7 CRITICAL RISK INVESTORS ALWAYS LOOK FOR

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DEPARTMENT OF BUSINESS AND
MANAGEMENT STUDIES
BY
NGANG PEREZ (MAJOR 1)
PAN AFRICAN INSTITUTE FOR DEVELOPMENT
-WEST AFRICA (PAID-WA) BUEA
Conference paper

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7 CRITICAL RISK INVESTORS ALWAYS LOOK FOR
1.0 Brief Introduction: One thing the entrepreneur often forgets to understand is the fact that,
Investors take a risk by investing in their business. These are the risks that influence how
investors think and react to the business opportunities, that entrepreneurs engage in. All
business opportunities are surrounded by a certain amount of risks, which in the eyes of the
entrepreneur are minimal, usually because they neglect them or did not see them. That’s why,
for investors rigorous risk analysis lies at the heart of making every investment decision. Many
entrepreneurs just don’t understand how to analyze their business from an investor’s
perspective. And only those entrepreneurs who know how to do this can improve their chances
of raising funding. This paper gives you an understanding on the 7 critical risks entrepreneurs
should identify and address in their business before approaching a potential investor. The
knowledge and insights you gain from this lesson will surely serve you throughout your
journey as an entrepreneur.
1.2 LEARNING OBJECTIVES
By the end of this session, participants should be able to:
➢ Outline the 7 critical risk investors always look out for
➢ Prepare a professional investment ready plan considering the 7 risks
➢ Analyze the business lifecycle and its related risk
1.3 DEFINITION OF KEY TERMS
(a) Entrepreneur: An entrepreneur is a starter. An entrepreneur is an initiator, a challenger and a
driver. Someone that creates something new, either an initiative, a business or a company. While
every entrepreneur is a small business owner, not every small business owner is an entrepreneur.
(b) Investor: An investor is any person or other entity (such as a firm or mutual fund) who commits
capital with the expectation of receiving financial returns. This definition makes no distinction
between the investors in the primary and secondary markets. That is, someone who provides a
business with capital and someone who buys a stock are both investors

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(c) Risk: The Oxford Dictionary gives us one of many definitions to consider which is, “a situation
involving exposure to danger”. Waters (2011) describes risk as a result of uncertainty about future
events. According to Manners-Bell (2014), risk is the probability multiplied by the severity or
impact of a given event.
1.3 MAIN CONTENT
Whether professional or generalist, curious reader, you stand to gain a lot of good knowledge from
this conference – even if you believe you are already ‘in tune’ with the key issues. It is necessary
entrepreneurs know that, uncertainty about a possible future threat disrupts our ability to avoid it
or to mitigate its negative impact, and thus results in anxiety. From this perspective, entrepreneurs
may dig deep into the minds of potential investors, to know why the so many questions are being
asked during business pitches or business plan presentations.
1.3.1 Business lifecycle and risk
This conference paper is focused on the seven categories of risk which investors always look out
for when they are analyzing an entrepreneur’s business plan or pitch. But before that, these are the
major risks that influence how investors always think and react when an entrepreneur is requesting
for a funding opportunity. The first is market risk, secondly, we have the competition risk, followed
by execution and operational risks, there is also financial risk, as well as legal and regulatory risk,
there is the people risk and lastly systemic risk. Recall that, investors always think and react to
your business in the following ways; Investors react with fear, doubts, expectations, skepticism
and questions. These are just but natural ways which investors react to risk in any business
opportunity that they are considering. What you need to understand as an entrepreneur is the fact
that, all these risks need to be factored in to every piece of material of communication you have
with a potential investor. You definitely need to cover these risks professionally and logically in
your business plan.
Figure 1.1 presents the business life cycle which clearly brings out the impact of the risks which
faces a business depending at the level of the cycle in which it belongs.

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Source: blogspot.com (2020)
Figure 1.1 Business Life Cycle
Figure 1.1 represents the life cycle of most business. On the vertical axes is revenue or sales and
on the horizontal axes is the progression of time. So, from the time a business launches itself or
goes operational, it is to grow according to graph into maturity. If you are in this conference, it is
expected that your business will definitely fall into the following categories.
First category is the idea or pre-startup phase: As the name indicates you haven't really started
the business at this level. All you have is an idea, a design, a prototype, a sample of the product or
service in its conceptual stage as seen in figure 1.2
Source: smallstarter.com (2020)
Figure 1.2 Idea Phase in the business lifecycle

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The figure, illustrates an entrepreneur at the idea generation level. For an entrepreneur in this
category, much work still needs to be done to convince first, yourself and others that what you
want to venture into is worthwhile. The business is more of what is in the mind of the vision bearer,
than what people actually see. Nobody can truly understand where you are coming from and where
you are going to. Most at times, much of what you are saying, is like “Noah preaching to his
generation to repent for God will destroy the world”.
The second category is the start-up phase: However, if your business has gone operational and
you are already producing or selling a physical or intangible service then, you are at the start-up
phase as seen in figure 1.3
Figure 1.3 Start-up phase in the business lifecycle
This stage is usually a very tough stage. It demonstrates characteristics of a beginner and one thing
to understand is the fact that, all beginnings are hard. It is a little tough because you are trying to
create awareness to the market about the existence of your product or service to customers.
The third category is the growth phase: After the start-up stage, is the growth stage. At this
level, it is important for the entrepreneur to know that he/she has done an enormous job.

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Figure 1.4 Growth phase in the business lifecycle
Actually, as an entrepreneur you have succeeded to some extend at this phase, because a lot of
businesses die at the start-up stage. But if your venture can move to the growth stage, it is an
indication that your business can stand the competition in the market. It also indicates that your
business has gone beyond just a few sales and has begun attracting more customers. One of the
evident signs of growth is that, you as an entrepreneur, you are struggling to cope with the high
customers demand for your products, which of course justifies why you are looking for funding.
At this stage you need capital to expand your business so that, you can satisfy more customers.
The fourth category is the maturity phase: The last category is the maturity stage, which is
where every entrepreneur hopes to end up in the world of business. All the established brands in
the world and all the big-name companies such as; Coca-Cola, Facebook, Dangote and many more
are examples of mature businesses. Businesses in this category are established players in the
market, who have a steady customer base. They may not be growing as fast as they were some
years back, but right now, they can actually predict their future performance and budget
accordingly.

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Figure 1.5: Maturity phase of the business lifecycle
Therefore, the mature phase is a very predictable face which is something very important. The
startup phase, is very unpredictable. At the growth phase, business is moving so fast, thus it is
difficult to predict exactly how market forces are likely going to change. Each and every one who
is in this conference, is in one of the above-mentioned phases. Now, the most important question
to ask is how does risk affect each business in the respective categories? Do they have the same
risk portfolio? Is risk affecting them to the same degree and gravity? Which phase of the business
life cycle are investors afraid to pump in their money and why? Figure 1.6, attempts an answer to
these worries.
Figure 1.6: Level of risk in the business lifecycle

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As you can see from figure 1.6, the level of risk that affects a business decreases as the business
grows from the idea stage to the mature stage. So, in the eyes of an investor or lender, a business
in the idea or pre start-up category has the highest level of risk. As the business becomes a start-
up, the risk is still high but lower than the idea stage. In the growth category, the risk continues to
fall as the business becomes more successful. Finally, at the mature stage, the risks are minimal.
So, this clearly explains, why it is very easy for mature businesses to gain loans and funding for
investment, while businesses in the idea or start-up stage find it difficult to attract any investment.
1.3.2 The Seven Categories of Risk
With the above foundation being laid, let’s explore each of the seven critical risks which is the
focus of this paper. However, as we make progress it is imperative that you keep in mind a picture
of the category in the business lifecycle that you belong. The reason is simple, not every risk will
apply to your business. For example, if you are in the maturity stage, the risk affecting that category
are quite low. But if you are in the idea, start-up or growth stages, your risks are pretty high and
thus, you will need to pay much attention to this lesson, so that you see how these risks can be
mitigated.
1.3.2.1. Market Risk:
The first category of risk I will be discussing in this conference is Market risk. What is market
risk? This risk is quite interesting. But before I go further in to the lesson, let me explain this to
you clearly and in simple terms what this type of risk is all about. Pardon me if you have advanced
knowledge on this already, but because this is a conference, I assume many are still beginners thus,
will need to understand the basics first. Now let's say you have an idea for a business maybe it's a
wine business or you are thinking of a website or e-commerce business or maybe it’s a logistics
business. The mistake I see many start-up entrepreneurs make is; they think that their idea is an
opportunity. Hear me, and hear me well, the truth is that a business idea and a business opportunity
are not the same things. In fact, they are totally two different things which young entrepreneurs
easily confuse and take to be the same. It is important you understand that investors only invest in
business opportunities and not in business ideas. So, what is the difference between a business idea
and a business opportunity?

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Figure 1.7: Business idea is not business opportunity
A business idea is your own personal opinion and usually subjective view about a product or
service that customers will want and pay for in the market. From this simple definition, you
discover that, the business idea is one sided (supply side only); usually it is what the entrepreneur
thinks and how he/she feels regarding a business, whereas the opportunity is the opposite. On the
other hand, a business opportunity is determined by the market’s opinion (demand side). From this
perspective, it not subjective, it is not coming from the entrepreneur alone neither is it personal.
However, it is only when a business idea really solves a need, market problem or a want and the
customers are ready to pay for it, that’s when you have a business opportunity. So, if you have an
idea, or a product or a service and the market does not want to pay for, then know that, it is not an
opportunity. Recall that investors only invest in opportunities and not ideas.
Figure 1.8: Entrepreneur’s opinion must match market opinion

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1.3.2.1.1: Indicators of market risk
Therefore, when it comes to market risk investors will be looking exactly for the following
indicators.
a. Willingness to buy: The first indicator of market risk is the willingness to buy. This is a very
important criteria because if you can show that people have paid for your product or are willing to
pay for your product (usually from your market survey or feedback) then your market risk is low.
Start-up statistics indicate that, up to 42% of businesses fail because customers are not willing to
buy the products or services of those businesses. The logic is that, the entrepreneur thinks that the
product will succeed but the market does not think so. So, you can see where the problem lies.
Many of us and likewise big companies fall in this trap. This explains why several products have
been lunched in to the market and they died immediately. Of course, in our context you remember
the famous buffort tango that brasseries lunched and not long the product was no more in the
market. Many entrepreneurs fall in this trap, thinking because the idea makes sense to them, it will
make sense to the rest of the customers in the market. No sir/madam entrepreneur, I am sorry to
disappoint you. The fact that a product appeals to your taste, does not mean it does the same to
others. This is market risk.
However, there are two key metrics that investors use to measure your market risk as an
entrepreneur.
Figure 1.9: Investors’ measurement of market risk

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As seen from figure 1.9, the two metrics are validation and traction. But what is validation and
what is traction in the first place? Validation means customers have bought your product or have
expressed an interest over your product. Traction on the other hand, means your sales are growing
and your business is attracting more customers. So, validation could be the first sale that you ever
made. When you made that first sale, that was an aspect of a customer’s willingness to buy your
product. Of course, this kind of validation is not your mother or your brother or your friend and
family relatives who buy your product because they feel they need to encourage you. Even though,
that is important, but it is not the validation we are talking about. Validation is a sale that you made
because somebody actually needed what you were selling. So, if a customer buys the first time,
then that is validation. However, if more people keep buying, then that is traction. Traction means
that your sales are growing and your business is attracting more customers. Traction demonstrates
the aspect of a repurchase. Therefore, while validation proves that, your product or service actually
solves a market problem or need or want and people are willing to pay for it, traction on the other
hand, actually indicates that your business has potential to grow.
b. Sizeable Market: The second indicator of market risk that investors will be looking at in your
business, is the size of your Market. No matter how powerful, beautiful and innovative your
product is, if the size of your target market is not large enough, it will be difficult for your business
to grow. The size of your target market could be 1 million dollar, 10 million, or a hundred million
dollars. So, the key about the size of your target market, is the that, the bigger the size of the
market, the bigger the size of the business opportunity and the more interested potential investors
will be. One big problem, I notice is that entrepreneurs don’t know how to properly estimate the
size of their markets. This is very important because investors need to know the actual size of your
target market before putting their money in to your business. There are two effective methods to
estimate the size of a market in a way that makes sense to the investor. However, we will look at
that in details in our subsequent lessons. So, the general rule here is that, the bigger the size of your
target market, the bigger the business opportunities and the more interest it will generate for your
potential investors. The truth is, investors don't mind getting a piece of the pie from a big market
than getting it all from a small market. It may sound ridiculous, but it is better to get a 10% from
a $100, 000,000 market than to have 50% from a $100,000 Market. Does it make sense to you? If
yes, then know that’s how investors think.

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c. Growth Potential: The third indicator of market risk which investors will be looking after in a
business is the growth potential of the market. A market may be large today, but is actually
shrinking in size over time. So, investors want to know if your target market is growing and if such
a growth is sustainable. Of course, you need to support that claim by presenting an explanation of
the drivers that are behind the growth of your market. A market doesn’t just grow on its own, there
are usually drivers that are responsible for that growth. Some of those drivers can be population
growth, demographic growth, urbanization, economic growth, business spending, government
policy and other drivers.
These are the main market risks investors will be looking out for in your business if you are an
entrepreneur. Is there a willingness from the market to buy your product or service, is the size of
your target market large enough to make an investment in your business worthwhile? and is your
target market actually growing over the long term?
1.3.2.2. Competition Risk:
The third critical risk that investors are looking out for in a business plan is the competition risk.
Recall that, a lot of entrepreneurs underestimate the presence and influence and impact of
competition on their business. The truth is, competition is everywhere and they are more abundant
and more aggressive than you think. In fact, if you say there is no competition in the market it
could be a sign to investors that your market maybe not that interesting. All the lucrative industries
and market around the world always have competition. Competition is always a sign that there is
action going on and entrepreneurs and businesses are always attracted to lucrative markets. So, if
competition exists, then it shows that there is action in that market. For example, in the social
media space there is a lot of competition, in fast food industry there is a lot of competition, in
luxury and fashion industry there is a lot of competition, in automobiles there is a lot of competition
and of course in beverages, there is a wide range of players and products in that space. So, if your
market is not very competitive, its either it is too small, or very new or maybe not profitable or
maybe you are just lucky enough. Business luck can happen but it is very unlikely. However, you
may just be lucky that the competitors have not found out yet or are just too scared to come in.

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1.3.2.2.1 Indicators of Competition risk
There are a number of indicators regarding competition risk that investors will be looking out for
in your business as an entrepreneur.
a. Strength of Competition: The first indicator of competition risk that investors will be looking
out for in your business is the strength of competition. If the competition is strong, it could crush
your business in a number of ways, especially if they are big and established players. They could
drop their prices, pump more money into marketing and promotion of their product, copy your
business model or even try to steal your customers and employees. These things happen and they
are the reality of doing business.
b. Alternatives and substitutes: The second indicator of competition risk that investors will be
looking out for in your business is alternatives and substitutes to your product or service. Unlike
your direct competitors, alternative and substitute products are indirect competitors and you are
very likely to miss out on them if you are not very careful. Unlike what most people think, your
target customers actually have more options than buying your product or service. The options often
range from not doing anything or coping with the problem or a getting substitute which is more
convenient and affordable that doesn't exactly look like your product but helps them to accomplish
the same objective. So, you need to be very careful about alternatives and substitutes that could
pose a real threat to your business as an entrepreneur.
c. Competitive Advantage: The third indicator of competition risk that investors will be looking
out for in your business plan is your competitive edge. Even if the competition in your industry is
strong, is there something that makes your business unique? why will customers abandon your
competitors and buy what you are selling? what difference or improvement are you bringing to the
market? The truth is, if there is nothing that sets you apart from other businesses in the market,
then there is no guarantee that you will succeed, because it is actually your difference that will
make consumers and customers show up at your door step to buy your product. So, the stronger
your competitive advantage the most likely is that you are going to survive the competition in your
market.

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Figure 2.1: Indicators of competition risk
Your competitive advantage could range from, maybe you are the most affordable product in the
market, or you offer the best value, or you are more convenient, or your customers service is better
than the others, your product is more durable-it last longer than those of competitors, or your
product is easier to use and maintain. There are a lot of different options and it is your responsibility
to create an advantage for yourself in your market.
So, these are three main competitive risks that investors are looking out for immediately you
present a business plan to them.
1.3.2.3. Execution and operational Risk
The next critical risk, is the execution and operational risk. The hard truth in business is that, talk
is cheap and dreams are cheap. It is surprising how you will hear people say; “I have this great
idea, I have this great strategy, I have this great vision for this business”. You need to understand
that, ideas don’t cost a penny and almost everybody these days has an idea. Investors know this
and so having a business idea is not the same thing as having a business opportunity. You are miles
away from a real business if all you got is a business idea. A business idea as I told you, is different
from a business opportunity and for any business to start, grow and succeed it needs execution.
Execution is the only thing that brings ideas, strategies, plans and projections into reality. To

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execute an idea or a plan or strategy you need action, you need knowledge, unique skills, you need
experience, you need resources and you need relationships.
Figure 3.1: Requirements for executing a business idea
These are the things that you need, to execute an idea to become a real-life business and if you
have a real-life business you need resources to move an existing business into growth and then
into maturity. When an entrepreneur, presents a business plan or a pitch to an investor, the investor
will be thinking of your capacity and ability to execute the ideas and strategies and projections in
your business plan.
1.3.2.3.1 Indicators of operation and executional risk
So, when it comes to execution, these are the key things that investors will be looking at.
a. Relevant knowledge, skill or experience: The first thing which an investor is looking for when
it comes to operation and executional risk is relevant knowledge, skills or experience in the
business you are presenting. The logic is simple, for example, you can’t be preaching to your
friends about a concept which does not work for you and you want them to easily accept and
believe your claim. So, you can’t tell an investor that you want to start a business that builds
spaceships or rockets that send people to the Moon all because you have this beautiful idea for
space tourism. To you, taking people to the Moon for exploration is a very good thing, however,
you can’t be talking all these to investors, when you don't have relevant skills, the relevant

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experience in the spacecraft industry and the relevant contacts. What am I trying to say here? The
fact of the matter is that, whatever your business is about, you need to have the relevant knowledge,
and even if you don't have these things you can partner with the people who have it, in that way,
you will reduce this risk in the eye of your investor, if at all your investor will be convinced.
b. Prototypes, sample or live product: The second risk investors will be looking at in terms of
your execution and operational risk is, real proof that you can actually create the product or service
that meets the needs and expectations of your customers. It is easy to say “I have this great idea
for this beautiful product that could satisfy customers”. Actually, there is a risk that you may not
be able to make that product or service as you claim. So, one thing investors will be looking at is,
do you have a prototype, example or something that shows that you have thought through the
technical aspects of this project or idea to the extent that you can actually deliver to the market?
If you are already in the business of making or selling the product, presenting it will not be an
issue. I hope you understand me? Take for example, imagine someone walks up to you as an
investor saying, “I have this idea for a business to import raw materials and make solar panels in
Ghana or in Zambia”. That is an idea and it is beautiful. However, it is different from somebody
who comes up you and say, “I have this business that imports small numbers of solar panels from
China, I need money to expand the business due to increasing customers demand”. Do you realize
that although the two sounds nice, but there is a great difference in them? If you observe very well,
the first person has an idea to start a business but the second person has not just an idea but a
prototype of that same idea in its physical state. Actually, he is already doing the business but on
a small scale. He is the real person who actually proves that he can execute and he has samples of
the real product. So, it helps when you are pitching an investor, if you can show the prototype of
the things which you want to produce or sell, you have a stronger position than somebody who is
just talking ideas in the air.
c. Resources and Relationships: The third risk in this category is resources and relationships. Do
you have any intellectual property? Do you have relationships of supplying resources with your
distributors? Do you have relationships that give you an advantage in your industry? If you have
an arrangement with distributors for your product, you are much better than another business
person that has not figured out how he/she is going to distribute his/her products in the market.

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d. Credible business model: The fourth execution risk in this category that investors will be
looking at, is a credible business model. Do you have a business model? How does it work for
your business? Can you clearly explain the business model to investors? But before we examine
all these, what is a business model in the first place? A business model, explains how you are going
to put everything together for your business to work effectively and efficiently. It is that which
makes your business different from those of others. You may even be operating in the same
industry selling similar products, but your business model, makes you to be profitable and the other
finds the market difficult.
There are 3 key elements of how a business model works. The first is, have you figured out a
credible way to create or manufacture the product? If you're going to sell anything, it’s going to
come from exactly from somewhere? It is either you are going to a make a finished product or you
are going to buy one. If you are delivering a service, then you need to hire people who are going
to deliver the service or you distribute it yourself. Have you figured out a cost-effective way to
create the product that you want to sell? So, the first angle of a business model is all about creating
the product or manufacturing the product or service. The second aspect of a business model is how
are you going to sell and deliver the product to customers? Are you going to sell directly to
customers? Or will you go through a distribution chain, may be retailers or wholesalers and agents
or will you be selling through the website where customers can just go directly and get the product?
How exactly are you going to deliver your product to your customers? The third essential thing of
a business model is, how are you going to make money from this business? Are you going to make
money from sales, from commissions, from subscriptions or what exactly is your approach for
making money form the business? These are the three aspect of every business model. You need
to be able to explain how you are going to make or get the product. Also, you need to explain how
you are going to sell and deliver it and finally, how are you going to make money from the
business? If you have been able to figured out a credible way on how your business is going to do
all these three things, then it wouldn’t be a source of concern to potential investors.

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Figure 3.2 Four key areas of execution risk
So, these are the four key areas of execution risk that investors are going to be looking at as they
go through your business plan and listen to your pitches. You need to have relevant knowledge
and skill or experience in the industry you want to business in. Secondly you need to show a
prototype or design or a real product that proves that you can actually build a product or is service
that customers want and will pay for. Also, you need to show how you have figured out how your
business model is going to work
1.3.2.4. Financial risk:
The fourth critical risk that investors will be looking at when you present a business plan to them
is the financial risk. Financial risk is all about the money and when you have a business and you
convince an investor to give you capital, there are only two things that could happen: Your business
could end up making a profit or return for the investor or it could make a loss. Financial risk is
about looking at the key factors that will help an investor know if your business has more chances
of making a profit or a loss.

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Figure 4.1: Financial risk
1.3.2.4.1 Indictors of Financial Risk
There are a number of key metrics that investors will consider in terms of financial risk.
a. Revenue and profits: The first is the amount of revenue and profits your business is already
producing. If your business is already bringing in money, there is a strong likelihood that it will
continue to bring money. This is a good indicator and it lowers the financial risk of your business
in the eyes of your investors but, if your business is not already bringing in money there is high
chance for your investor to withhold capital from giving you. This explains why banks are mostly
willing to give loans to businesses that are generating sales. If your business is just an idea or start
up that isn’t making any money yet, it can be very hard to acquire a bank loan.
b. Realistic financial projections: The second financial risk investors will be looking at when an
entrepreneur walks up to them for funding is how realistic are your financial projections and
assumptions. I see a lot of business plans that just pool figures haphazardly. This actually sends
the wrong signal to the investor because it tells the investor that you don't actually know what you
are doing. That is why you need to study the logical ways to create financial projections. In fact,
the way it happens is, it all starts with properly estimating the size of your target market. Thereafter,
use that information to create sales forecast and it will lead in to your financial projections. You

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don’t just harvest figures from the air and think a logical investor will be convinced. This is exactly
the method that makes sense to potential investor.
Figure 4.2: Realistic financial projections
c. Investment Funds: The third financial risk that investors will looking out for when an
entrepreneur presents a business plan is the use of investment funds. Investors need to be convinced
that you are putting their funds in areas that are going to be profitable. It also tells the investor that
you know exactly what you are doing, so you need to make sure that you have a plan for using the
funds that your business will generate. You need to make sure that you have a clear plan for the
investment funds.
d. Attractive Return: The fourth financial risk that investors will be looking out for in a business
plan is the attractiveness of the return. Do you have an attractive return on the investment? If
investors don't think that the return from your business will meet their expectations, they will not
invest. Most investors have a target return on investment in mind. Don't waste time talking to an
investor like a venture capitalist who is only interested on a 700% return on investment when your
business can only deliver 200% return. It will not work, this time not because your business is bad
but because you did not meet the expectations of the rate of return to the investors.

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Figure 4.3: The four areas for financial risk
So, these are the four areas for financial risk that investors will be looking out for. If your business
is already making money then, your perceived risk will be lower. If you can prove that your
financial projections are realistic, your perceived risk will be lower, if you have a clear and define
plan for using funds invested in your business, your perceived risk will be lower. And if your return
on investment is attractive enough then you will get an investor.
1.3.2.5. Legal and regulatory risk:
The fifth critical risk that investors will be looking out when an entrepreneur presents a business
plan or is making a pitch, is the legal and regulatory risk. This is a very important area of risk that
many entrepreneurs do not pay attention to. This is the type of risks that can take you out of
business in a certain way you least expected. In fact, in most cases you could be paying a heavy
fine or going to prison. So, investors are always on the lookout for this type of risk and I strongly
recommend that you pay attention to it.
1.3.2.5.1 Indicators of legal and regulatory risk
a. Any legal strengths or handicaps: The first areas of legal risk are any strengths or handicaps
your business may suffer from. Some of these include; patents, trademarks, copyrights, contracts
or agreements. If you have a patent or copyright that protects your product, that is a strength. But
if your product is likely to infringe on another company’s patent, trade mark or copyrights, then

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that is a handicap and of course this may lead to a court case or penalties. If you have contracts or
agreements that are not properly written and have loopholes, that could be significant handicap for
your business. These are some of the technical areas which investors would be looking out for.
Figure 5.1: Legal strengths and handicaps
b. Regulated Industry: The second area of legal risk is regulation. If your market is regulated by
strict standards and codes or laws then, it means you need to be careful as a starter in the business
because breaking any of these rules could affect the business. In fact, to get started in most
regulated industries and markets, you may need a license or permit to operate. Some of these
industries may include banking and financial services, healthcare, mining, food processing,
pharmaceuticals, education, security services and several other industries that are regulated.
c. Legal nature of your business: The third area of legal and regulatory risk that investors will
be looking at is the legal nature of your business. Is your business legally registered, are you
operating as sole proprietorship? Is your business registered as a partnership? Is it registered as a
limited liability venture that separates you from your business? These aspects are very important
and you should endeavor to answer the above questions on the legal nature of your business. If
your business is in the idea or pre-start up, then you really don't have a business, so this may not
be a point of concern to an investor. But the question that may come to the investor’s mind is, if I
give you this money you are asking for, for example $5,000 $100,000 $1000,000, who am I

23
investing this money in? Am I investing it to a person or Am I putting it in a business? That type
of question is implicative in several dimensions. This explains why, you need to clearly legalize
your business.
Figure 5.2: The three key areas of legal and regulatory risk
Investors are more likely to be comfortable, when they know that the money is going straight in to
the business and you can show that the business exist and is properly registered, having its own
bank accounts such that everything is properly laid down. If you are a start-up business or a growth
business, I expect that you should have covered these essential legal aspects of your business.
These are the three key areas of legal and regulatory risk that investors will be looking out for as
you pitch your business to them. You need to be careful with this risk, because, they have the
potential to get you into a lot of troubles or totally shut down your business.
1.3.2.6. People Risk
The next critical risk, we shall be looking in details is what is commonly called the people risk.
Recall that, investors know that, while the business may have promising potentials, it is actually
the people behind the business, who determine if a business succeeds or fails.

24
1.3.2.6.1 Indicators of people risk
It is the entrepreneur and his/her team of partners and advisors with employees who have the
biggest influence and impact on any business. So, let me show you one of the biggest risks that
investors will be looking out for in terms of people risk.
a. Personality of the entrepreneur and team: The first indicator of people risk that investors are
looking out for when you are presenting your business plan to them, is the personality of the
entrepreneur and her team. Are they passionate and mission driven people? Are they determined
enough to make this business succeed in the face of challenges and daunting odds? Nobody wants
to invest in an entrepreneur who will abandon the business and give up during difficult times.
Investors want to know why you are interested in your business. It sounds absurd, right? Yes, they
actually want to know your reason for doing what you are doing. The reason will justify whether
you will leave or stay during challenging moments. Is it just for the money, or you are trying to
make an impact to something that is fundamentally wrong or problematic in the society? Your why
is important because investors know there will be hard times, but are you going to abandon the
business or keep continuing? Of course, if you abandon the business, any money they have
invested in your business will also been abandoned and go down the drained. Therefore, it is
important your personality is right for them. One important thing with this personality issue is the
fact that, you can’t hide it from them. Curious investors may go as far as checking your social
media postings.
b. Personal sacrifice: The second indicator of people risk that investors will be looking out for
when you are presenting your business pitch is your personal sacrifice. They want to know what
you have done so far with the business, how much personal progress have you made? How much
business sacrifice have you contributed to the business even in the little time you have run your
business? So, between 0 and 100, how much capital have you invested into the business? It may
not be money, but how have you tried to advance this business without any investors’ help? So, if
you want an investor to take you to 100%, you should at least put in something, at least sacrifice
something so that the investor knows that he is putting his money where your effort is also there.
Even if it is 10%, 20% no problem, investors expect to see your sign of commitment. They want
to know you are sharing the risk with them and not just leaning on the shoulders of their capital.

25
c. Support System: The third risk that investors will be looking out for in terms of people risk,
will be the people you depend on for help and support. Many good heads are better than one. The
more good heads you have in the business, the more comfortable the investor is. Do you have
partners, employees, advisers who support you and contribute in one way or the another? In fact,
partners and advisors can contribute their knowledge and experience in areas that you are weak.
Therefore, some partners and advisors don't need to have any share in the business. However, you
can allow them to own a share but it all depends on their level of commitment in the business.
Nevertheless, showing that you have experienced people behind you can be a strong advantage in
the eye of the investor.
Figure 6.1: The three key areas of people risk
So, these are the risks that will be on the mind of a potential investor, when it comes to the people
who actually drive the business. Recall that, a beautiful idea may amount to nothing if the people
who are running that business are incapable. But an average idea can become an outstanding
success if you have a well-motivated team that have the right combination of experience, expertise
and human qualities. So, investors are not blind on this very strategic but usually neglected aspect
on a business plan.
1.3.2.7. Systemic Risk
The last type of risk that investors will be looking and paying close attention when you are
defending your business plan, is the systematic risk. These are the types of risks that affect the

26
entire business environment and not just your own business. Sometimes investors don’t invest in
your business not because they don’t want to, but because the wider business environment is not
just favorable.
1.3.2.7.1 Indicators of Systemic Risk
The following are some of the important systemic risks that investors will be looking at when you
are pitching your business to them.
a. The nature of the business environment: The first type of systemic risk that investors will be
analyzing is the business environment. Is the business environment favorable? One good way to
look at this is, from the world bank report of doing business. This is a report which the world bank
together with partner countries and agencies publish annually about doing business across
countries in the world.
Figure 7.1 business environment
Figure 7.1 shows all the world’s countries and how easy it is to do business in each of the countries.
It covers metrics like registering a business, how easy it is of doing a business, how do you enforce
contracts? Is it easy to enforce contracts? How well are investors protected? And access to credits
and the list is extensive. The countries in green are some of the easiest countries to do business
with, which happens that most of them are developed countries. Africa has the highest

27
concentration with red. This explains why compared to the amount of investment that flows in to
other parts of the world, Africa is not getting as much investment because the business environment
is not really favorable for a lot of investors. But interestingly, things are beginning to change for
two reasons. First, some countries are beginning to improve their doing business ranking. They
are actually making structural changes to make sure that it is easier to do business. The second is
that, the biggest return on investment is only possible in emerging-markets of which most parts of
Africa fall in to. So, more investors are willing to take higher risks, so that they can enjoy the
higher reward. The nature of the business environment is something which the investors consider
very much. This tell them how safe their investment is. But again, a growing number of investors
are increasing their appetite for risk, by investing in places like Africa where systemic risk is high.
b. Industry/Sectorial Risk: The second area of systemic risk which investors do not neglect, could
be specific risk that affect your industry or country particularly. Even in a favorable business
environment, there could be specific risk that affect an industry or country. Presently in the world,
we understand that the oil and gas industry are going through challenging times because of the
slump in commodity prices and coupled with the COVID-19 pandemic. Thus, investors will be
weary to put in money in to these businesses. Even in countries that have good performing
economies, there are specific industries that are highly vulnerable that investors may not like to
touch. You need to find out if your business falls within such an industry and prepare logical
response in place to mitigate this type of risk.
c. Political risk: This is another type of risks that affects countries and even though all of Africa
may be favorable, there are some conflict zones that put off potential investors. Right now, in
Africa investors are afraid of places like Libya and Somalia, English speaking regions of
Cameroon not because there no market opportunities but because the government in these
countries are unstable. So that is political risk which is a type systemic risk. Political risk affects
all types of businesses, it doesn’t matter how well your business is doing. If you are in a country
or an industry that is vulnerable to this risk then you will be equally affected.
d. Economic risk: This is another type of example of systemic risk. Presently the economic
recession all over the world due to the COVID-19 pandemic has left every economy handicap.
Even though some countries have been heated hard than others, it makes these investors reluctant
of investing their money generally. So, In Nigeria for example the tight foreign exchange market,

28
makes investors, afraid because they are not confident that, they will be able to take their money
out of the country. This is a fear that an investor may have, so you need to find a way to address
the situation convincingly.
You don't just pretend that these risks do not resist, you take them head-on, you admit that they
exist, you identified them and proposed mitigation strategies to these risks. These risks do not
mean that investors will not invest? Your job is to show them how you plan, to mitigate these risks.
And despite the downside risk, entrepreneurs are still raising capital from foreign investors in
countries like; Nigeria, South Africa, Zimbabwe and in other countries in Africa. In fact, people
are still getting investment funds even in these challenging times, so there is no excuse for you.
Even beyond the current challenges that we are having, investors who have a long-term view and
know that most countries in Africa, are favorable in the long term. The long term looks very green
for Africa, so if you target right investors, do have a long-term view. This is because they are going
to look beyond the immediate challenges and still give you funding for your business, since as
these challenges will not be around forever. And once as they’ve passed away, and we will go in
to the boom times, they will have to be adequately compensated for the risk they have taken.
Other types of specific systemic risk are social risk, like the COVID-19, the Ebola outbreak, and
several outbreaks. Even when the economy is doing well and you have this kind of outbreak, it
affects every aspect of business. There is equally the technological risk, the environmental risk.
This session is too short for me to take you through all of this. However, for the systemic risk, we
have seen the areas which are most likely to affect your business. Your business may have good
prospects, but these systemic risks may affect the perception of your investors regarding your
business. That is why it is your job to educate and convince investors about your plans and
strategies for mitigating these risks. That is the only way to address fears and doubts in the minds
of your investors.
1.4 Conclusion
Everyone is exposed to some type of risk every day – whether it’s from driving, walking down the
street, investing, capital planning, or something else. An entrepreneur’s personality, lifestyle, and
age are some of the top factors that investors consider for risk purposes. Each investor has a unique

29
risk profile that determines their willingness and ability to withstand risk. In general, as investment
risks rise, investors expect higher returns to compensate for taking those risks.
A fundamental idea in finance is the relationship between risk and return. The greater the amount
of risk an investor is willing to take, the greater the potential return. Risks can come in various
ways and investors need to be compensated for taking on additional risk. For example, a U.S.
Treasury bond is considered one of the safest investments and when compared to a corporate bond,
provides a lower rate of return. A corporation is much more likely to go bankrupt than the U.S.
government. Because the default risk of investing in a corporate bond is higher, investors are
offered a higher rate of return.
Quantifiably, risk is usually assessed by considering historical behaviors and outcomes. In finance,
standard deviation is a common metric associated with risk. Standard deviation provides a measure
of the volatility of a value in comparison to its historical average. A high standard deviation
indicates a lot of value volatility and therefore a high degree of risk.
Individuals, financial advisors, and companies can all develop risk management strategies to help
manage risks associated with their investments and business activities. Academically, there are
several theories, metrics, and strategies that have been identified to measure, analyze, and manage
risks. Some of these include: standard deviation, beta, Value at Risk (VaR), and the Capital Asset
Pricing Model (CAPM). Measuring and quantifying risk often allows investors, traders, and
business managers to hedge some risks away by using various strategies including diversification
and derivative positions.
1.5 Summary
We have seen the seven critical risk that investors always look out for and what they could mean
for your business. If these risks are not address in your business plan, your pitches with potential
investors, then investors’ fears, doubts, skepticism and questions about your business will prevent
them from making a positive decision to fund you. The first step is to identify the business that
affects you. The second step is to go in to developing mitigation strategies. It is very important
you know how to address each of these risks in your business plans, pitches and even in emails to
potential investors. So that, these investors will know that you have done a thorough risk analysis
of your business and you have identified effective ways of mitigating the risk.

30
1.6 Review Questions
a. What stage in the business lifecycle does your business belong and what are the risks
that threaten investors from funding your business in that phase?
b. With the help of a diagram, clearly explain the business lifecycle, illustrating how a
business grows through the different stages and bring out the major challenges at each stage.
c. At which stage of the business lifecycle, is it possible to predict a business’s future
performance and budget accordingly. What justifications can you give to your answer
d. What is market risk? How is a business idea different from a business opportunity?
e. When it comes to market risk investors are looking exactly for certain indicators on an
entrepreneur’s business plan. What are these and why are they important to an investor?
f. In your business as an entrepreneur, what are the various types of competition risk that
your business is facing?
g. What are the requirements for executing a business in the industry in which you operate?
h. What do you understand as financial risk and how best do you think an investor can
assess them in a business plan?
i. One of the most important risks that investors pay close attention to is the legal and
regulatory risk. How best do you think an investor should go about analyzing these risks in a
business plan?
1.7 References
https://www.investopedia.com/terms/r/risk.asp Date accessed: March 29, 2020
https://www.smallstarter.com Date accessed: March 27, 2018
Manners-Bell, J. 2014. Supply Chain Risk Management: Understanding Emerging Threats to
Global Supply Chains. 2nd Edition. KoganPage.
Waters, Donald. 2011. Supply chain Risk management. Vulnerability and Resilence in Logistics.
2nd Edition. KoganPage.

31
www.blogspot.com/-Product-life-cycle.png Date accessed: March 30, 2020
1.8 Task
❖ Read the notes on unit 6 (People Risk) and make a brief summary of not more than half a
page
1.9 Reading Assignment/Suggested Readings
❖ Read this article titled “Types of investment risk” (2019), from the internet, accessed from
https://www.getsmarteraboutmoney.ca/invest/investing-basics/understanding-risk/types-
of-investment-risk/ /April 16, 2019
1.10 Reading Assignment Supplementary Source
❖ YouTube Video lecture: 3 things investors should remember about risk in 2020.
❖ Video Highlights: - To successfully manage risk, investors need to first understand it and
then follow some key principles says Tim in his first video of the New Year.!
❖ Note: To access the video, copy and paste this Playlist
❖ URL: https://youtu.be/ScfNtt_dWO0?t=13
❖ Source: https://www.youtube.com/watch?v=ScfNtt_dWO0. Retrieved 27 April 2020.
1.11 Written Assignment
A beautiful idea may amount to nothing if the people who are running that business are incapable.
But an average idea can become an outstanding success if you have a well-motivated team that
have the right combination of experience, expertise and human qualities. Justify the validity of this
statement.
1.12 Discussion Assignment
In groups 4, discuss amongst yourselves the various types of systemic risk that your respective
business may face and which one is most important to you and why?

7 CRITICAL RISK INVESTORS ALWAYS LOOK FOR

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