Three Types of Risk And What Investors Should Do About It

This shouldn’t come as a surprise but you simply can’t evaluate an early stage company the same way you might evaluate a late stage company. Yet, so many private market investors (mostly angels, in my experience) make this mistake every day.Regardless of company stage, there are three main types of risk to be considered for any investment opportunity:

  • Product Risk: “Can they build it and will it work?”
  • Market Risk: “How many people want it?”
  • Distribution Risk: “How big can it get?”

At the earliest stage of the company (e.g., a company’s first outside fundraise or a company raising money pre-product), an investor ought to spend 80% of their time determining product risk. The remaining 20% of time should be spent on understanding market and distribution risk.

At the next stage of the company (often called the bridge or Series A stage), 80% investor’s time should spent on understanding the market risk. The remaining time should be spent understanding product and distribution risk.

Beyond that, most companies have figured out the majority of product and market risk. The primary concern at this later stage tends to be around distribution risk.

I’ve invested in hundreds of companies over the past few years and this framework has served me well.