To be a Venture capitalists broker you need money, you need to be considered an accredited investor, and you must know the risk involved. So let’s cut to the chase, how much money do you need to invest in VC? The government declares that you need a net worth of $1 million or a $200,000 annual income to be worthy of risking your capital in start-ups.
Simply put, we took money out of the equation, if you have the money, you’re an accredited investor, then let’s see if the risks are worth it to you to invest in VC. There are a number of risks associated with VC investments. To get a clearer understanding seek a professional’s advice, like that of Efraim Landa. VC investment risks are as followed:
Management Risk: Some VCs are willing to gamble on a bad management team, while other VCs expect a strong management team. If the product or idea is good and the management team is only average some VCs will step out on a limb. Doing so is risky, without a solid management team a business can fail. Without a good solid team, many problems can arise and a VC firm can lose out on their investment if this is the case.
Product Risk: Product risk or technology risk means bad product development. Some VCs invest in the idea stage, while a product is just an idea… the idea may not sell, another company may beat you to the punch and out do your idea, and the idea may never become something of substance. If your product is a highly complex piece of software or equipment that has not yet been created, you are asking a VC to take a risk on your team’s ability to get the job done. Some VCs will take that risk and others won’t.
Revenue Model Risk: Revenue risk refers to fact that your product may be great but the product may not sell. Some VCs are comfortable backing companies that have a great idea on how to attract lots of users with the thought that the startup will monetize and advertise the service or product later. Some VCs expect to see a plan for generating revenue up front. A revenue plan is great to expect, as a VC you can expand on the revenue plan if you feel the idea is great but have concerns with the revenue model.
Market Risk: Market risk means there is no real niche for the product or service being created. Some VCs expect the service or product to be much more than a trend for this reason. Markets can dissolve if the environment changes or if trends change.
Competitive Risk: Competitive risk varies by the environment, and the threat of other product or service related companies. What if the competitor makes a better product, a product that solves more problems than the product you invested? VCs’ aversion to this risk varies.
The more you’re willing to risk the more opportunity there is for your VC firm, however, with more risk means your VC firm can lose out big time. Considering the risk associated with being an investment broker will help you evaluate and keep you in a safer position involving such risk.