5 Ways to Minimize Risk for Investors
If you want investors to be confident in financing your business, show them you know the risks your business is up against and are working to avoid them. Here are five ways to get started.
Opinions expressed by Entrepreneur contributors are their own.
If you're looking to raise money for your company, it's critical you understand your risk profile. Here's why. Most investors and lenders, like banks and venture capital firms, are essentially professional risk managers; they invest or lend money by managing the risk that the money will be repaid or not. So, your job when seeking capital is to reduce the investor or lender's risk as much as possible.
The key to reducing risk is to identify and accomplish "risk mitigating milestones." A risk mitigating milestone is an event, that when completed, makes your company more likely to succeed.
Below are five key "risk mitigating milestones" that will reduce the risk of your failure and thus make it significantly easier to raise funding for your company:
1. Build a board of advisors.
One of the easiest risk mitigating milestones to accomplish is building a board of advisors. This is a group of individuals who agree to support and advise your company. Typically you do not pay them cash, but often give them stock options to incentivize them to help you.
Your advisory board is typically comprised of industry experts and other professionals whose advice and connections can help you grow the business. By building an advisory board, you show investors that other successful people, often including industry insiders, believe in your vision. Wise investors also know that by soliciting the advice of experts, your company will become more successful.
Related: 3 Ways to Find Your Perfect Board of Advisors
2. Secure beta customers.
Beta customers are non-paying customers who are willing to test your product or service. Typically these customers are not going to waste their time trying something in which they have no interest. As such, beta customers prove there is a demand for your product or service.
Equally, if not more importantly, beta customers tell your company what they like and don't like about your product or service, so you can make improvements before a public launch. This market research is invaluable, and gives investors and lenders comfort that your offering will truly satisfy customer needs.
3. Forge partnerships.
Securing partnerships proves your viability and positions you for success. For example, a distribution partnership could ensure your offering will be able to reach the right customers. A manufacturing partnership could prove your ability to develop your product at a set cost.
In either case, signed partnerships also prove to investors that others in and around your industry believe in your vision.
Related: How to Protect Your Personal Finances From Business Risks
4. Secure publicity.
Media outlets will write about your company if, and only if, they think their readers, listeners or viewers will care or benefit. As such, if the media covers your company, it's a good indication to investors that customers care about what you are doing. And if customers care, there is a good chance they will purchase your offerings in the future.
5. Generate revenue.
As you may have noticed, several of the risk mitigating milestones above focus on showing that customers want what you are offering. If there's enough customer demand for your product or service, the chances of your success are much higher.
And the ultimate indication that customers truly want your product or service is if they buy it. As a result, generating revenues from customers is perhaps the strongest risk mitigating milestone you can accomplish, and best positions you to raise money from lenders and investors.
Showing lenders and investors that you have accomplished key risk mitigating milestones will make it easier for you to raise money. It is understandable that for certain business ventures, like opening a new restaurant, you can't achieve all the milestones (such as generating revenues) before you raise funding. In such cases, try to accomplish as many risk mitigating milestones that don't require outside funding as possible. For example, you could develop your menu, survey customers in your area, and secure permits and licenses to help prove your restaurant will succeed.
Get creative, accomplish these key milestones and both your company and investors will benefit greatly.
Related: Where Small Businesses Are Finding Money (Infographic)