Should you present risk analysis to your investors?

Should you present risk analysis to your investors? An interesting discussion spurred by this question has emerged from a business plan presentation I attended yesterday. It will be interesting to examine the different perspectives and come up with a framework when a risk analysis should be presented.

“One of the greatest myths aboout entrepreneurs is that they are risk seekers. All sane people want to avoid risk.”
- William A. Sahlmann

I was invited along with a few entrepreneurs and investors to a business plan presentation by students yesterday. It was based on a course conducted by a lecturer, who is also a practising venture capitalist. I am always learning from these presentations because circumstances can be very different from different teams in different situations. As we were giving out our feedback near the end of the presentation, one of the other judges felt that most of the teams should have presented a risk analysis of the business in their presentation. The lecturer then replied that he has suggested to the teams in the class that they should not present the risk analysis in the first investors’ meeting, if these presentations are to simulate the real world situation with the venture capitalists. I came from the school of thought that we should be upfront and declare the risks early in our presentation to our investors, otherwise we might be legally liable to non-disclosure or delibrately hiding information from them. That sparked off an interesting exchange among all of us. Although we stood on different viewpoints, I did not see that there is a truly “correct” way to go about this. So, what I decide to do in this article, is to illustrate the different schools of thought and explain why each one of them is suitable for certain situations and let you, the entrepreneur make the decision.

To make it short and simple, every enterprise is exposed to risks. The risks can come from different sources: (i) within the company itself, (ii) from the enviroment which the company is operating in, for e.g. some new law passed that might affect the nature of the business. Risks are dynamic as they need to be continually reviewed and recognized to keep most entrepreneurs in check all the time. A good introduction in risk management can be found here in Wikipedia. Most people use the SWOT analysis, a common and basic method in risk analysis that stands for strengths, weaknesses, opportunities, and threats. It is a strategic planning tool that helps to evaluate these key factors in a project, business venture or any decision making process. For the context in what we are discussing, here is a checklist for what the entrepreneur might want to present the risk analysis:

• Within the company: There are a couple of factors that presents risk to the company: (i) the key positions cannot be filled, (ii) a core member leaves the team, and (iii) the delay of the development of a prototype or a research blunder that requires a rethink in the product. It is often important that the team needs to acknowledge that they might not have someone who can handle the role of CFO in the business plan, and address the issue in the plan that they are seeking one.
• External factors: In this case, here are some problems which you might encounter: (i) your sales target dropped, (ii) lack of acceptance of your product/technology from the market, (iii) manufacturing or distribution channel having problems to supply you the units you need, (iv) you cannot patent your product and (v) the technology licensed to you is no longer exclusive from the inventor. In these cases, you need to explain how you will handle the problem should it arises.

With these thoughts in the background, we come to the important question, “Should you present risk analysis to your investors?”

• You should not present risk analysis to your investors: The lecturer gave a few reasons why one should not present risk analysis of your enterprise during an investors’ meeting. Firstly, if it is the first meeting between the team and the investors, you can choose not to bring it upfront till the second meeting and due diligence process. He reckons that if the venture capitalist will also examine the risks sooner or later in the due diligence process, hence it is not important to disclose these problems at the early stage discussions between investors and venture capitalists. Second, there is a possibility that the investors might have another set of risks that the team does not consider, and it might lead to the whole presentation into a discussion of both sets of risks. In other words, you should only have a slide ready in case, someone ask you upfront about what the barriers of entry or competition you might face in your industry.
• You should present the risk analysis to your investors: Some of us come from the opposing end. Our reasons are different and if you clearly examine it, it is also situation-dependent. First of all, there should be a full-disclosure of the risks to demonstrate that the entrepreneurs are honest and upfront about the possible problems in the business enterprise. It takes away any form of legal liability for failing to disclose, and moral liability that you did not lie about the potential problms which might lead the enterprise to failure. Anyone who tells me that his/her business enterprise is devoid of risk is as good as a person who is hallucinating after smoking crack. The other reason concerns the strategy of the entrepreneur to capture the hearts of the investors, is that it is better to lay it upfront and wait for them to question you. There is a situation which this method might fail. If you present the risk analysis to a industry expert and they are all wrong and baseless assumptions from your part, the situation might not work in your favour. This is the likely situation why I might be inclined to agree with the venture capitalist with the earlier view. Of course, I still advocate the need to illustrate the risk analysis earlier, otherwise, teams will find it hard for me to put investments on them.

As of always, we have different views to how a certain situation would appear. That’s the essence of entrepreneurship. There is no one right way to go about it. The entrepreneur must listen to all possible viewpoints and make a decision towards how it should be done.

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