Returns got out of investment are the rewards for the risk the investor takes in by investing in that business.To come into some kind of return expectation one should disclose the risk associated in the business.Moreover business n investment is a long time affair so y dont we be transparent in the begining.

Having said that, in my own experience, you need to be very aware of risks and know how to explain how you handle them. Any mgmt team worth its salt will have charted out the key dangers ahead and would have a ready back up plan and answer for would be investors.

Similarly , any investor would ask about risk. it is just a matter of when.

Most probably, investor will leave the running of company to the team. This is why probably it always good to tell them outfront about the risk the business is facing, and how the team will handle that. What investor needed is not a “a team that too good to be true” but a team that they are confidence of and at least give them a good assurance and impression that they can executed the job. If a business failed, the investor feel that the team is not at fault, since the team is an “expert” in that business industry.

As the first comment say is probably right, relationship turn sour and may have legal sue because information is withdrawn. Afterall, when company makes money, everyone is happy. When company lose money, fingers will be pointed and head will roll. Unless if someone is willing to gamble and withdrawn important information to secure the investment, and hope thing goes well, if not, it is better to tell to the best of knowledge.

Investor is human too and which mean they have “human side”. Even if you do not tell them, they most probably know the risk and keep quite mum about it. When thing goes wrong, all they need to do is to mention that they are ignorance of the risk and therefore invest “blindly”. It is true that we can always pass it back that investor should be prudent and wise, and presume them to know this and that. But why take this risk ?? In the eyes of public, the team will have bad reputation and blame for “failing to disclose the truth”. This always happened. Looking back, at dotcom period, there is a lot of trial going on which investor sue the company for failing to discuss information, and including risk associated with business. They claim failure to do so actually mislead them into thinking the business is feasible.

Look at “Angry Investors Seek To Liquidate Idealab”
http://www.forbes.com/2002/12/30/cz_eb_1230idealab.html

IdeaLab is a company setup by Bill Gross, an famous innovator.

When things goes wrong, all funny kind of excuses will popup out of nowhere.

especially if they see more dealflow, they should logically be able to to have a bird’s eye view.

i think it’s only prudent on investor’s side to do adequate due diligence. of course, there will be certain risks that will never be disclosed. and it’s not just on the entrepreneur’s side of things. even entrepreneurs have to consider the risk of taking on investment capital!

but at the end of the day.. too much analysis also leads to analysis paralysis. at the end of the day, I think this is very much like an art. and also a dance between the entrepreneur and investor. the endgame, of course, is a fruitful courtship and a long relationship.

These are the fundamental thing that investor need in the first place. Investor , like most of us are subscribed to Maslow’s Hierarchy of Needs. Most probably, it is the safety and physiological needs in lowest level that needed to be satisfied first before other needs will be addressed. I believe knowing about risk and then thinking if it is worth investing in the business albeit the risk is what satisfy these basic needs for investor.
see link http://chiron.valdosta.edu/whuitt/col/regsys/maslow.html

It is only when they perceived their return of investment far outweight the risk will then they invest in a business.
However, if no risk is mentioned in the first meeting, how well can they determine their return of investment ??
In fact, it is greater the risk in business, the greater amount they seek for equity to hedge the risk.

It may also be the risk component that eventually undermine the business investment.
For example, the second round of presentation to then include risk analysis may be result in wasted effort on the team and investor, because the risk could not be resolved in cost-economic manner.
For example, the risk might involve licensing some technological deal or patent that require hefty amount of money to create a product for new market, and that the investor wouldn’t want to invest that in the first place, especially if it may also mean to spend money promoting the market as well.

So then if it is a fundamental concern and “almost a requirement” for investor , why exclude it in first presentation ??? And what the chance that if first presentation can’t resolve the issue, and then a second presentation could ???
Unless the fundamental concern is addressed by the team, the investor might consider the idea “cool”, but that’s all about it, “A cool idea without a sound business”.

Addressing the risk earlier could actually save the team’s time, effort and money, and that include the investor.

Hence, it is best to acknowledge the issue upfront and be honest about it. Most investors nowsaday are pretty adamant about how their investment will pay off, and lack of risk analysis will only indicates to the investors that the presentation lack substance, and this will reduce the credibility of the plan somehow.

The reason maybe that lack of risk analysis in the first stage may be deliberate for some reason, but despite any reason to explain that, it will definitely lead to the investor’s perception that it is not completed and is major shortfor. A business plan is like a strategy, and a strategy that does not aknowledge risk is not an effective strategy, let alone implementation. the plan may change somehow along the way, but this may not be the concern, what investor’s really want is that the team is outright, and perform due diligence to acknowledge and tackle issue, and doing so, will increase the investor’s confidence of the team.

Most good investors will really appreciate the honesty of team to be outright and “truthful” even if they felt that team may jeopardised themselves through revealing “negativeness” in the business. However, one never know that the investor might already know more of the business and come ready for it. So it is better to err on the good side by covering all front.

One major reason that investor invest in the business is because of the team. Afterall, all business have to been executed by the team. So it is good foremost to implant a good impression in the very first presentation.

Just my thought and experience.

To be fair, the lecturer did not stop them from doing that and also offer ways and means to do risk analysis for their business plan. But it seems that the teams heed his advice. It’s hard to know whether the teams debated over it, but I will give them the benefit of a doubt.

With respect to presenting the risk analysis in front of potential investors, I would think that it has to be done well and early on to prove that you have done your due dilligence during your research phase. Better to have highlighted a risk factor which you may or may not be have found a solvable solution to than to gloss over it and have it sting you later when more money has been pumped into the venture.

On the plus side of being frank on your risk position, given their experience, investors may have seen similar risk patterns before and be in a better position to help you mitigate the risks.

On a side note, one thing that I do not yet understand is why the students merely heeded the lecturer’s viewpoint that “they should not present the risk analysis in the first investors’ meeting” rather than debating on the pros and cons of doing otherwise?

But good article..