Analyzing Risks and Ethical Considerations for Start-ups (MBA603)

This report provides a comprehensive analysis of the risks and ethical considerations involved in launching and investing in start-ups. It begins with an introduction to start-ups, venture capital, and relevant examples, such as Flipkart and Uber. The report then delves into the risks faced by entrepreneurs, including financial, strategic, and technological risks, and the risks faced by investors, such as operational, liquidity, and market risks. Ethical issues are explored from both the entrepreneur's and investor's perspectives, covering topics like funding, achieving goals, environmental responsibility, and fair competition. The report concludes with a discussion of mitigation measures to address these risks and ethical concerns, emphasizing the importance of a strong business model and financial planning. The analysis is supported by references to relevant research, making it a valuable resource for anyone involved in the start-up ecosystem.

Contents
INTRODUCTION.....................................................................................................................................2
Start-up Examples..................................................................................................................................2
Risks/Risk Assessment...........................................................................................................................2
Entrepreneur Risk..............................................................................................................................3
Investor Risk......................................................................................................................................3
Ethical Issues.........................................................................................................................................3
Entrepreneur Perspective..................................................................................................................4
Investor Perspective..........................................................................................................................4
Mitigation Measures..........................................................................................................................4
Conclusion.........................................................................................................................................5
References.............................................................................................................................................6

INTRODUCTION
A start up business means an organization who is typically in the early stage of development. In an
early stage the business require fund in order to survive for long run. A venture capital investment
may be appropriate for small business that are beyond the start up phase and already generating
revenue. Few fast-growing companies like flipkart, uber, ola, amazon with an exit strategy already in
line and can gain up to tens of millions of dollars that can be used to invest, network and grow their
company very fast and quickly.
Venture Capital are the professional managed fund who invest in companies that have a very strong
potential. They usually invest in business against equity of that particular business and do exit when
there is an IPO or an acquisition. (ProfitBooks.com, 2018)
The reality in today’s world is that the start up business is always like the Titanic and the iceberg. The
factors which are the main reason for catastrophe are often failed to be acknowledged until the ship
is already sinking.
Studies also have shown that organization learnt more from failure than success and also retain the
knowledge longer.
Start-up Examples
Some of the leading examples of start-ups that have managed to do great in the recent years are in
Artificial Intelligence, Ecommerce start-ups, Ed Tech, FinTech, Food and Beverages, Healthcare, Block
chain, Internet of Things, Software and Software as a Service, Transport and Travel, Mobile Apps and
Fashion. All these fields have been the most active in promoting start-up considering the advent of
technology in startups. Let us take some example of start-up along with major funder or venture
fund:
(a) Survey Auto: Field Artificial Intelligence, Bill and Melinda Gates Foundation;
(b) Spacemaker: Field Artificial Intelligence, Atomico;
(c) Capacity: Field Artificial Intelligence, Equity.com;
(d) Snackpass: Field E Commerce, Andreessen Horowitz;
(e) Cazoo: Field E Commerce, DMG Ventures;
(f) NutSpace: Field Ed Tech;
(g) Labster: Field Ed Tech, Owl ventures;
(h) Securitize: Field FinTech, Stripes;
(i) Meatable: Field Food & Beverage, Golden Angel Investors;
(j) Zenyum: Field Healthcare, RTP Global
On basis of above, it may be inferred that the global world is full of start-up, some of these start up
have become prominent face in our daily lives like Facebook, WhatsApp, Amazon, Uber etc. These
start-up have started low and now ranks among the largest companies in the world. Thus, start-up
comes with own risk and rewards.
Risks/Risk Assessment

Entrepreneur Risk
The entrepreneurs are risk-takers, they risk everything when they decide to launch a new business.
Few risks one should evaluate are here in below:
1) Financial Risk: An entrepreneur is always in need of fund either in the form of loan from the
investors, their own saving of funding from family members. The founder of the company
first has to put their own skin into the game. A new business must have the full financial plan
involved within a overall business plan which shows the projections of income ,cash to be
required in order to meet the break even .If the plan is not accurately laid ,it could lead to
bankruptcy with nothing to be left in the hand of investors. (Investiopedia.com, 2019)
2) Strategic Risk: An entrepreneur can appeal to investors by drawing an impressive business
plan, but the change in market or the business environment can lead to the chosen strategy
to be wrong as we are living in a fast pace world where strategies become outdated very
quickly. The company might also have to struggle in order to meet its benchmark and KPIs.
3) Technology Risk: New technology are evolving at a very fast pace. Some of the changes
which can be characterized as “Paradigm shifts” or “disruptive “technology. A newly set up
and growing company has to spend drastically in new technology and system which could
severely affect the bottom line. This risk shall also be considered as one of the major risk
factors. (Investiopedia.com, 2019)
Investor Risk
Various risk which are involved and to be considered when launching or investing in a start-up are
1) Operational Risk: It is the major risk of loss which results from inadequate processes and
systems supporting the organisation. It is a principal consideration for the investor
regardless of the class of assets that PE funds invest into. (Kleiner, 2018)
2) Liquidity Risk: This refers to the investor’s inability to redeem their value of investment at
any given time. The PE investors investment are also locked in for a period of five to ten
years and they are also unable to redeem their committed capital on request during that
period. Similarly, the lack of an active market for the investment lying, it also become very
difficult to ascertain when the investment value can be realised. (Kleiner, 2018)
3) Market Risk: There are also various market risk involved which affects the PE investment like
equity market exposure , geographic sector exposure, foreign exchange, price of commodity
and rate of interest. In share market were priced daily fluctuates and is highly volatile.PE
investment is subject to infrequent valuation and are also valued quarterly.
Ethical Issues

Entrepreneur Perspective
1) Funders and investors: When an entrepreneur is beginning and working on a start up
concept, and the product he is trying to launch into a market. The entrepreneur must
determine whether he will seek funding from private equity or government research and
development grant. He have a choice either to develop a new product or technology that
will prosper and go long in the private market or to target the development of a product in
order to get government grants. When an organization is funded through private equity it
basically have some clause and agreement for funding which also includes performance
reporting. One can face such ethical issues into business of fudging his data or product
development update if one cannot reach the desired goal. If the entrepreneur believes that
he will make it up in terms of performance or data, as he does not want to lose his funding,
one choice needs to be made than. This creates a very serious challenge. (Airan, 2017)
2) Desire to Achieve: When a person decides to expand his business or start a newly fresh
firm ,he always believes in innovative ideas for a new product or technology .There is always
a spark and passion to the idea with a never give up attitude to learning and fighting through
what others might perceive the same as a failure. It needs a heavy courage again to stand up
and develop a path for business. Huge sacrifice of money, time and energy is taken from an
entrepreneur’s family .The pressure mounts on the company owner and he might try to find
out shortcuts or fast-track methods in order to achieve the same success without even
recognizing the same that the bad ethical decision can be done on this.
Investor Perspective
Ethical issues which are involved from investor perspective are here in below:
1) Winning at Someone Else’s Expense: Both losers and winners perceive in a free market
economy, the major issue is how a company survive under both the scenario is a vital
question. The company who enjoys monody in a free market economy can function very
efficiently and smoothly in many aspects. They also try and mange to prevent any form of
healthy business competition in order to enjoy monopoly power. This is considered to be un
ethical by some investors.
2) Environmental Responsibility: Energy and manufacturing industries ,in the long run always
have been considered to be destroyers of nature and wildlife with the level of pollution
emission and destroying the forest,lake,river.Investors who are very much ethical only
favour companies that do the replacement what they take away from the planet and also
strictly follow the government guidelines and norms. (Cussen, 2019)
Mitigation Measures
Mitigation measures that may be adopted by investor and business to avoid risk of failure and
ethical issues shall involve having a strong business model with defined timelines of turning into
profitability. The revenue model proposed under startup shall have commercial feasibility and shall

be in line with present and future demand. The investment pattern in the start up should have
option to convert the debt financing to equity under different situation so as to prevent capital loss.
Conclusion
On the basis of above it may be inferred that millions of start-up take place every year out of which
only few survives the peril and only few become giants like Amazon, Uber etc. A start-up
environment is full of complexities right from the brain of idea to its ultimate IPO. The phases
through which a start -up goes and change in ownership of the start-up or dilution of ownership to
be precise determine the future of start-up. Further, there are many risks both from entrepreneur
and investor point of view which needs to be coordinated and mitigated timely so as to avoid the
failure.

References
Airan, R., 2017. 4 Ethical Issues in Business that Every Entrepreneur Faces. [Online]
Available at: https://www.rashmiairan.com/ethical-issues-business/
[Accessed 18 April 2019].
Cussen, M. P., 2019. The Ethics of Investing. [Online]
Available at: https://www.investopedia.com/articles/basics/13/ethics-of-investing.asp
[Accessed 18 April 2020].
Investiopedia.com, 2019. What Risks Does an Entrepreneur Face?. [Online]
Available at: https://www.investopedia.com/ask/answers/040615/what-risks-does-entrepreneur-
face.asp
[Accessed 18 April 2020].
Kleiner, R., 2018. Key risks in private equity investment. [Online]
Available at: https://www.geraldedelman.com/insights/key-risks-in-private-equity-investment/
[Accessed 18 April 2020].
ProfitBooks.com, 2018. 10 Funding Options To Raise Startup Capital For Your Business. [Online]
Available at: https://www.profitbooks.net/funding-options-to-raise-startup-capital-for-your-
business/
[Accessed 18 April 2020].