Managing Investment Model Risk

The investment model refers to the money needed to enter the business and sustain the operations of the company till it achieves breakeven cash flow. Risk can be reduced by minimizing the upfront investment required. According to Mullins & Komisar, (“Getting to Plan B” Harvard Business Press, 2009) a few key questions must be addressed while managing investment model risk:
§ What are the hard assets – facilities, equipments, needed?
§ What are the development activities that must be completed before launching the product/service in the market place?
§ What are the investments that can be delayed or eliminated?
§ How much revenue and gross margin will the business generate to contribute to the ongoing costs?
Raising money is usually difficult. So the less the money the business needs, the better. Venture capital comes at a price. Venture capitalists are quite likely to demand their pound of flesh. For a small contribution they may demand a high equity stake in the start up. So the investment model must be built carefully to avoid an overdose of the capital. At the same time, the capital base should not be so small that the company runs out of cash before the operations stabilize.