In a series of posts over on my personal blog I outlined the four categories of venture risk. I find myself explaining this to entrepreneurs quite often and thought it would be useful to summarize them here.
Management risk is the probability of the venture failing to meet its business objectives due to not having the people with the appropriate skills in leadership positions or due to poor teamwork.
Market risk is simply that the predicted market for the startup’s new products turns out to be substantially less then what the founders forecast.
Product risk is commonly referred to as technology risk. It is the likelihood that a startup will fail to produce the product it sets out to create.
Funding risk is the likelihood that a startup will fail to raise sufficient capital financing to get the venture to a self-sustaining cash flow positive state (or to the point where it is acquired).
The important thing to remember is that these are the risks that venture capitalists think about when making investment decisions. An entrepreneur on a path to venture capital needs to think like a VC. Reduce the amount of risk present in each one of these categories (the links lead to more detailed discussion on how). This not only increases the probability of funding but also the valuation of the venture.