Comprehensive Analysis of Start-up Risks, Ethics, and Investment

This report provides a comprehensive analysis of risks and ethical issues pertinent to start-ups, examining perspectives from both entrepreneurs and investors. It begins by defining and categorizing various risks, including market, operational, and management risks, with examples from Australian fashion start-ups like Genkstasy and Whitelane Textiles. The report also details the risks from an investor's viewpoint, such as return, valuation, funding, and disclosure risks. It then delves into ethical considerations, highlighting issues like lack of infrastructure and ethical compliance challenges for start-ups, as well as the importance of integrating ethics into business plans. The study identifies market risk, disclosure risk, and ethical negligence as the top three critical factors. Finally, the conclusion stresses the importance of proactive risk assessment and ethical management for the long-term success of start-ups.

BUSINESS
MANAGEMENT
1

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Risk assessments..............................................................................................................................3
Risk according to entrepreneurs..................................................................................................3
Risk according to investors..........................................................................................................4
Ethical issues...................................................................................................................................5
Ethical issues according to entrepreneurs....................................................................................5
Ethical issues according to investors...........................................................................................6
Top three risk/ethical issues.............................................................................................................6
CONCLUSION................................................................................................................................7
References........................................................................................................................................8
2

INTRODUCTION
In the present scenario, effective management of business operations and activities has
become vital for the long-term growth and sustainability of an organisation. Nowadays,
companies are required to carry out appropriate risk assessment so that they can become aware
of the significant risk confronting their plan, strategies and overall operations (Hanssens, Deloof
& Vanacker, 2016). Based on the information collected through the risk assessment, it is
required by businesses to develop suitable plans and strategies to mitigate those identified risks.
The present study outlines different types of ethical issues and risks which need to be
considered at the time of launching and investing in a start-up. The viewpoint of entrepreneurs
and investors on risk and ethical issues linked with start-ups are mentioned in this study. The
examples of companies which are Genkstasy, Whitelane Textiles and Gloria Dulcie have been
used to gain insight into different types of risk in start-ups.
RISK ASSESSMENTS
Risk according to entrepreneurs
In the modern era, risk has become one of the most important aspects of businesses and
organisations. In simpler terms, the risk is defined as the possibility of injury, loss and other
unexpected circumstance. Business risk is defined as the situation in which companies generate
less than the anticipated profits or causes losses. The significant impact of risk is in areas such as
operations and profitability of a company (Henderson et al. 2015). According to the
entrepreneurs, there are several risks which need to be considered while launching a start-up.
The first and foremost risk is a market risk in which companies are required to determine
whether the market is ready for the entry or not. The fashion start-ups in Australia such as Miss
Summer, Genkstasy, Whitelane Textiles and Gloria Dulcie are at great market risk. Most of the
time, entrepreneurs fail to anticipate appropriate demand in the market, and this results in
creating failure of the start-ups in the market. It is also suggested that before launching any start
—ups, it is required by the entrepreneurs to conduct adequate market research. Such kind of
research is suggested because it provides precious data and information about areas such as
market trend and customer demand (Goldschlag et al. 2017).
However, it can also be argued that before launching any start-up, it is necessary for the
entrepreneurs to make sure that the demand of products and services which they are looking
forward to the offering is not seasonal.
3

Another risk which needs to be considered by entrepreneurs while launching a start-up is
linked with operations. It is mandatory for the entrepreneurs to ensure that the business is set
effectively to deliver products and services to customers (Wennberg, Delmar & McKelvie,
2016). Nowadays, the concept of starts-ups has become very popular especially among the
young entrepreneur, and almost every start-up claims that they have certain innovation in their
products and services. However, it can be argued that the rate of the start-up failure in Australia
is 42% and every year the rate is growing. The failure of start-ups is a significant threat to the
entire economy of Australia.
Davnet, 99dresses, PocketMail, CanYa, are some example of the start-ups which have
badly failed in the Australia market because, in the long-run, the internal functions of these
businesses were not competent enough to deliver products and services to customers.
Management risk is another major risk which has been faced entrepreneurs while launching and
carrying out their start-ups (Eberhart, Eesley & Eisenhardt, 2017). It can be expressed that tech
start-ups such as PocketMail failed not because of market demand or lack of technology
credentials but because of inexperience in the management. The new venture was not able to
manage cash and other valuable resources and therefore failed in the market.
Risk according to investors
According to investors, there are wide ranges of risks which should be taken into
consideration before investing in any kind of start-ups. For example, return risk is a common risk
which should be considered by every investor. It is suggested that before investing money and
resources in any kind of start-ups, the investors should carefully examine the risk of return
associated with the investment which needs to be made (Ojala, 2015). Valuation risk is another
major risk which needs to be considered by investor before investing in any start-up.
The investors are required to understand the fact that it is very difficult to access the
valuation of a start-up and most of the time, the investor ends up overpaying for their investment.
The funding risk associated with start-ups should be also considered by investor before investing
their money in the start-up (Hull, 2014).
Every company whether big or small require funds for activities such as operations, new
product development, marketing, expansion etc. In situations if the start-up is not able to acquire
adequate funds then it will be required to delay its operations, marketing, new products
development and expansion (Franks et al. 2014). In future, it is also possible that the start-up
4

generates heavily losses and the money of investors comes to a stake. The disclosure risk is also
an important risk which needs to be considered before investing in any kind of start-ups. Most of
the time, complete information about operations and future plans are not disclosed by start-up
because the operations are not developed fully and the trading history of company is also very
short. When complete information about the company is not available, then the chances of losing
money are very high.
ETHICAL ISSUES
Ethical issues according to entrepreneurs
Nowadays, ethics are considered as critical for long-term growth and success of any
business enterprise. Ethics play a vital role because they help in carrying out differentiation
between what is right and what is wrong. According to entrepreneurs viewpoint lack of
infrastructure is the most important ethical issue which needs to be considered when launching a
start-up. It can be stated that large corporations which are carrying out their business operations
from the extended period can quickly comply with ethics (DesJardins & McCall, 2014).
The availability of adequate funds, resources and dedicated staff in large corporations
makes ethical compliance very easy for them. On the other side of this, these features or such
kind of infrastructure is not available in start-ups and therefore it ethical compliance becomes
very complicated for them. The framework used to address ethical issues and challenges is also
missing within start-ups and this further creates obstacles in terms of carrying out compliance
with ethics.
During the initial stages, start-ups are more inclined towards covering up their cost of
operations and generating higher profits. Start-ups entirely neglect the cultural and social impact
of business operations and activities, and this can be perceived as another major ethical issue.
The start-ups are required to make sure that their operations and activities do not have any
negative impact on society and culture under which the business will be operating (Chell et al.
2016). Companies with good ethical practices have a well-defined set of rules, regulations,
policies and procedures. At the time of carrying out their assigned task and activities, the staff
members are encouraged to comply with these policies effectively and in the best possible
manner.
However, most of the time, start-ups neglects the frame which is required to set
regulations, rules and policies. During the initial stages, even the employees working in start-ups
5

are not aware of the rules and policies of the business. Nowadays the entrepreneur’s neglects all
the above mentioned ethical issues thinking that they will deal with them later on or once the
start-up gets fully established (Goldschlag et al. 2017). On the contrary of this, it can be argued
that along with the passage of time, the negligence of ethical issues and challenges result in
making the entire situation worse for the start-up.
Ethical issues according to investors
According to the viewpoint of investors, it is required by the investors to identify whether
the start-up in which they are investing has made ethics as a core value of enterprise or not
(Shaw & Barry, 2015). It can be expressed that the chances of getting successful are higher in the
start-ups which integrates ethics in business plan, objectives, mission statement and company’s
policies. Before investing any kind of resources, the investors should be make sure that the ethics
are integrate in the organisation’s overall plans and strategies.
Apart from this, the investors are also required to considered the fact that whether ethics
are the part of start-up’s day to day operations and activities or not. The day to day operations
and decisions of start-up needs to focused on resolving different ethical tensions (Chell et al.
2016).
On the other side of this, it can be argued that ethical issue such as conflict of interest is
the most important component which needs to be addressed by investors before investing money
and other resources in the start-up (Crane & Matten, 2016). The business ethics are concerned
with several areas, functions and it is required by start-ups to consider all of them. Investors
should focus more investing in the start-ups where effective policies and plans are developed to
manage the conflicts of interest among different internal and external stakeholders.
TOP THREE RISK/ETHICAL ISSUES
Market risk, disclosure risk and negligence of ethical practices in core values and
operations are the three major considerations which need to be taken care of while launching or
investing in a start-up. The term market risk determines the overall degree to which the people in
the market are ready to accept the products and services offered by the start-up. Companies or
start-ups fail because they do not conduct adequate market research to identify the need and
demand of people in the market (Graetz & Franks, 2016).
Apart from this, start-up also fails because as soon as they introduce their new and
innovative product in the market, the demand for target market changes. In such kind of
6

situations, massive losses and financial setbacks are encountered by start-ups, and this is
perceived as a significant threat to the long-term success and growth of the company. Increasing
competition in the industry is also a part of market risk which is encountered by start-ups.
Intense competition within the industry makes it very complicated for new ventures to
attract customers and capture the market share which is dominated by existing players. Thus, it is
perceived that market risk is a significant risk which needs to be considered by while launching
and investing in a start-up (Hanssens, Deloof & Vanacker, 2016). On the other side of this, start-
ups do not disclose complete information about their plans and operations during the initial
stages, and this is an important thing which needs to be considered by investors.
The chances of losing the invested money are very high in situations when the investment
has been made without having proper knowledge and data about the start-up (DesJardins &
McCall, 2014). Ethical issue such as negligence of ethics while developing company’s policies,
mission, vision, objectives and strategies is another vital factor which needs to be considered
while launching and investing in a start-up. Nowadays, ethical practices have become critical for
companies to ensure sustainability and growth in the long-run (Hillson & Murray-Webster,
2017). Therefore, it is the responsibility of entrepreneurs to make sure that the ethics are
integrated within practices, aim and policies from the beginning of the start-up.
CONCLUSION
From the above study, it can be concluded that managing business operations and
activities is not an easy task for companies. It is required by organisations to carry out effective
assessment of the different risks which have the potential to affect the operations, profits and
activities of an enterprise. It can be also inferred that market risk is one of the most crucial
element which needs to be considered before launching or investing in any kind of start-ups.
The changes in need and demand of customers and increasing competition in the
marketplace can create several kinds of obstacles in overall growth and success of the start-up. It
can be concluded that risk related to valuation, disclosure and return should be effectively
accessed and well examined by investors before investing their money in the start-ups.
7

REFERENCES
Chell, E., Spence, L. J., Perrini, F., & Harris, J. D. (2016). Social entrepreneurship and business
ethics: Does social equal ethical?. Journal of business ethics, 133(4), 619-625.
Crane, A., & Matten, D. (2016). Business ethics: Managing corporate citizenship and
sustainability in the age of globalization. Oxford University Press.
DesJardins, J. R., & McCall, J. J. (2014). Contemporary issues in business ethics. Cengage
Learning.
Eberhart, R. N., Eesley, C. E., & Eisenhardt, K. M. (2017). Failure is an option: Institutional
change, entrepreneurial risk, and new firm growth. Organization Science, 28(1), 93-112.
Franks, D. M., Davis, R., Bebbington, A. J., Ali, S. H., Kemp, D., & Scurrah, M. (2014).
Conflict translates environmental and social risk into business costs. Proceedings of the
National Academy of Sciences, 111(21), 7576-7581.
Goldschlag, N., Jarmin, R., Lane, J., & Zolas, N. (2017). The Link between University R&D,
Human Capital and Business Startups. In Measuring and Accounting for Innovation in
the 21st Century. University of Chicago Press.
Graetz, G., & Franks, D. M. (2016). Conceptualising social risk and business risk associated with
private sector development projects. Journal of Risk Research, 19(5), 581-601.
Hanssens, J., Deloof, M., & Vanacker, T. (2016). The evolution of debt policies: New evidence
from business startups. Journal of Banking & Finance, 65, 120-133.
Henderson, L., Herring, C., Horton, H. D., & Thomas, M. (2015). Credit Where Credit is Due?:
Race, Gender, and Discrimination in the Credit Scores of Business Startups. The Review
of Black Political Economy, 42(4), 459-479.
Hillson, D., & Murray-Webster, R. (2017). Understanding and managing risk attitude.
Routledge.
Hull, J. C. (2014). The evaluation of risk in business investment. Elsevier.
Ojala, A. (2015). Geographic, cultural, and psychic distance to foreign markets in the context of
small and new ventures. International Business Review, 24(5), 825-835.
Shaw, W. H., & Barry, V. (2015). Moral issues in business. Cengage Learning.
Wennberg, K., Delmar, F., & McKelvie, A. (2016). Variable risk preferences in new firm growth
and survival. Journal of Business Venturing, 31(4), 408-427.
8