All businesses and investments carry an inherent risk of financial loss. That’s just the way the system works. Services like Spectrum Specials would not be available today if cable and TV providers didn’t take a gamble on the internet becoming a household utility. Today, these providers reap the benefits on top of their industry. In general, high rewards are usually associated with higher risk factors as well. Otherwise, there would really be no incentive to take on greater financial risk. Especially when you could get the same return on a safer investment or business model.
Some types of businesses are often perceived to have higher risks associated with their industry or business model. These are typically high-risk businesses. And while you may still be able to carve a road to success, it will be much more difficult to convince your investors to do the same. It is important to note that a high-risk industry or model does not doom your business to failure. It just means you’ll have a higher time turning it into a sustainably profitable venture.
Understanding the Factors that Contribute to Risk
Investors, like consumers, are a lot more meticulous these days than they were a few decades ago. People have generally become more cautious and tend to do their homework, especially when it comes to potential scams or frauds. The world has also grown a lot more connected, meaning people hear about frauds and massive scams from across the globe. All of this contributes to making investors warier in investing their money.
This makes your job even harder if you run a high-risk business. At the very least, you can expect an investor to closely examine all core aspects of your business. Of course, certain investors may be more flexible on certain things than others. But on the whole, investors will definitely be uneasy about certain factors, such as:
High Failure Rates In Your Niche or Industry
Businesses tend to do their best to survive, and very frequently do just that. But on the whole, certain industries have much higher business failure rates than other comparable industries. The fine-dining industry is a great example. In large urban centers like New York City, you may have observed a new place to dine opening only to shut down a few weeks later. A few weeks later, a new restaurant opens in the same vicinity, only to end up the same way.
This high turnover is a result of being unable to differentiate a restaurant in any meaningful way from its competition. Therefore, investing in a new restaurant in the vicinity carries a high risk of failure. Unless, of course, you have a strong product or offering to differentiate yourself.
Your Business Type May Be Bad for PR
You may have a great income coming in from an industry that shows no signs of failure. But you may still be perceived as a high-risk investment if the type or nature of your business is not appropriate to the investor’s image. For example, the adult entertainment industry or the online gambling sector is legal in many parts of the world. But many investors will still balk at working with you, simply because of fear of their image being associated with your business.
Inexperienced Business Owners
Investors don’t just look at a business model, but the people who manage, run, and own it as well. As a rule, investors aren’t likely to hand over substantial funds to a business owner they can’t trust. Even if your business model is sound, you’ll still need to convince the investor of your own competence and drive. Many first-time business owners find it very difficult to find willing investors for this same reason. Unless you have someone more experienced and seasoned in your core team, you’ll come across as an inexperienced entrepreneur, which most investors will be skeptical about.
Capital-Intensive Business Models Requiring Cash Upfront
All businesses, especially new ones, have capital needs to get them off the ground. For almost any business model, you may need equipment, furniture, stationery, and even premises. But certain industries have far greater capital needs. For example, if you wanted to set up a new car manufacturing brand, you’ll require a massive inflow of capital investment. The research and development costs alone could be astronomical, and that’s even before your first production models roll off the line.
With these businesses, the first few years may be devoted to recovering the investment alone. Of course, as with companies like Lamborghini or Mercedes, in 50 years the company could be a world-class brand. However, you can understand that investors would be wary of putting their money into such an ambitious venture.