Equity investors have a very specific framework for looking at the risk of investing in startups. Their perception of risk in turn directly impacts the valuation they may offer on their investment. This video provides a clear explanation of why and how angel and venture capital investors think about risk.
Investors’ perception of risk is grounded in the high rate of business failure. This video shares three infographics on “why startups fail,” along with data for general business failure and venture capital investment returns. Risk and opportunity go hand in hand.
Investors are assessing risk at every point in the process of interacting with entrepreneurs, from screening through valuation. The video details two specific valuation methodologies, detailed in another video, that specify risks and measure their impact on the pre-money valuation for seed stage companies.
In short, understanding how investors’ perceive risk will be key to understanding them and ultimately securing an investment at a mutually acceptable valuation.