Systematic and Unsystematic Risks, Venture Capital

Arend Pryor

Dec 20, 20218 min read

Updated: Jan 3, 2022

Author: Arend Pryor | Created: 09/14/2021

Details: Sharing content created as part of pursuing my MBA degree

Assignment: You are the chief risk officer for a company, and you’ve been tasked with identifying the areas where your company is exposed to systematic and unsystematic risks. Based on the information you learned about this concept, what approach would you take in explaining how systematic and unsystematic risks affect risk planning?

Describe your approach. Name 3 or more systematic or unsystematic risks your company might face. Think of some implications if your company decides not to be proactive and plan for these risks.
Venture Capital: You are a business consultant who works with new business owners. A new client wants to start a bakery and seeks your advice. Based on what you’ve learned from the readings, discuss the advantages and disadvantages of using venture capital as startup funding for a business.
Describe what approach you would recommend for the client by using the information you researched.

It was Tim Ferriss who said, “what we fear doing most is usually what we most need to do” (Ferriss, 2009). This is one of those quotes that can apply to a variety of different situations and in the case of this paper, it can be an important mindset to have in business. For instance, the act of analyzing and identifying systematic and unsystematic risks and the impact they could have on your business operations, should they occur, can make all the difference in your company’s ability to weather the storm. Planning ahead for what can seem like unavoidable market or specific risks is the method by which companies navigate these waves. On the other side of the coin, some companies have yet to make it to this point as they are still working on getting started. In some instances, venture capital funding can provide the lifeline needed to help them raise their sails and get underway. Sailing metaphors aside, in the sections below, we review some of the advantages and disadvantages of pursuing this type of funding and provide a recommendation for a fictitious company that is considering this type of funding.

Systematic risks, also referred to as market risks, are those risks that occur as a result of macroeconomic events that companies and investors do not have control over. Examples of these events include variations that occur in interest rates, inflation, oil prices, and changes in currency rates, all of which impact businesses and the overall market. Conversely, unsystematic risks are the opposite in that the effects of these types of risks can be specific to a particular company or even entire industries. In terms of planning for both systematic and unsystematic risks, the first step is to assess the macroeconomic factors that could have an impact on business operations such as sales, financing, and investing. It is important to note that this can include both positive and negative effects. The benefits of which would be to help mitigate the bad and capitalize on the good. Examples of these factors might consist of decreases in sales during a recession or a boost in revenues when the economy is in a growth phase.

Another example can include a company’s disinterest with investing in capital expenditures when inflation rises, but they will gladly hand over their cash when inflation declines. When planning for unsystematic risks, diversification is generally the most optimal course of action to mitigate the issues being faced. This could be in the form of diversifying the products or services being offered, the customers they are being offered to, or in the mix of investments the company pursues. In order to lessen the risk, or at least be well informed of it, the assessment of investment risks should include identifying the beta associated with investments the company is considering for the purposes of selecting an optimal combination (Brealey et al., 2019).

As mentioned above, both systematic and unsystematic risks pose a danger to our company and the healthcare operations we manage. The following are three specific risks we face along with the dangers of not planning ahead for them:

Wild Fires:

Issue Faced: Over the last five years, an average of 7,874 wildfires have burned in the state California (Giant, 2020). This has led to many of our Northern California locations being shut down due to poor air quality, mandatory power outages, and the proximity of the fires.
Dangers of Not Planning Ahead: A failure to plan for such events would not only halt many areas of our business operations, but would also negatively impact the thousands of health plan members we serve via case management services, treatment authorization requests, and customer service activities.

COVID:

Issue Faced: The recent pandemic has shown the impact that mandatory stay at home orders can have on our employees as well as on the operations of our business.
Dangers of Not Planning Ahead: In a sense, planning for an event such as this falls under disaster recovery planning in that it requires coming up with options for employees to connect from any location in the event of a catastrophe. This also applies to their access to company systems and mission critical applications, all of which are needed to avoid lengthy interruptions in the operations of the organization. Failing to plan for this scenario can leave the company dead in the water.

Aging Population:

Issue Faced: According to the World Health Organization, the healthcare industry will see a drastic increase in the population of people aged 65 or older, which will put a financial strain on the industry and the management of medical services for those in this group (Garza, 2021).
Dangers of Not Planning Ahead: This issue would be listed as both an opportunity and threat in our SWOT analysis and rightly so as it requires planning for the impacts associated with it and identifying opportunities for improvements and additional products and or services that can be offered to meet new demands.

Before jumping into my recommendation on venture capital funding for your business, I wanted to first congratulate you on taking this step towards entrepreneurship and thank you for the opportunity to aid in the process of securing funding. As you are aware, venture capital firms can be utilized by startup businesses such as yours to obtain the funding needed to get things up and running or to expand their operations (Hayes, 2021). Advantages and disadvantages of this type of funding are as follows:

Advantages:

High Level of Funding: Venture capital firms often have access to increased levels of funding for the right opportunities, which can more than help startup companies jump start their operations (Hayes, 2021).
Industry Expertise: In addition to funding, venture capital firms can often provide business owners with guidance and expertise on improving their operations as well as offer input on business and financial decisions (Advantages vs. Disadvantages of Venture Capital, 2021).
Established Connections: Some firms will have a network of contacts they can draw on for assistance in areas such as manufacturing, distribution, or even product placement in big box stores (Advantages vs. Disadvantages of Venture Capital, 2021).

Disadvantages:

Can be Difficult to Obtain: Obtaining venture capital funding can be difficult for companies who do not meet the varying requirements of these firms. This makes sense as venture capital firms are made up of investors looking for the best return on their money, which is one of the main goals of their business (Biel, 2021).
Requires Positive Financials: Prior to investing, they will want to perform a deep dive on your company’s financials, forecasts, and business plan, all of which take time to compile with no promise of securing the funding you desire. In the event you are competing with other companies to obtain funding, the benefits of investing in your company may need to outweigh that of their other opportunities. The financials for your company would also need to show a history of profitability and/or exhibit positive growth potential (Hayes, 2021).
Contract Terms: Depending on the structure of the deal, many companies that utilize this type of funding will have to give up a percentage stake in their organization and possibly allow their new backers the ability to weigh-in on key business decisions (Advantages vs. Disadvantages of Venture Capital, 2021).

Given that you are at a point where obtaining venture capital funding is an option you are interested in considering, my advice as to whether it is something you should pursue really depends on your comfort level with the give and take of any deal you are offered. Meaning, are you willing to give up a portion of the business in order to receive the funding and expertise needed by your company. This is a question you should ask yourself now prior to moving forward as it will need to be answered at a later time once you reach this point in the process. Based on what I know about the needs of your business, I would recommend moving forward with an attempt to obtain venture capital funding as it will provide you with the capital you require as well as invaluable connections within your industry that will no doubt lead to future growth. However, as mentioned, I would strongly recommend a thorough analysis of any deals being offered to make sure they are a good fit and align with the goals of the company.

As a counter to the advice above, I know that some will recommend against venture capital funding due to the strings that often come attached to the deal. This might include giving up too much control of the company and losing sight of your original mission and vision (Vaisman, 2020). These are the same ones that would recommend taking the slow growth route associated with rolling up your sleeves and doing it all on your own, which I can totally respect. For any business owners who take this route, I would say they made the right decision, as long as they were willing to weigh the pros and cons of venture capital funding or any funding for that matter. After all, even loans from family and friends can come with conditions, however, it all boils down to analyzing the terms of the deal and being realistic with the needs of your company, your employees, and your vision for the future.

While analyzing systematic and unsystematic risks is not something that all companies spend time doing, I can almost guarantee you that one hundred percent of the ones who continue to thrive make it a priority. You may be able to get lucky here and there when macroeconomic factors cause your sales to take a dip, however, companies who prepare for these situations stand a much better chance of avoiding as big a hit to their revenues. This is also true of unsystematic risks that are specific to a particular company or industry, however, the difference in surviving here lies in diversification. In both cases, planning ahead for each of these types of risks can serve to evade or at least mitigate some of the issues identified. For those looking to start or grow their business, venture capital funding is an area of concern for some new business owners who have this option. As with many key business decisions, it is important to weigh the advantages and disadvantages of the deal and this is no exception. Taking on venture capital funding often includes conditions that require business owners to give up a percentage of their company and decision making powers in exchange for a more hands-on approach by investment firms looking to maximize the return on their investment. This is not all bad however as many of these firms offer the benefits of increased funding, real-world experience, and industry connections. The decision to pursue this type of funding mainly depends on the comfort level of the business owner, their vision for the future, and whether this is one of those decisions they fear but must be done.