Nobody likes to think about the “what ifs” of business. There you are, pitching your heart out, asking for funding, convinced that your company is the next Facebook or Virgin or Apple, and yet somehow they expect you to give a set of “what ifs” about your business. This is called the Risks and Contingencies section of a business plan, and it is important to show investors you’ve done your homework.
Some of the elements that could cause your business to operate different than you expected include market risk, competition, operational risks, legal risks, financial risks as well as overall economic risks. Will your market develop the way you predict in your plan? Will someone start a competitive business? Will a new law or regulation curb the way you do business? What if your cash flow doesn’t go as anticipated, or if you’re expecting a capital infusion at a certain point and it doesn’t happen? What happens in an economic downturn?
I was part of a startup in 1996 that was expecting a cash infusion, and at the tail end of ’96, after a few companies went public but didn’t do as expected, capital markets for startups dried up. The founder had to fire all of us, though he eventually obtained a bridge loan and hired us back at half-salary. His plan was dependent on everything going perfectly, and when it didn’t, it threw off the entire business.
Had he thought through risks and contingencies, he might not have hired as many people as quickly, or he would have looked for the bridge loan when investment started to look iffy, instead of waiting till the company was almost out of business. It is very rare that everything goes according to plan. Talking through the possibilities gives a management team options, opportunities to mitigate the potential downsides, and even places to pivot if the opportunity arises.
By discussing and thinking through the possible downside risks to your business, you show that you’re a mature, intelligent entrepreneur who has thought through the possibilities and has planned intelligent contingencies. Potential investors will respect this, and may even offer to help you think through the best plans and options for change. Don’t skip this part of your planning.