Technical Risk

The risk that a technology will not work as intended, cannot be produced at scale, or takes much longer to develop than planned.

Example

A new battery chemistry performs in the lab but fails at commercial manufacturing volumes.

Important

It dominates early deep tech, biotech and hardware investments, and requires specialist judgement to assess.

Related terms

• Capital Intensity — The amount of capital a business needs to invest, in equipment, inventory or projects, to generate revenue and grow.
• Binary Outcome — An outcome that tends toward one of two extremes, such as a large success or near-total loss, with little in between.

Lessons that explain it

• AI companies can have software growth with hardware-like costs; deep tech trades time for defensibility — AI businesses must be judged on the cost of running models and on what protects them from competitors using the same models. Deep tech companies face technical risk and long timelines before revenue, in exchange for harder-to-copy advantages. (12 min)
• Biotech outcomes are often binary; healthtech outcomes depend on who pays — Biotech value is driven by clinical trials with low overall success rates and long timelines. Healthtech depends on proving clinical or economic value and securing payment from hospitals, insurers or health systems. (13 min)
• Climate and hardware companies need capital before revenue and margins before scale — Physical-product businesses face manufacturing risk, inventory, lower gross margins and large capital needs. Many climate companies also depend on policy and on project finance to deploy their technology. (11 min)
• Ask why now, and what stops the next ten companies — Evaluating competition means understanding why this opportunity exists now, who else can serve the customer, and what would make this company hard to displace once it is working. (11 min)
• The Berkus method prices progress that reduces risk — The Berkus method assigns a value to each of five risk-reducing milestones a pre-revenue company has reached, with a fixed maximum for each, and adds them up. (9 min)
• Risk factor summation adjusts a price for twelve named risks — The risk factor summation method starts from a benchmark valuation and moves it up or down in fixed steps for each of twelve categories of risk, making every adjustment explicit. (10 min)

All 578 terms in the Investing glossary