Risks And Ethical Issues In Launching And Investing In A Start-up

Risks and Risk Assessments

Discuss the various risks and ethical issues to be considered when launching and investing in a start-up.

To describe and define the concept of a start up in the simplest form is that a start up is a business venture that has just begun its operations in the industry. Many people have vision for the products or services that they want to offer a target market and therefore create a company, but the success or failure of the organisation depends upon several factors. This assignment is going to give an understanding regarding two most important stakeholders perspective in an organisation that has just begun its operations or is not even at an incorporation state. These stakeholders are the entrepreneurs and the investors (Marques et al. 2013). The companies that are going to be studied in the assignment are UBER, Airbnb and Sellanycar. Uber is a company that allows the customer to hire a ride; the company operates by using mobile phone application and a website. Airbnb is a company that offers accommodation option to the travelers and connects local people with the tourist, this is a social media platform that allows the customers to post reviews and rate the accommodations as well. On the other hand sellanycar is a service that allows an individual to sell any car in any condition the company auctions the car to the other vendors.

An entrepreneur is a person who is the owner of a business organisation. The concept of the business model is the brand child of the entrepreneur. The entrepreneurs of the companies are: Uber: Travis Kalanick and Garrett Camp; Airbnb: Brian Chesky, Joe Gebbia and Nathan Blecharczyk; Sellanycar: Saygin Yalcin.

Execution risk:

The risk of being a failure, this is the most important risk that the entrepreneur has until the business has gained some momentum. As a considerable amount of liability lies in the shoulders of the entrepreneur it is his or her duty to ensure that the company is able to meet the requirements. There is always a risk of aligning the idea of the entrepreneur with the requirement of the target market if this is missing then there is a risk of failure in terms of the idea (Kozubíková et al. 2013). The case of Uber can be a good example here, the business model is based on the efficiency of the drivers therefore executing such an idea is challenging especially when the idea is innovative there is yardstick or any evaluation process of previous organisations to measure the outcome.   

A: As an Entrepreneur

Financial risk:

The second risk that the entrepreneur bares is the financial risk, launching a business idea ensures that the owner has a incorporate capital in terms of finance, as investing in an idea can be risky based on the success or failure of the endeavourer as discussed above (Sadgrove 2016). If the idea is a success the company starts generating revenue which is further used as capital but if this is not the case then the money that has been invested is waste. For example: in the case of Uber the risk of using an internet based platfrom to book a cab was completely new to the target market, the entrepreneurs of the company has invested a large amount in developing the website and curetting taxis, if the plan did not work out, there would be a major loss (Verbano and Venturini 2013).

Market risk:

This is one of the most significant risks that are associated with the entrepreneur, it is essential to understand and analyze the customer in order to understand the reason and the procedure the target market is related or will be motivated to buy the product or service. Furthermore, Verbano and Venturini (2013), state that it is essential to understand the competition in the market in terms of direct as well as indirect competition. Therefore it is essential to undertake proper market research in order to reduce this market risk.  It also helps in understanding the gap in the requirements that are in demand (Verbano and Venturini 2013). The business model of Airbnb is explained as a disruptive innovation model, in such cases, there is high market risk associated as the customers as well as the investors are unsure regarding the service and the quality and utility of it.

Most of the time for a start up finance is a major issue, in that case the entrepreneur should ensure that the process of incorporation and formulating policies for the company should be adhere to the norms and regulations of the country of operation like labour law, taxation policies etc. there are several instances where start-up companies are caught in illegal activities in terms of the proceedings and operations (Verbano and Venturini 2013). In order to attract the customers or investors, entrepreneurs may be lured in to exaggerating and making up things regarding the products which may turn out to be false; this is one of the most important ethical considerations that entrepreneurs must have while launching an idea (Hansen 2015). The entrepreneurs make false promises and portray different things in order to gain for the company but are this kind of effort ethical? While expanding in other countries Uber has faced a lot of controversies for example Uber has been banned in London and there is also negativity regarding the company’s policies among the drivers in Paris.

Top Three Risks / Ethical Issues (inclusive)

As the business model of the company is created by the entrepreneur, they should make sure that the model not only concentrates on the financial benefits of the company but also recognize some of the societal and environmental objectives as well (Griffith 2016). While planning the strategic management, setting clear goals and objectives help in the growth and expansion of the organisation. In this process how far a start is up obliged to give the society and the environment is the ethical consideration that the entrepreneur has to decide. All the three organisations Uber, Airbnb and Sellanycar follows strict CSR proceedings and have CSR reports published every year.

Another ethical consideration that the entrepreneur should determine is: what is the outcome of the company, what will the entrepreneur do if the plan is a success and is making earning revenues and is highly valued in the industry (Griffith 2016).  Airbnb is a company that is passionate about spreading joy of sharing experiences. The company offers the platform to the consumers to ensure that the tourists share the experience of staying in a accommodation while which has the essence of the location.

Market risk:

Market risk is something that is essential the entrepreneur has to prepare for the business before commencing on the operation (Kozubíková et al. 2013). With the help of business plan and strategic management practices like various market research, rational formulation of the policies etc. It also helps in mitigating the market risk, before entering an industry the entrepreneur should be well aware of the dynamics that are associated with the industry.  This helps in minimizing the risk of the market fluctuation and provides a better understanding of the perspective of the demands of the consumers (Kozubíková et al. 2013).

The most important ethical consideration that entrepreneurs must incorporate is the recognition of the responsibilities and the duties that a business unit have towards the development and protection of the society and environment (Kozubíková et al. 2013). These are building on the basis of the values and principles that drive the entrepreneur hence the CSR activities undertaken by the company is a reflection of the values that the organisation follow (Marques et al. 2013). Which in the long run helps in developing the goodwill of the start up? For example: Airbnb is a startup that has a number of CSR activities although the company is fairly new.  Each year the company tries to surpass the activities and the scale that they have set in the previous year in terms of their responsibility (Hansen 2015).

The last of the top three is also a risk element that every startup organisation faces, the risk of execution (Hansen 2015). For example: Saygin Yalcin, the founder of the used car marketplace Sellanycar.com has set exemplary bench mark in terms of executing risk mitigation. He had envisioned his perspective clearly which helped him to establish the organisation (Kozubíková et al. 2013).

Risks / Risk Assessments

Legal risk is the first issue that an investor should consider while putting money in to a new venture. None of the investors would like to be associated with any kind of illegal association, hence it is essential to do a complete background check of the product and its entrepreneurs in case one is thinking of investing in a new business unit (Kravet and Muslu  2013). As mentioned above, Uber is under various speculations and legal boundaries which make the position of the company bad in terms of investing.

Capitalization structure risk is associated with the growth perspective of the company. The investor should calculate the prospect he or she has being associated with the company. This would ensure the profit or loss in the process of the investment (Verbano and Venturini 2013). If the value of Uber falls based on the controversies that encompasses the company then the investors will also have to lose their money.

Market risk: As mentioned above the investors have a significant impact on the market risks as well, the dynamics of the market impact the investment and the operations of the business which in turn positively or negatively impact the investors interest (Savor and Wilson 2013).  These uncertainties are market adaptation, reaction of the target market, adaptability with the changing dynamic situation etc (Sadgrove 2016). For example in the case of sellanycar, the investors should be aware of the dynamics of the automobile industry in order to understand the growth opportunities for a format like sellanycar. Saygin Yalcin the founder of the company in 2015, met venture capital investors in the US, in order to expand the business in the European market. He is seeking to raise as much as $100 million to fund the objective. The company buys used cars from individuals and auctions them to businesses, including dealerships. Some of the services are: free inspections and valuations of the vehicles, and owners can accept or reject the price. Mobile application and internet platforms are used to help in the deal (Griffith 2016).

The investors should look at the product and service before investing in a new venture, if the product or services are based on unethical values and principles, the investors should consider judging the case before putting the money in to it. The process of manufacturing an production also fall in this category, before investing they should check whether the company is adhering to the legal boundaries in the country of operation (Griffith 2016).

The investors should consider the rate of accountability of the investors in terms of the risks that is borne by them in the process of business operation. The investors must decide the involvement in the business while it is facing any bad situation or is in a risk (Hansen 2015).

Lastly the role of the organisation in the societal and environmental development and well being is a common consideration for both the entrepreneurs and the investors.

The investors of all the three organisations that have been discussed have their obligations and responsibilities towards their investment. They must understand the value the company stands for and must respect the principles (Griffith 2016).

The first ethical consideration is important for the investor as they have certain responsibility towards the consumers as well, since the investors are the reason for which the business is supported with financial aid. If an organisation is associated with unethical products or services, uses unethical means of production, uses unethical means to get the attention of the customers; the investors must decide upon being associated with such a company (Hansen 2015).

The growth risk and opportunities is one of the significant aspects that the investor must consider while choosing to invest in an organisation. They should analyze the dynamics of the return that they are going to get juxtaposing the investment they have made. The risk of the market is one of the most important aspects while investing. For example: an investor would like to invest in an organisation that is developed in a prospective industry rather than a stagnant market (Brink 2017).

Legal risk is also significant in the part of the investor they deal with the finances which acts like a fuel to the company; the investors should be alert regarding any illegal activities that are associated with the business (Hansen 2015).

Conclusion

It can be concluded from the above discussion that the market risk can be associated with both the entrepreneurs and investors as the dynamics of the market decide upon the success and failure of the business to a large extent. Both the roles of an investor as well as entrepreneurs are crucial in any business, start-ups are special as they are innovative and are new hence they need to be worked hard with in order to reach the position where established organisations are.

Considering the triple bottom line business model is a good idea for both the parties as well. This helps in creation of value and maintains goodwill in the industry from a business perspective

References:

Brink, C.H., 2017. Measuring political risk: risks to foreign investment. Routledge.

Elyasiani, E., Mester, L.J. and Pagano, M.S., 2014. Large capital infusions, investor reactions, and the return and risk-performance of financial institutions over the business cycle. Journal of Financial Stability, 11, pp.62-81.

Griffith, E.,  2016. The Ugly Unethical Underside of Silicon Valley. Fortune magazine, [Online].  Available at: https://fortune.com/silicon-valley-startups-fraud-venture-capital/ 

Hansen, K.O., 2015. The Ethical Challenges Facing Entrepreneurs. The Wall Street Journal, [Online].  Available at: https://www.wsj.com/articles/the-ethical-challenges-facing-entrepreneurs-1448247600

Kozubíková, L., Belás, J., Bilan, Y. and Bartos, P., 2015. Personal characteristics of entrepreneurs in the context of perception and management of business risk in the SME segment. Economics & Sociology, 8(1), p.41.

Kravet, T. and Muslu, V., 2013. Textual risk disclosures and investors’ risk perceptions. Review of Accounting Studies, 18(4), pp.1088-1122.

Marques, C.S., Ferreira, J.J., Ferreira, F.A. and Lages, M.F., 2013. Entrepreneurial orientation and motivation to start up a business: evidence from the health service industry. International Entrepreneurship and Management Journal, 9(1), pp.77-94.

Sadgrove, K., 2016. The complete guide to business risk management. Routledge.

Savor, P. and Wilson, M., 2013. How much do investors care about macroeconomic risk? Evidence from scheduled economic announcements. Journal of Financial and Quantitative Analysis, 48(2), pp.343-375.

Verbano, C. and Venturini, K., 2013. Managing risks in SMEs: A literature review and research agenda. Journal of technology management & innovation, 8(3), pp.186-197.