plan on how to handle the risks.
InvestaMatch Is Ready To Help
If you're planning to invest in a business opportunity or are looking for external investors for your business idea,InvestaMatch, NZ's online investment directory, is here to help.
Contact us today if you have investment questions and let's forge a way ahead.