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Posts Tagged ‘venture’

Investment in a start-up is not a child’s play

In fraud, General, Risk, Uncategorized on September 24, 2019 at 3:25 am

80% -90% of Start-up businesses fail in the first few years of operations. Given this data, investment in a start-up is not a child’s play. Being a Ph.D. in risk management and having studied large institutions where the failure rate is far lesser, I was always intrigued about how angel investors calculate the risk of start-ups to make an investment decision. At the same time, it would be equally difficult for start-ups to convince the investors for their potential and ability to perform.

Recently I visited the University of Southampton for my research and met an interesting lady who was an angel investor with enormous funds to invest particularly in Ghana. My questions became specific as I heard the word ‘Ghana’. Why an angel investor wants to invest in Ghana only? What motivates her to take such a decision. Very soon, the lady revealed the reasons: one by one setting a story. She taught me investment risk in a unique way, which I cannot forget lifetime.

The lady had seven children, five dogs and two visiting foxes living with her in a beautiful house at London along with her husband, who was a medical practitioner. She said, “if you are a mom/dad, it is easy to understand what an investment in a start-up means. Consider your child as your angel investment and marriage of child as an exit for the investment. Investment in Ghana was not a new idea as for a parent from Ghana just wanted the child alike”.

Similar to a promoter-based company, when you invest in your child, it is full of optimism while if it is for others (start-ups), many times, investors are not that optimistic. The concerns are raised about principal risk, return risk, valuation risk, and many others. A company may not fail to deliver the promised product or fail. The returns will be variable in frequency, time, and amount. The main difference between the two situations is about trust why people tend to trust their own child than others.

Most often, start-up makes a mistake in demonstrating why investors can trust them and those who can demonstrate, most often receive the investment. To maintain that trust, they are required to answer some what if questions of angel investors which deals with risk management.

What is new about start-up: is it a product or a service? What is the start-up target market for the product? What if you don’t find a market for your product?

How will you make your product/service profitable? Show your business plan. What are the business objectives? What if you will face issues related to higher expenses, delays in projects, labor problems, license issues, stiff competition, and testing of the product.

What if you require funds over its existing cash resources to develop market capabilities?

How is management planning to execute the business for viability and success? What if you find that management is not enough experienced and expert in dealing with it?

 How you will manage fraud, and what are the controls? What if you find that the company’s management team is involved in fraud?

Further, I met another start-up business CEO who received large funding from angel investor by just showing how he can prepare the best British tea. Angel investor asked the start-up CEO how you will address the need of the British being Indian? He argued that he knows British culture, and taste better than British and can offer a British Tea. If he likes it, he will give him funding, if not, it’s okay. Eventually, he got the funding.

Investment in start-ups requires a fair understanding of the risk management and particularly two major aspects: how to develop trust and ability to answer what if questions. Remember, trust is developed first for the team; the product comes next. It is well said,

The first-rate team with a second-rate idea will always outperform a second-rate team with a first-rate idea.”
― Brian Cohen

 

Women! Open the Pandora Box of Strategic Risk

In Risk, Risk Management on November 19, 2017 at 2:34 am

WomanRisk

Women! Open the Pandora box of strategic risk. Untangle it and mix it with your strength and weakness. This is the time when your strengths must speak.’

In general, the perception is ‘women are risk averse’ and therefore take fewer positions as CEO of a company. Alice Vaidyan (CMD of GIC Re) and Indra Nooyi (CEO of Pepsi) are well-discussed the examples of emerging successful women in the corporate world. Recently, I was the speaker at Conference on Empowering Women Entrepreneurs organized by FICCI partnering with NITI Aayog as a part of Road to GES Series at Chennai. During my presentation, I discussed that organisations’ face three types of risks: external risk, internal risk and strategic risk. Several women entrepreneurs during the forum discussed the issues related to unavailability of infrastructure to kick-start the business, and if they start it, it remains as small scale for years. They are not able to take it to next level. Why women need hand holding while men often do not complain about this. The market data also reflects the same:

After a high score in World Bank’s rankings for ease of doing business (Improve 30 places), India has declined in its overall Global Gender Gap Index ranking of the World Economic Forum (WEF). It slipped 21 places on the index to 108 behind neighbours China and Bangladesh, primarily due to less participation of women in the economy and low wages” (Excerpt from a News Report).

A few professors from University at California and Virginia found in their research that before 2007-08 crisis, large institutions have taken greater risk than the market average and booked the losses (Erkens, Hung, & Matos, 2012). The issue was more related to lack of understanding of risks undertaken and its inter-relatedness with other risks. If we accept some strategic risks which we do not understand, we cannot rightly estimate the consequences. There are three ways to deal with such risks: do not take such risk, take but fewer risks or thoughtless /thoughtful expansion to satisfy the greed of more and more profits. Women entrepreneurs, in general, chose the first or second option while large institutions chose the third one. For large entrepreneurs’ this made sense as they have the large capacity to take risks with structured systems and processes and capital to absorb the shock. Women entrepreneurs have less exposure to large strategic risks; they lack in capital back up. Also, they are surrounded by the culture issue of ‘not a failure’ therefore they can-not afford failures as it may serve as bread and butter for many of the families having kids and senior citizens. Emerging questions are: who will help them? How can they survive and sustain?

Understanding of Strategic Risk is one of their weakness. Even I found strategic risk-taking ability is the problem of many developing countries. Companies often know ‘what they can-not do’ but often don’t know ‘where they are good at’. Good means whether they are the better than their competitors in the local industry, country, globally or for simply a niche. It is the argument similar to a journey. If you don’t know where you want to go, you may fail many times. For example, the level of preparation needed to visit a cold place is substantially different than a requirement of hot place. Knowing you want to go locally or globally will make a significant difference. I met a very influencing lady at a conference in Lyon, France. The Turkish lady was the owner of a top scarf brand similar to the level of Louis Vuitton (a scarf costing around $ 1000). Though she was from Turkey, she decided to buy wool and silk from China, hired a team of designers from Italy and opened the first store in Switzerland. After the success of her scarf in Europe, she expanded throughout US and Asia including Turkey. I was also impressed with a CRO of a large reinsurance company who was very confident that they were the best in the aviation business and exploited the opportunities when the situation arises.

Understanding the strategic risk is important for the women executives. The gender does not change the business paradigm, the environment remains the same. In my opinion, women are NOT risk averse, they are in much better position to understand risk than their men counterparts. Afterall, it’s always ladies first ……..

References:

Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), 389–411. http://doi.org/10.1016/j.jcorpfin.2012.01.005