How can you effectively communicate risks to investors?

In highly regulated industries such as cannabis risk management is an integral part of day-to-day business operations. Aside from regulatory compliance risks, there are the following risks that should be considered: 1) High barrier of entry. Investors should precisely calculate the OPEX and CAPEX required till receiving return on investment or at least breaking even. 2) Once fully operating there are risks associated with rivalry with existing competitors. 3) The risk of disruptive innovation, the threat of substitute product and services. 4) Bargaining power of buyers. 5) Bargaining power of suppliers. 6) Threat from new entrants to the market.

Risk should be assessed based on the rate of potential impact and likelihood of probability. Importantly, some of the risks may occur at a higher frequency while others at a lower frequency. High frequency and high consequence severity risks could be the most devastating to an organization. Therefore, executive management should aim to always proactively measure these risks to ensure the reduction of potential risk severity and frequency.

Risk mitigation could be approached in 4 ways: 1) Accept the risk 2) Avoid the risk 3) Transfer the risk 4) Reduce the risk

The way the risks are communicated is of paramount importance. Risk reporting is a delicate process. First and foremost it should be proactive, based on validated evidence, case studies and trustworthy sources. It should be methodical, organized and as much precise as possible. Lack of organization when reporting risks may lead to confusion, uninformed optimism and biased decisions.

It is very important to be open and honest about the risks in your business when engaging with investors. First, you'll help the investors manage their expectations and second, you'll be providing an opportunity for them to proffer solutions to mitigate those risks.

Risk and opportunity are often times interconnected. High risk may be associated with high reward or vice versa. Investors should be diligently informed about risks throughout the pre-launch phases and throughout the project execution. Ineffective communication with investors may result in deviation from originally projected outcomes. Therefore, it is critical to establish mutual expectations and outcomes including several alternative scenarios.

I think this article nails it on the head. Never avoid risks when communicating with investors. Identify the risk, quantity the risks into things you can mitigate completely and risks that cannot be mitigated or have limited mitigation. Be up front with your investors on these risks do not hide them! Also demonstrate the reward that is on the other side of those risks as well.