’s Lior Krengel on Identifying and Communicating Risk to Investors During the Fundraising Process

No startup is without risk, whether it’s not having your full team in place, lacking a great go to market strategy, or any other element of your growth plans that aren’t rock solid yet. And you need to know how to present those risks to investors in a way that doesn’t send them running. Lior Krengel, who does ecosystem relations at, hosted a session during the 5 Day Charge all about presenting risks to investors during the fundraising process. Here’s what you should know.

The three assumptions that underlie the fundraising process

Before you can start to think about the risks your startup presents to investors, you need to understand a few assumptions that Krengel lays out below:

  1. Startups want hockey stick growth. “You can have great ideas and really innovate, but if you don't grow in a hockey stick, it means you're not a startup. This is really what defines a startup,” she says.
  2. You usually need outside money if you want that hockey stick growth. “If you have a cool idea and you don't want to raise money, that's fine,” Krengel says. “It just means you’re going to grow slower, and in some cases you can actually end up bootstrapping and getting to the right pace.”
  3. There will be many valuation points over the course of your startup, especially if you grow. “When you start raising money your valuation of the company is not what it is once you're going public, for example,” Krengel says. “A key driver for valuation increase is raising money, and you can only raise money once you reduce the risk that you're presenting. And risk is changing over time. So the risk that you present as a pre-seed company is not the same risk as what you're presenting as a company that is about to IPO.”

Risk is subjective and relative

All startups come with risks, but “risk is subjective,” Krengel says. “Let’s say that you have a team of three and a great idea you’ve started working on. But you don’t have a CTO yet to really execute and build the first demo. You meet with an investor, show them a great presentation, and tell them that you don’t have a CTO. If all of the other startups they’re currently looking at do have CTOs, that’s a risk point for you. Not necessarily because you won’t be able to build a company without having a CTO when raising money, but because everyone else who’s pitched these investors has one.”

“This is a key point about risk,” Krengel says. “It’s not just about your market and competitive landscape—if everyone else raising money has something that you don’t, that puts you in a risk point for investors. Investors have to choose a few investments out of hundreds, so they look for reasons to say no instead of yes. So if you present an incomplete team but everyone else has a complete team, it’s easy for them to say no.”

The same can apply to the stage of development you’re at. “If people are pitching investors with a demo or MVP and you’re coming in with only a presentation, you present a bigger risk than the other startups,” Krengel says. “Risk is all comparative between companies and subjective.”

Risks also change over the course of a startup’s lifecycle. “An investor putting the first money into a company isn’t going to be asking if the startup can become public one day because that’s not what they care about at that point,” Krengel says. “And when you reach the IPO stage, investors aren’t wondering if your go-to-market is a risk.”

Present risks that investors can help you overcome

It’s not a bad thing to present a risk to investors, and as a startup, it’s virtually guaranteed that some element of what you’re pitching investors on is risky. But the type and amount of risk you present matters. Typically, investors want to see that the risk you’re presenting them with is something that can be mitigated or overcome with capital. “Say right now that I have three people on my team and I’m missing a crucial team member,” Krengel says. “But if I tell investors that I have a very strong candidate I want to hire, and the only thing I need is money to rent an office for them to sit at, or pay their salary, the investor hears that their money can solve that risk.”

Here’s another example: “Let’s say that you’ve already tested marketing channels and you know that you have a very good conversion on your funnel. You did that with $5,000 and now you need $2 million,” Krengel says. “That’s a risk related to whether you can scale, but money would solve it, so that’s a very good risk to present.”

Risks that no amount of money or expertise (meaning they are out of the founder’s and investor’s ability to solve) could conceivably fix, on the other hand, are not good. And a prime example of this type of bad risk is a market problem. If your market is immature or not ready, “but the next person coming in to pitch the investor is talking about a better market, they’re a better investment in the eyes of the investor,” Krengel says. And that’s because money or expertise can’t fix markets.

It’s also key not to present the same risks through multiple rounds of fundraising. Krengel says this example: “Say you and two other people came out of a very good technical unit in the army,” she says. “An investor gives you money to build something in cyber security because, based on your background, they know that you can do it. A year later, you’ve built your MVP but you have no sales, and you want to raise more money. You’re presenting the same risk you did when you first raised, because the risk was always whether you could sell the product, rather than whether you could build it in the first place. So you might nott see an increase in your valuation because your risk is the same. And if you wanted more money, you’d need to show that maybe you were going to use it to hire someone who can do sales.”

Your risks need to be connected

When you present your risks to investors, “the ideal situation is being able to show that all of the risks come to one point,” Krengel says. For example, if all of your risks boil down to hiring the right team, or putting more money into your marketing channels. “If you start presenting risks that are all over the place, it’s too much for investors to take.”

You have to point out your risks, not try to hide them

The most important thing about presenting your risks to investors is being honest about them. What you don’t want to do is try to hide them, or worse, be unaware of what your risks really are. Krengel shares the example of a first-time CEO who was inexperienced as a founder. Instead of trying to present himself as having more experience than he did to investors, “he showed that the first thing he was going to do with the money raised was bring in a more senior team to lead the startup,” Krengel says. “He called out the risk, so investors didn’t have to point it out for him. That eliminated the risk because it showed that he understood the problem and that their money would solve it.” If you have an obvious risk and you don’t point it out, “that makes investors think that you’re unaware of the risk or don’t have a plan to fix it,” Krengel says, which is truly worse than having it in the first place.

Of course, risk identification and presentation is a mute point if you’re not being honest with yourself about your business. “You can only talk about your risks if you sit down and critically analyze your business,” Krengel says. “Entrepreneurs are used to talking about how great the opportunity is. They’re so optimistic that they sometimes don’t focus enough on what might stop them.” But by taking the time and energy to identify the risks in your business and present them in a way that investors can understand and feel comfortable with, you’ll actually make your startup less of a risk. A good technique to becoming more aware of the risk you present is pitching in front of your cofounder or another team member and letting them list the risks they identify in your talk.

Learn more about fundraising as an early-stage startup.

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