Potential risks to watch out for on the investment path

Potential investors are normally eager to start businesses, oblivious of, or sometimes ignoring, the potential risks. Sooner or later, these risks rear their ugly heads and if not properly mitigated may result in imminent collapse of business.

Technology risk

Technology risks threaten assets and processes vital to your business and may prevent compliance with regulations, impact profitability and damage your company’s reputation in the marketplace.  

Information technology risk can result from human error, malicious intent, or even compliance regulations.

Protecting information assets like operational and financial data, customer data, intellectual property, personally identifiable information, or protected health information is only the beginning.  

It’s also important to identify and verify events such as data breaches, network failure, electronic fraud and other suspicious activities before they result in fines and expenses, damage your brand or reputation, prevent you from reaching your business goals or even lead to a lawsuit. 

Market and supply chain risk

There is always the risk that the marketplace will not accept your new products. This happens often for startups even after much money has been spent upfront on marketing.

Buyers may be slow to adopt a new product because of loyalty to other existing brands. Strive to offer product attributes that competing brands don’t offer.

Supply chain risk results from a mismatch between supply and demand.

With today’s focus on efficiency, lean “just in time” inventories, outsourcing, supply base reduction, centralised distribution, more and faster product launches, low cost country sourcing and supply chain globalisation, companies are at greater risk than ever before.

To be ready for any eventuality that may disrupt the supply chain firms should maintaining extra inventory of all of the raw materials or component parts used in production in case of a demand spike, supply shortage, missed shipment or late delivery of raw materials.

Other strategies include reserved capacity, order expediting, developing alternative distribution methods and dual sourcing.

Competitive risk 

There are risks that other firms will emulate your product offerings and use their superior distribution or marketing reach to crowd you out of the marketplace.  There is also a risk that dozens of copycat businesses will emerge and lower the margins and unique value offering that the company you are investing in provides.

To mitigate this:

Identify your competitors. Locate other businesses in the same segment. Gather information regarding their products and future. Study the areas of their research and how much they have invested. Evaluate whether these competitors pose a threat to your market position.

Focus on customers. Develop feedback mechanisms to keep track of customer expectations. Before you settle on a new product, check if it’s going to satisfy consumers’ needs.

Determine what you need to include in order to make sure people prefer it over your competitor’s. Maintain balance between technological development and customer comfort.

Management risk 

This is the biggest risk for young companies, as often, the person who can write code well, bake amazing bread or write lots of books on a small topic is not also the person who is an excellent CEO. 

Many times, the CEO will need to grow faster than the company is growing, or be replaced. If you wake up to the fact that you as the founder of the company may not have the capacity to “grow” at the same rate as the company, then it makes business sense to hire someone with the type of speed that the company needs.

Finance risk 

If a product works and sells well, the company may need additional financing to fuel the expected growth, buy inventory, enter new markets or expand distribution channels.

Sometimes clauses imposed by early investors make it difficult for future investors to participate.

Sometimes obtaining funds, especially debt, at reasonable rates may be difficult. Also, when private equity is the alternative, investors may want shareholding that will dilute the controlling interest of original founders.

Companies should strive to maintain good credit rating and also adopt robust corporate governance. The company may thus attract funds a lower cost.

Mr Were is a consultant with Anchorage ltd, a financial and business advisory firm based in Nairobi.