Founder Operational Risk Management for Stronger Venture Capital Portfolios

Founder Operational Risks and VC Portfolio Health: Navigating the Complexities

Introduction

In venture capital, the performance of a portfolio is dependent on market trends, financials, and, just as importantly, operational performance. When it comes to the operational performance of portfolio companies, founders play a significant role in the ongoing operational performance of their start up. It is essential that due diligence of the operational risks that founders are subject to are recognized by the investor. This article explores what founder operational risks besides and how those operational risks impact VC portfolio performance, as well as provide knowledge and actionable steps for investors to mitigate those risks.

The Hook: Why Founder Operational Risks Matter

The founder plays a major role in the performance of their startup. You may have the next big startup and decide to invest as the startup seems to have significant potential only for the startup to become irrelevant due to management issues or poor operations. There are many operational risks for a startup founder to deal with that can potentially quickly manifest, and have a significant negative impact on an innovative idea. Founders, being the drivers of their companies, must manage many operational issues like supply chain issues, changes in regulations, and losing key people to name a few. The consequences of not mitigating operational risks can have a disastrous impact on VC investments and valuation.

Pain Points: The Challenges Faced by Founders

1. Supply Chain Disruptions: In a globalized economy, even the most well-thought-out startup can suffer debilitating supply chain issues. These issues can range from raw material shortages to transportation delays. Disruptions at any point in the supply chain can result in production delays and potentially cause lost revenue.
2. Regulatory Compliance: There are many complexities the founder must navigate in order to ensure regulatory compliance. Regulatory compliance for startups in highly regulated environments such as healthcare or finance can be daunting as any lapse could potentially expose the startup to significant regulatory agency penalties, fines, and legal ramifications.
3. Key Personnel Departures: Any departure of a key player can not only put a kink in the operation’s performance but can also be demoralizing for the remainder of the team. Founders should also ensure they have talent management strategies in place.
4. Cyber Security Threats: In today’s world, in which we rely on technology and digital infrastructure, startups rely on various technologies that are vulnerable to cyber-attacks. If founders are lucky enough to survive a cyber attack, the data breach alone can severely tarnish a company’s reputation, leave an impact in their pocketbooks.

Analysis: Assessing Founder Operational Risks

A structured approach is essential to effectively dealing with operational risks. The following describes the steps to assess operational risk:

1. Risk Identification: The first step is to identify the risks by analyzing the company’s operations in detail. That means mapping out all the business processes and then identifying where you have the potential risk. For instance, the SaaS company is likely to be at risk for data breaches, thus targeting cybersecurity as a primary risk.
2. Risk Assessment: Next, you can assess the risks you have identified to determine what the impact or likelihood is using an impact and likelihood scale or a Risk Assessment Matrix. This is necessary for categorizing the risk by type and level to prioritize the risk and allocation of available resources.
3.  Measurement and Mitigation: The risks can be measured against a consistent scale, by prioritizing them, you will know what to implement mitigations and what the cost to control the risk is, compared to potential exposure. There are a variety of mitigations for operational risk, such as business continuity plans and insurance.
4.  Monitoring and Reporting: This step is crucial, basically continuous monitoring of operational risk will allow you to deal with issues as they arise, preventing more serious, consequential risks. Periodic reporting to senior management and other stakeholders provides an opportunity to monitor the continuously evolving nature of threats to the organization and operational risk. In turn, senior management and other stakeholders can provide more informed strategic direction to management and the organization will have greater transparency around any ongoing operational risks.

Depth Understanding: Best Practices for Managing Operational Risks

1. Establishing Strong Governance Structures: Create strong governance structures in portfolio companies. Set up committees, and define risk roles and responsibilities.
2. Establishing a Risk Culture: Foster a risk-aware culture within the organization. Make ongoing training and education available to ensure all employees are on the same page with regard to managing risk.
3. Business Continuity Planning: Consider and prepare for potential disruptions through firm business continuity plans. Detail processes to follow to sustain operations in the event of a disruption such as a natural disaster or cyber event.
4. Using Technology to the Firm’s Advantage: Ensure operations while limiting human error through the use of technology. AI can be used in predictive maintenance with manufacturing firms to help stave off equipment failure.
5. Insurance and Hedging to Transfer Risk: Consider insurance policies and hedging as forms of transferring risk, if applicable. Biotech firms often take out policies to insure loss for clinical trials not succeeding.
6. Using Experts Outside the Company: Access to outside experts and consultants to understand and help manage complex risks is very helpful.

How Evolve Venture Capital Can Help

At Evolve Venture Capital, we recognize that operational risk management is essential to the success of our portfolio companies. Our holistic approach includes:

1. Proactive Risk Assessments: We conduct comprehensive risk assessments to identify and prioritize risk, ensuring our portfolio companies are appropriately ready for operational challenges.
2. Strategic Support: We partner with founders to design governance and build a culture of risk awareness.
3. Technology: We leverage new technology to help in the streamlining of operations and minimize potential human error, ultimately helping with operational efficiency.
4. Ongoing Monitoring: Our portfolio companies are continuously monitored for risk and provided with ongoing reporting, ensuring that any issues are identified at an early stage for action and the decision making will utilize all available and accurate information.
5. Expert Oversight: We know the importance of client input and expertise, and seek to safely expose, and guide, our portfolio companies to the greatest possible amount of support in managing complex risk through financial stress testing, third party subject matter experts and consultants.

Conclusion

Managing operational risks of entrepreneurs is an important part of running a successful VC portfolio. A proactive and systematic approach to risk management will protect the investor’s investment and add value to its portfolio companies. At Evolve Venture Capital, we are extremely committed to supporting all of our founders, through their journey of facing challenges, making our portfolio companies resilient, and ensuring they are well-positioned to take advantage of opportunities in an evolving marketplace.