The worst case to happen with a business is for it to run out of funds and eventually close down. In a period of economic downturn, less people are spending their hard-earned money which is why businesses are barely thriving from sales. If you are just a new business and you have gotten startup capital from a venture capital firm or banks, the biggest fear is that the funds would not be sufficient enough to subsidize the business needs.
Entrepreneurs, when asking for financial support from venture capital firms, would often base their financial need on the best scenarios. Unfortunately, entrepreneurs are making mistakes of not incorporating or considering the worst cases that could happen with their businesses that would require them to have bigger funds. In short, they lack in preparing a second or backup plan.
There are also entrepreneurs who are preparing themselves for the difficulty of raising the startup capital. But actually, that is just the start. More financial risks are could happen when the business are already running. There are different financial risks that could push the business to its edge.
There are the credit risks or customers failing to pay, commodity price risk could happen when the prices of raw materials increase. If you are doing international trade or dealing with international customers, the fall or the recovery of the dollar could also affect trade and manufacturing relations which is called the exchange rate risk. The se are just some of the financial risks an entrepreneur could face while of the startup stage of the business.
These financial risks would be what we should keep in mind when looking or negotiating with financial assistance from venture capital firms and angel investors. Based on experience, it would be difficult to raise money immediately during a financial issue. So it would be important to take advantage of assistance being offered on the first place.
Venture Capital Firm Risks
Venture capital firms also face financial risks. Investing on a startup business is not risk-free. The fact that venture capital firms are not sure if these new businesses would be able to survive its startup stage is already a risk. Especially, if venture capital firms would only expect to profit within 5 to 7 years of the business.
This is why venture capital firms are very stringent when selecting entrepreneurs and business plans that apply for funding. VCs would have to analyze if the entrepreneur and the management team would be able to cope up different financial risks or problems that could happen to the business. They would ask entrepreneurs if there are plans devised to address these kinds of issues. Sometimes, venture capital firms would outsource a third-party firm that would serve as consultants during financial risks and problems.
Businesses are not risk-free, regardless of what stage you are already in. It is important for entrepreneurs and venture capital firms to prepare backup plans so that they would be able to resolve issues and at the same time recover from it. Which is why having a business plan is totally essential. As an entrepreneur, it is not enough to remember what to do during these situations, it is important for venture capitalists to see them concretely.
Raising startup capital for your business venture, is not easy. Maintaining your business thriving is not also a work in the park. It is something that you would put your effort into.