Types Of Risks VCs Take

Different VCs take different types of risks. When you are selecting which VC funds to target you should be sure to avoid funds that do not take risks that are still associated with your venture.

The risk categories essentially can be categorized according to the investment criteria that VCs consider. While there are many risks associated with any investment, I have included a short list of risks that typically distinguish one VC investor from another.

• Management Risk: While few VCs will state that they are willing to gamble on a bad management team, some VCs place more importance on the strength of the management team than others. Some believe that an average team can make money with a good idea, others don’t.
• Product Risk: Commonly referred to as ‘technology risk’ in the IT sector, product risk refers to the chance that the product will not be successfully developed. If your product is a highly complex piece of software that has not yet been developed, you are asking a VC to gamble on your team’s ability to get the coding done with a given set of resources. Some VCs will take that risk and others won’t.
• Revenue Model Risk: Revenue risk refers to the potential that your company may not have a model for generating revenue. Not every business plan includes a revenue model and some that do don’t have very good ones. Some VCs are comfortable backing the YouTubes of the world - ideas that will attract lots of users - with the belief that the entrepreneur will figure out how to monetize the service later. Others want to see a plan for generating revenue up front.
• Market Risk: Market risk refers to the risk that the addressable market may not exist. Truly disruptive technologies rely on an assumption of adoption which may not materialize. Furthermore, markets may dissolve if the landscape undergoes unforeseen change. Some VCs require that the market be validated through customer adoption; others don’t.
• Competitive Risk: Competitive risk refers to the potential for a venture to be beaten to market, outperformed or substituted. Competitive risk varies by the competitive landscape, barriers to entry, threat of new entrants and so on. VCs’ aversion to this risk varies.
• Partnership Risk: Partnership risk refers to the risk that key partnership may not be obtained. This significance of this risk is driven by the importance of the partnership to the success of the business, the number of potential partners and the difficulty of obtaining partnerships. As with the other risks, VC tolerance for this varies greatly.

You should honestly evaluate each category of your business when selecting VCs to target. Your time will be better spent if you only pursue VC funds that can accept the risks associated with your business.

Unfortunately, most VCs do not articulate their risk profiles are their websites. As a result, the best way to learn about a VC’s appetite for specific risks before using a favor to get introduced is to both look at their portfolio and ask around.

This column was provided by Mark Davis. Mark is the author of Get Venture, a column designed to help entrepreneurs raise venture capital. In addition to his column, Mark is active in the venture community as an entrepreneur, advisor and venture capitalist. He currently works at DFJ Gotham Ventures, a leading early-stage IT venture capital fund based in NYC. Mark earned his B.A. in Economics with a minor in History at Duke University and is pursuing his MBA at Columbia Business School, where he is the Early Stage President of the Private Equity and Venture Capital Club and the Founder of the Columbia Venture Community .