My friend Tim is trying to open up a new business and needs a great deal of investment money to get off the ground. The business is a zoo by day, nightclub by night, in downtown. Tim has no experience in this industry, and has never run or owned a business before. Although my financial advisor, friends and family say I shouldn’t, I invested $300,000 in Tim’s business, because he seems pretty confident it will make millions some day, and I will get 10% of his profits.
a) What is the calculated risk? this should be a dollar amount.
b)In what risk level would you categorize this investment and why?
a) To calculate the risk in this investment, we need to factor in the likelihood of losing all or some of the invested money. Given that Tim has no experience in the industry and has never run a business before, there is a higher level of uncertainty and potential for failure. The full $300,000 investment could be at risk.
b) Categorizing the risk level of this investment depends on various factors, including the industry, business plan, and market conditions. However, based on the information provided, we can categorize this investment as high risk.
Here's how you can arrive at this assessment:
1. Lack of experience: Tim's lack of experience in both the industry and business ownership makes the investment riskier. Without a proven track record, it's uncertain whether he can successfully manage the operations and generate profits.
2. Unique business model: Opening a zoo by day and nightclub by night in downtown is an unconventional and risky business model. The combination of two seemingly unrelated businesses could pose challenges in attracting and retaining customers, as well as managing the operations effectively.
3. Uncertain market demand: It's unclear whether there is sufficient demand for such a business in the downtown area. Without a thorough market analysis or validation, there is a higher risk of not attracting enough customers to generate significant profits.
4. Potential regulatory challenges: Running a zoo and nightclub involves dealing with different sets of regulations and permits. Navigating these requirements successfully may add another layer of complexity and risk to the investment.
Considering these factors, it is important to note that high-risk investments also have the potential for high returns. However, it is crucial to thoroughly evaluate and understand the risks involved before making any investment decisions.