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Tuesday, March 17, 2009

How To Assess Risk in Private Company Deals

Growthink blog

Written by Jay Turo on Monday, March 16, 2009

By far the biggest aspect of private company investing, which causes severe hesitation on the front end and sleepless nights on the back end, is risk.

All of us, of course, are profoundly interested in getting early stakes in high-flying companies but are downright frozen in our tracks by the considerable risk-taking involved in actually doing so. And once invested, the hard realities of company-building quickly take hold:. These include: longer than expected times-to-market, lower than expected cash flow, harder to attain market recognition, etc...

... The intelligent investor views risk simply as a measurement of the likelihood of a set of future outcomes, or of probability.

There are three main drivers of the probability of success: 1. Technology Risk. Can the enterprise actually bring-to-market the product or service as designed and on what timeframe?

2. Market Risk. Once the product is in the market, will anyone care?

3. Execution Risk. Can the the people of a business manage its technology and market risk to build brand, asset, revenue, and most importantly, cash flow growth over a sustained period of time?

... Suffice to say for now that risk for any business is driven not by the addition of these factors to one another, but by their multiplication to one another. Lack of performance on any one of the above has an exponential impact on a business' overall risk profile. ...

... For now, I will close with the words of perhaps the greatest entrepreneur of them all - Thomas Edison - who once said, "Restlessness and discontent are the first necessities of progress."