What is risk tolerance?
Risk tolerance is the degree of risk that an investor, founder, board or other decision-maker is willing to accept in pursuit of expected returns. Risk tolerance is shaped by investment horizon, liquidity needs, capital base, return expectations, regulatory constraints and personal disposition.
Different investor profiles have markedly different risk tolerance: VC funds tolerate high failure rates for outlier returns; banks have low tolerance and demand collateral; family offices and pension funds occupy intermediate positions. Aligning founder, investor and customer risk tolerance is essential to deal structuring.