Major start-up firms can have different consequences while investing in new launches. Business investments can track the record of income, spend money to make more money, and generate more revenue. Also, the study considers both the perspectives of an entrepreneur and an investor in developing risk prevention and solution strategies.
Highlighting key risks to be considered when launching or investing in a start-up
Investing in a start-up can be based on lending money or buying an equity stake in the company. Also, entrepreneurs can face pretty risky situations at every single stage related to competitiveness, financial losses, and risk to the company’s reputation (Susilo 2020).
- Product risk: entrepreneurs may face problems with products by not suit the marketplaces. Also, investors can be questioned on or before investing in such unsuitable products.
- Risk of the unknown:investing in a new business requires unique foresight and future-oriented awareness to respond to the demand quickly. According to the investor’s perspective, unique foresight must assess the critical value generation of the business that requires knowledge and understanding of the nuances of the business. Lack of such understanding and unknown risks can create an unconditional breakdown of the situation.
- Executional risk: from the perspective of an entrepreneur, execution risks can be associated with a lack of understanding of the business dynamics and inappropriate use of resources in the external environments. According to Saura, Palos-Sanchez, and Grilo (2019), a lack of understanding of the political environment and economic stability, and also a lack of knowledge about the appropriate marketing channels of the start-up can lead the entrepreneurs to face complexes in execution.
- Market risk:entrepreneurs may face market risks by unprecedented changes in commodity prices, increase in labor costs, high intense competition as well as risk factors related to the availability of the raw materials in the marketplaces.
- Financial risks: investors may face challenges regarding credit risks, foreign investment risks, asset-backed risks, liquidity risks, currency risks, and also equity risks while considering investments in startup firms.
There are different risk management strategies related to prevention, risk mitigation, and removal of the damage from the risk.
- External unknown risks can be uncontrollable introducing changes in exchange rates, Foreign direct investment rates, and interest rates (Ahluwalia, Mahto, and Guerrero 2020). Buying insurance, legal regulations, completed operations insurance, and compliances can be bound to a set of standards required for the long-term management of start-up businesses.
- In a startup, limiting the liability of a sole proprietor can change the company to a limited liability company (LLC) where this type of structure cannot target the owner of the business for any type of liabilities or the responsibility for the company’s debts.
- Quality assurance programs can be set for regular review, monitoring, and get feedback from essential stakeholders to avoid complications in the business process.
- Lastly, controlling the growth of the business can limit high-risk customers to avoid risks of declining and lead to quick-thinking entrepreneurial solutions to manage the asset of the company.
|
Identified risks |
Example of each risk |
Solution |
|
Product risk |
Complex features and undefined programs of a new product cannot cope with significant demand in the market (Kim, Kim, and Jeon 2018). |
Investors only invest in rationalized products and avoid immediate challenges of sales and manufacturing. |
|
Executional risk |
When a company fails to execute new business system management or is facing difficulty to implement. |
The possible solution to this situation is to involve technological expertise and solve problems effectively. |
|
Financial risk |
Investors may face financial risks related to delays in delivery of goods, and defaulting on loans. |
Proper insurance can save the amount of investment and maintain adequate emergency funds for the business (Lee, Yun, and Gong 2017). |
|
Market risk |
A commodity price hike can lead to an increased price of the product which can impact on lowering the demand for the product. |
Strategic initiatives including diversification can lead to flexibility and manage risks associated with price and product cost. |
|
Risk of uncertainty |
Changes in government policy can impact the overall business process of an organization. |
Entrepreneurs must sustain reform proposals and avoid long-term plans for accelerating governmental policy changes easily (Tur-Porcar, Roig-Tierno, and Llorca Mestre 2018). |
Highlighting key ethical issues to be considered when launching or investing in a start-up
Ethical business practice must cover data protection, ethical teamwork, and also legal marketing of the products. However ethical issues can be faced by startups, such as:
- Unethical leadership:unethical leadership can arise the chance of workplace misconduct introducing team conflicts, decreased productivity, and employee absenteeism in the form of bullying, skipping standard procedures, and also reputation loss of the entrepreneurs.
- Unrealistic goals:unrealistic goals can have uncontrolled business premises, licensing, and permit issues due to the lack of legal knowledge of the entrepreneurs. Another factor for investors may focus on concerning bodies related to investing to protection and legal hindrances (Long et al. 2020).
- Issues related to advertisement and unethical marketing: due to a lack of understanding and market research, investors may invest in false claimed advertisements, scandalous or obscene promotions, and marketing. However, entrepreneurs need to avoid risks related to using someone’s patent, intellectual property, and copyrights that create risks of plagiarism.
- Issues in business structure:as per the views of Jarmai (2020), tortious liability may arise in terms of risks related to risks in shared profits, taking costly measures, breach of contracts, and issues with employment conditions, termination, job position, and termination.
Ethical risk management is incredibly complexion mostly for start-up businesses to manage teams, and customers and also accomplish principles of the business.
- Promoting values and leading:entrepreneurs must focus on accountability, honesty, and also integrity to motivate and inspire ethical employees.
- Using organizational structure to determine unethical activities: according to Lubberink et al. (2019), appropriate management hierarchies can provide routined training by emphasizing the fact that most of the employees can take part in the feedback sessions and share their opinions that they are facing in the organization.
- Communication as the key factor:unethical leadership can be transformed successfully to communicate the severity of the risk for the under-managed teams and employees from remote locations.
- Implementing legal compliance:to avoid team conflicts, most entrepreneurs must start up with regulatory compliance and governance processes to avoid discrimination and any type of bullying in the organization and take necessary steps toward the person who behaves unethically (Resnik 2018).
Highlight examples for each risk and its solution
|
Identified risks |
Example of each risk |
Solution |
|
Leadership risk |
According to the views of Swirsky, Gu, and Boyd (2020), unethical leaders can lead to poor management of the team and create an autocratic position that which most the employees may face a lack of motivation. |
Regular monitoring and feedback from employees can lead to the development of successful leaders and transformational support to work with motivation. |
|
Issues in business structure |
High turnover can create issues in the business structure that cause most start-up firms to face decreased productivity or permanent shutdown. |
Entrepreneurs must create new structures, review current positions of employees, and monitor them to maintain a robust company network through training. |
|
Unrealistic goals |
Entrepreneurs may have unrealistic goals related to undefined objectives and aims of the business leading to unsuccessful market plans. |
According to Bessen, Impink, and Seamans (2022), entrepreneurs must understand the demand of the market, map out a chain of communication and establish clear deadlines to reduce risks related to miscommunications and assumptions. |
|
Unethical marketing |
Lack of understanding of the product or the brand, investors may put effort and invest in unlawful advertisements or false promotions of products. |
Most investors need to create a code of ethics and establish a set of protocols to continuously review the codes and empower employees against unethical business settings. |
Conclusion
The study sheds light on different key risks and ethical issues faced by investors and entrepreneurs when launching or investing in a start-up business. Both investors and entrepreneurs must focus on mitigating these identified risks by accomplishing proper legal compliance, enhancing scheduled risk assessments on or before the investment, and also providing employees regular training to reduce the impacts on business.
References
Ahluwalia, S., Mahto, R.V. and Guerrero, M., 2020. Blockchain technology and startup financing: A transaction cost economics perspective. Technological Forecasting and Social Change, 151, p.119854.
Bessen, J., Impink, S.M. and Seamans, R., 2022. Ethical AI development: Evidence from AI startups.
Jarmai, K., 2020. Responsible innovation: business opportunities and strategies for implementation (p. 97). Springer Nature.
Kim, B., Kim, H. and Jeon, Y., 2018. Critical success factors of a design startup business. Sustainability, 10(9), p.2981.
Lee, H.H., Yun, H. and Gong, C.H., 2017. A Study on the Factors that Determine the Initial Success of Start-up. Asia-Pacific journal of business venturing and entrepreneurship, 12(1), pp.1-13.
Long, T.B., Blok, V., Dorrestijn, S. and Macnaghten, P., 2020. The design and testing of a tool for developing responsible innovation in start-up enterprises. Journal of Responsible Innovation, 7(1), pp.45-75.
Lubberink, R., Blok, V., van Ophem, J. and Omta, O., 2019. Responsible innovation by social entrepreneurs: an exploratory study of values integration in innovations. Journal of Responsible Innovation, 6(2), pp.179-210.
Resnik, D.B., 2018. Ethical Issues in Academic/Industrial Collaborations. Philosophy and Public Policy, p.121.
Saura, J.R., Palos-Sanchez, P. and Grilo, A., 2019. Detecting indicators for startup business success: Sentiment analysis using text data mining. Sustainability, 11(3), p.917.
Susilo, D., 2020. Scalable start-up entrepreneurship and local economic development in emerging economies. Applied Economics Journal, 27(2), pp.145-163.
Swirsky, E.S., Gu, C. and Boyd, A.D., 2020. An ethical framework to nowhere. The American Journal of Bioethics, 20(11), pp.30-32.
Tur-Porcar, A., Roig-Tierno, N. and Llorca Mestre, A., 2018. Factors affecting entrepreneurship and business sustainability. Sustainability, 10(2), p.452.
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