Outside Counsel, Start Ups

When Investors Are Skittish: Tips for Startups to Minimize Investment Risk

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While launching a company is an exciting venture, all startups need capital–a lot of it, usually–and that means seeking funding from investors. In fact, the future of your company may depend on whether you can convince investors to get on board with you. That said, startups also carry inherent risks, and that can make investors reluctant. On top of that, even venture capital investors who thrive on high-risk investments can become skittish if you don’t present them with a solid plan for a return on their investment and explain how you’re going to mitigate the business’s risks.

The good news is that good startups do get properly funded when they take steps to overcome the objections of potential investors. Let’s look at some actionable steps you can take to minimize investment risk and instill confidence in potential investors.

Have a Solid Business Plan

A comprehensive business plan serves as a roadmap for your startup and can significantly mitigate investment risk. It should include clear goals, detailed operational plans, market analysis, and financial projections. A well-thought-out business plan not only guides your operations but also demonstrates to investors that you have a clear vision and strategy for your startup so they can feel more confident in funding you.

Have Your Accounting in Order

Proper financial management is crucial in reducing investment risk. This includes careful budgeting, effective cash flow management, and accurate financial forecasting. By maintaining financial discipline from the beginning, startups can demonstrate to investors that they are capable of effectively managing funds and delivering on their promises.

Build a Strong Team

Investors are not just investing in your idea, but also in your ability to execute it. That’s why having a skilled and diverse team can significantly increase investor confidence. Investing in the right people and skills is as important as developing your product or service itself. By attracting great talent and organizing your team in a way that maximizes and complements everyone’s strengths, you can show investors that you have what it takes to make your startup successful.

Diversify Revenue Streams

Having multiple revenue streams can reduce dependence on investors and lower investment risk. This could include exploring different markets, developing additional products or services, or seeking alternative funding sources. Diversification not only provides additional income but also demonstrates to investors that the startup is resilient and adaptable.

Maintain Open and Transparent Communication

Startups must maintain regular and transparent communication with their investors. This includes providing updates on progress, challenges, and changes in strategy–the good news along with the bad. Maintaining consistent and honest communication can build trust with investors and reduce the perceived risk.

Understand and Communicate Risks Honestly

To be clear, investors expect some measure of risk. You want to convey a positive outlook when making your pitch, but making an exaggerated claim that there is no risk will surely scare away any savvy investor (and could get you in hot water down the road). A smart investment is about calculated risk, so be upfront about the level of risk involved, the potential pitfalls, and more importantly, the steps you are taking to reduce those risks.

Be Legally Compliant

Legal compliance is critical in reducing investment risk–and investors know it. Take the time to structure your company and workflows so you are compliant with all relevant laws and regulations. This includes matters related to securities law, employment law, intellectual property rights, and any industry-related regulations that might apply. Hiring a business attorney can be beneficial in ensuring that you are on the right side of the law.

At Hood Venture Counsel, we’re focused on helping startups achieve their goals. Our legal team can assist with compliance issues, help you develop a solid business plan, negotiate beneficial contract terms, and take other steps to make sure you’re putting your best foot forward with investors. Contact us to learn more.

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