Understanding potential risk is critical for all investors. Startup investing is inherently more risky than many other kinds of investments. That risk comes with the potential for significant gains, but it’s still important to seek de-risked investments as much as possible. There are many kinds of risk a startup can face – financial, market-based, team-based and more. KingsCrowd breaks risk down into eight unique subcategories in order to measure an investment’s potential risk. Each startup then receives an overall risk score that ranges from one (low risk investment) to five (a very high risk investment). (Become an Edge member today and access this quantitative risk score for every startup that’s raising capital online!) But are certain kinds of startups more risky than others?
This Chart of the Week looks at the average risk rating across various product types. KingsCrowd sorts all startups into one of four product types – hardware/CPG (consumer packaged goods), pharmaceutical, service, and software. To accurately judge the average risk for each of these categories, we also split early stage and growth stage companies apart. This data represents more than 550 active raises at the end of April 2022.
Interestingly, it seems that product type matters more than stage when it comes to risk. For both early stage and growth stage startups, pharmaceutical companies yield the highest level of risk. Factors like stringent regulations, long research and development cycles, and the need for FDA approval all contribute risk to these startups. After pharmaceutical, hardware/CPG startups come in second for risk. Software companies had the lowest average risk at 2.4 for early stage startups and 2.1 for late stage ones.
With the exception of pharmaceutical startups, early stage companies tend to have slightly higher risk scores – but not by much. It seems that a growth stage company – one that has more revenue, more prior funding, or a higher valuation – isn’t an inherently de-risked investment. While many investors might expect more mature companies to bring less risk, KingsCrowd’s data shows that risk is more complicated than that.
Note: All data used for the Chart of the Week comes from the KingsCrowd database and represents a snapshot of the crowdfunding market.