Recognizing Important Risk Factors

Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.

Investing is risky, plain and simple. No investment will ever be risk-free. It is possible, however, to mitigate your risks so as to increase your likelihood of achieving a successful exit. The due diligence process, for example, serves to mitigate risk. Whether speaking with a team or examining a business plan, keep these potential risks in mind and make a clear determination that each has been sufficiently mitigated prior to investing.

The Team

Ensuring that you’re investing in the right team is one way to address investment-related risks. Any team in which you’re planning to invest must be honest, driven, and tenacious. They should have industry experience and understand their target audience. Investing in an untested team is OK, though you’ll need to ensure that they have industry knowledge and will work together well. Toward this end, reference checks are a powerful tool, as is simple observation. When spending time with a team, pay attention both to the person speaking and to how the rest of the team is occupied at that moment. Observe their interactions and consider whether they work effectively together. Are their skills complementary?


Rarely is an idea or product so revolutionary as to have no competition. When a new product comes to market, it is almost always attempting to displace an existing option. The original MP3 player, for example, attempted to replace both the Discman and the Walkman. While it represented an interesting innovation, it still faced the challenge of convincing users of old technology to jump ship. In the process, of course, it also had to drive the adoption of an entirely new music ecosystem based on shareable files instead of physical media.

When an entrepreneur tells you that they have no competition, beware! Either he hasn’t done enough research or he isn’t sufficiently knowledgeable of his industry to recognize his competition. Consumers have options and entrepreneurs must be aware of every one if they hope to capture the public’s attention.

Market Share

Is it plausible that the product or service might capture enough market share to ensure business success? Projections are only prognostications. They’re difficult to map and are worthless absent supporting data. If you’re not familiar with the industry in which you’re proposing to invest, you must spend the time necessary to learn more about the sector and the market in general. Only after you’re up to speed can you make an informed determination of whether a business will be able to generate the market share required for success. Will the company experience the necessary growth and successfully convert ever-more customers? Businesses too frequently focus so narrowly on new customers that they begin to neglect existing ones. Is retention receiving the emphasis it merits? Are plans in place to alter the product or service in the future in order to increase market share? If there’s not enough being done upfront to ensure that a market exists, both in the present and the future, you may want to walk away.

Wrong Assumptions

Assumptions that remain unvalidated are dangerous. No product or service comes with a guarantee that it’ll be purchased or used, regardless of how obvious its benefits may be to its inventors and/or investors. A sales and marketing plan that assumes consumers will recognize a product’s utility is courting failure. One relevant case study of this concept is Febreze, the odor-neutralizing spray:

When first engineered, Febreze was an odorless spray that helped to shrink odor molecules. Entering the market research phase, the assumption was that individuals who owned pets or smoked (i.e. individuals who might experience odor problems in their homes) would want to utilize the product to eliminate the associated odors. The team failed to realize that those individuals were incapable of discerning the odor-state of their homes. While some acknowledged the product’s utility, it wasn’t seen as necessary. Eventually, the team realized this error and pivoted the product to address a different market. Extensive target audience research revealed that: 1) people desired a scent; and 2) it needed to be utilized as part of a routine. By refocusing their marketing efforts, Procter & Gamble turned their initial dud into a range of popular products that many customers have incorporated into their cleaning routines.

The moral of the story is that one should question everything. Business rarely presents easy answers. If something appears to be an exceedingly simple matter, then perhaps the right question hasn’t yet been asked. Examine every assumption from all possible angles; play devil’s advocate on a regular basis. Make certain that assumptions are supported by evidence and not emotion. No assumption is ever above being challenged, regardless of its source.

Polaroid faced this exact problem and found itself falling from its position as an industry leader to that of a nearly irrelevant historical footnote. By failing to question their own business model, which relied heavily on the sale of instant film, they didn’t discern or acknowledge the emerging importance of digital cameras – despite having their own prototype for four years. Their assumption that people would always need to purchase film led directly to a major industry upset.

Lack of Industry Knowledge

If an investor or team doesn’t know enough about an industry, they may unexpectedly encounter some surprising regulatory hurdles. If you’re interested in a particular industry, but don’t have personal experience with its applicable regulations, you may be surprised to learn at a later date that some of the assumptions or activities detailed in the business plan fail to pass muster. Investing in an industry with which you’re familiar can greatly increase your likelihood of success.


When we become attached to an investment, it can hamper our judgement. This can lead directly to our continuing to fund a failing venture. Because we’re so heavily invested (in every sense) in wanting to see it succeed, our own confirmation bias prevents us from noticing the warning signs. Becoming attached to a business idea or team will lead to blind spots. While our instincts certainly play a part in investing, those same instincts can cause trouble when they overwhelm our other, better senses. It’s imperative to maintain objectivity so as to be capable of rendering fully informed, rational decisions when necessary.

Risk is not inherently bad. Smart risk-taking (and risk mitigation) is a necessary part of doing business for every entrepreneur and investor. Recognizing risk factors can help you to better mitigate risks and to more thoroughly question and vet businesses in which you’re interested. By working to address the range of relatively (individually) minor risks and by thoroughly questioning our assumptions, we can help to reduce the major risk of failure.

Although every investor will experience investments that fail to recoup their original capital, those failures all teach a valuable lesson for the next investment. Remain open to learning and committed to questioning and due diligence; you’ll very likely find that your angel investment results improve over time.

About the Author

Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (

Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.

Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to