Why Inventions Are High Risk
How investors think about risk, failure and returns in early-stage ventures
Inventions often fail not because they are bad ideas, but because they combine multiple layers of uncertainty. Investors understand this — and price it into how they think about risk, return and portfolio construction. This page explains why inventions are inherently high risk, how technical and market risk reinforce each other, and why failure is not an exception but a structural feature of early-stage investing.
Risk and return are inseparable
When investors talk about risk, they are not making a moral judgement about your invention. Risk is simply the price of uncertainty. The higher the uncertainty, the higher the return an investor must expect to make the investment worthwhile. This logic applies everywhere in finance, from savings accounts to venture capital.
A bank savings account offers low risk and therefore low return. The money is safe, predictable and liquid, but the upside is limited. At the other end of the spectrum are early-stage technology ventures. Here, outcomes are uncertain, timelines are long, and failure is common. For an investor to accept that uncertainty, the potential upside must be large enough to compensate for the many ways things can go wrong.
This is why investors always look at inventions through a risk-return lens. They do not ask first whether an idea is elegant, original or intellectually impressive. They ask whether the level of uncertainty is balanced by the possibility of exceptional returns. If that balance is missing, the investment simply does not make sense — regardless of how interesting the invention itself may be.
For inventors, this difference in perspective can be confusing. In research, uncertainty is often seen as something to reduce step by step through experiments and validation. In investing, uncertainty is accepted as a given — but it must be rewarded. Understanding this difference is essential before looking at funding options or investor behaviour.
The real challenge with inventions is that their risk is rarely caused by a single unknown. Instead, several different types of risk tend to appear at the same time. And unlike in many traditional businesses, these risks do not replace each other — they accumulate.
multiple independent risks that stack
If you - let's say - start a shoe store you will be exposed to certain business risk. It could be that your store is opened in the wrong neighbourhood or suddenly walking barefoot in public is cool and the market for shoes completely collapses. You never know... But these are considered as "normal" business risks and a bank can deal with that. A bank knows how these risks should be estimated (based on your personal situation and your business plan) and will come up with a loan offer which is based on a certain interest rate. The interest rate depends mainly on the level of risk in the investment (other factors are e.g. the inflationary expectations). In other words: what are the chances that the bank will not get his money back (together, of course, with interest and profit)? As a rule, banks are always very selective when considering loans to a startup company.
However, when a startup company is based on an innovative technological product that still has to be developed, the situation changes completely. It is far from certain that the company will succeed in turning a promising concept into a working product — many ideas look brilliant on paper or in the lab, but fail once they have to function in the real world. Even if the technology can be made to work, the newly developed product must still prove that there are enough customers willing to pay for it. History is full of technically impressive devices that never found a market.
As a result, an investor is not only exposed to technological uncertainty, but also to a fundamentally different level of business risk at the same time. These risks do not replace each other; they accumulate. It is this accumulation of risk layers that creates a risk-return profile that is usually unacceptable for banks. This is why the owners of innovative business ideas typically have to rely on other types of investors.
This observation also explains why, when investors talk about “risk”, they rarely mean just one thing. In early-stage technology ventures, several fundamentally different types of risk exist simultaneously. What makes inventions especially risky is precisely the fact that these risks do not cancel each other out — they add up.
So, the first layer is technical risk. Will the invention actually work outside the lab? Can it be engineered into a reliable, reproducible product? Many promising prototypes fail at this stage, not because the idea is wrong, but because scaling and robustness turn out to be harder than expected.
And the second layer is market risk. Even if the technology works, it is often unclear whether customers are willing to adopt it, pay for it, and change existing behaviour. A technically elegant solution does not automatically translate into a viable market.
There is a third layer, which is increasingly important, and this is regulatory risk. In many domains — such as medical devices, AI-based systems, biotechnology or data-driven products — a working product and a willing market are not enough. The invention must also comply with complex and evolving rules and standards.
Regulatory risk is particularly difficult because it is often uncertain in the early stages. Rules may still be under development or not yet fully implemented, as is currently the case with AI regulation in Europe. Even experts cannot always predict how new regulations will be interpreted or enforced in practice. From an investor's perspective, this creates a form of risk that is hard to quantify and hard to mitigate.
And then there is even a fourth layer, which is one of the most underestimated risks in innovation: the possibility that the invention is not truly new. Significant time and capital may be invested before it becomes clear that similar solutions have already been disclosed, patented and on the market. Conducting an early novelty assessment can therefore reduce both strategic and financial risk. See our guide on determining whether your invention already exists for a structured approach.
What matters is that these risks stack. A venture may face technical uncertainty, market uncertainty and regulatory uncertainty at the same time. This cumulative risk profile explains why inventions are perceived as very high risk — even when the underlying idea is strong and the problem it addresses is real.
The photo above shows exactly why investors consider inventions like this high risk. What you see is my colleague operating a prototype device during the very first real patient measurements in hospital. On the other side of the wall is the operating room, where a patient is undergoing brain surgery. It is seven o'clock in the morning. We are tired, nervous, and extremely excited — because for the first time we can actually see a signal. The biomarker shown on the laptop screen is the result of an idea I had: that this signal should be present in exhaled breath during surgery, and of my colleague's ability to actually measure it with his equipment. In that moment, the combination of hypothesis and technology seemed to work.
Now look at the same situation through the eyes of an investor. What they see is a fragile prototype, used by a small team, in a highly controlled setting, with enormous technical, clinical and regulatory uncertainty still ahead. They are not questioning the science or the passion — they are questioning how many years, how many iterations, and how much capital it will take before this could ever become a reliable, approved and scalable medical product. The excitement in the room is real, but so is the risk.
Seen through the eyes of an investor, moments like this explain why so many invention-driven startups hear “no” long before they hear “yes”. Not because the idea is weak, or the science is wrong — but because too many critical uncertainties are still unresolved at the same time. This is also why investor feedback often feels indirect or incomplete. To understand what investors are actually evaluating when they decide not to proceed, see why investors say no — and what they are really thinking.
Why invention risk is higher than startup risk
Starting a business is risky — but inventing something new introduces a different category of uncertainty. A typical startup builds on known assumptions: the technology works, customers exist, and regulation is understood. The challenge lies in execution.
An invention, by contrast, questions those assumptions simultaneously. The technology may not work outside the lab. The market may not exist yet — or may not value the solution. Or the invention was already invented before and on the market. Regulatory approval may be unclear, slow, or impossible.
This means invention risk is not simply additive. Each layer of uncertainty increases the impact of the others. A technical delay can invalidate market timing. A regulatory constraint can render technical success irrelevant.
From an investor's perspective, this creates a fundamentally different risk profile. It is harder to model, harder to diversify, and harder to compare to traditional startups. As a result, inventions are evaluated with higher discount rates, staged financing, and stricter proof points — long before scale or growth become relevant.
In plain terms, this means investors experience inventions as “messy” and unpredictable. They cannot easily calculate what success looks like, they cannot spread the risk across many similar cases, and they cannot compare your invention to a long list of proven startups.
Because of that, investors protect themselves. They assume things will take longer, cost more, and fail more often than planned. So they value future success less, release money in steps instead of all at once, and ask you to prove one key assumption at a time — before talking about growth or scale.
Why failure rates are structurally high
High failure rates in invention-based ventures are not caused by bad execution or poor decision-making. They are the result of how uncertainty unfolds over time. Each stage of development removes one layer of uncertainty, but only after time, money and focus have already been committed.
An invention typically starts with many open questions at once: does the technology work outside the lab, can it be manufactured reliably, will regulators accept it, and does the market actually care? These questions are not answered in parallel — they are answered sequentially.
This means most inventions fail late, not early. Teams often discover critical problems only after technical progress has been made, pilots have been run, or regulatory feedback arrives. By then, significant resources have already been spent.
From an investor's perspective, this creates a pipeline where many projects must fail in order for a few to succeed. Failure is not an accident — it is a built-in outcome of exploring unknown territory.
In other words: if your invention feels harder, slower and more fragile than expected, that does not mean you are doing it wrong — it means you are doing something genuinely new.
How investors absorb failure through portfolios
Individual invention projects are extremely risky. Investors know this — and they do not try to eliminate that risk at the level of a single company. Instead, they manage risk at the portfolio level.
Professional investors expect that many investments will fail completely. A small number may break even. Only a few need to succeed spectacularly to compensate for all losses. This is why investors focus less on avoiding failure and more on identifying asymmetric upside.
Banks cannot play this game. They depend on predictable cash flows and downside protection. Venture investors, business angels and corporate investors can — because they spread their bets across many high-risk opportunities.
For founders, this means one crucial thing: your project is not evaluated in isolation. It is evaluated as one option inside a much larger risk-return equation. Understanding this helps explain investor behavior that otherwise feels irrational or unfair.
Why high risk does not mean low quality
High risk is often misunderstood as a signal of low quality. In invention-driven ventures, the opposite is frequently true.
Truly new technologies start with fewer reference points, less historical data, and more unanswered questions. That uncertainty increases perceived risk — even when the underlying idea is strong.
Many inventions that eventually change entire industries looked unattractive, unproven or even unrealistic in their early stages. Their risk was real — but it was the price of novelty.
For founders, this distinction matters. Investor hesitation does not automatically mean your invention is weak. It often means it is early. The challenge is not to remove all risk, but to reduce uncertainty step by step and make progress visible.
Understanding why inventions are high risk is only one part of the story. To see how investors think about risk, return and decision-making more broadly, read the cluster pillar How investors think.