Hint: It is due to embracing risky investments, not avoiding them.
Venture capitalism is rife with "what if" stories that are actually legend.
An investment of $990 for 45 shares of a garage-based company called Apple following its initial IPO could have netted a VC $394,758 in 2017 dollars, a near 40,000 percent ROI. Similarly, few could have predicted Amazon would turn into a titan of ecommerce that could deliver an incredible number of products an hour following the click of a "buy" button, but those savvy enough to bet $5,000 in early stages will be sitting on $2.4 million. Senior high school dropout Erik Finman’s $12 gamble within an obscure online currency called Bitcoin in 2011 made him a millionaire at age 18.
THE BUILDING BLOCKS of Success Is Taking Disciplined Risks
Many would argue these investment outcomes are strokes of genius predicated on luck rather than strategy. If you ask me, however, these risk takers were smarter than we provide them with credit for. They prove a good mantra: An effective investor doesn’t ask, "Will this business work?" but instead, "What goes on if it can?"
Investors shouldn’t search for a sure thing. Microsoft executive and former private equity partner Tren Griffin’s observation that "investors should be contrarians to outperform the market" — or an investor can’t beat the crowd if he’s part of it — holds true. Instead, investors should pursue ventures considered too difficult or too risky to touch by other VCs.
In no way is intentional contrarianism a fresh concept for investors (it had been a significant part of my investment philosophy as a VC at American Family Insurance.) However, I rarely think it is in the normal entrepreneur’s toolkit. And I really believe that, when applied correctly, it could provide important help with building, pitching and growing a business. Actually, this risk vs. avoidance mindset framed my decision-making process for founding Clearcover. Here are some stories from our journey up to now.
Investing is about decision-making, therefore is creating a business. From the outset, a founder makes countless daily decisions shaping the business for a long time to come — who to employ, where you can launch, which partners to select. Furthermore to decisions aimed toward delivering value to customers, founders also needs to ask themselves, how does this decision separate me from the crowd? Ironically, many entrepreneurs take the best risk by starting a fresh business, but shy from risky decisions within their business’s first stages. Unorthodox choices are vital for standing out to VCs and customers alike.
How exactly to Take Risks That Win (Almost) EACH AND EVERY TIME
Our "hell yes" hiring strategy is one way that we’re betting upon this approach. A "hell yes" hire is a person who shows "superpower talent," a talent that solves a particular company pain point. This means hiring for strength, no "lack of weakness." (Side note: this plan can be an amalgamation of two separate concepts.) I haven’t encountered many companies more comfortable with this kind of talent investment so in early stages, but it’s a forward-looking risk we always highlight in a pitch deck.
Partnerships present another differentiation opportunity. The mix of today’s ubiquitous technologies, simple integration and consumers’ open-mindedness toward new brand experiences is one which must not be ignored. Startups can’t restrict themselves to defining success as partnering with the "usual suspects" already chosen by their larger, competent counterparts. Evidence that unique partnerships are fundamental to being truly a successful contrarian are proven by examples like Uber’s partnership with Pandora and Airbnb’s partnership with Vice. These startups turned industry titans broke the mold because they applied a fresh lens to partnerships.
We hear ad nauseum that VCs hit a "home run" investment once every 10 deals. The truth is, it is probably nearer to one in 50. But, a good VC understands, with these odds, the magnitude of an individual success can far outweigh the frequency of misses. An equally smart entrepreneur will know this when coming up with strategic decisions so when entering the boardroom.
Entrepreneurs Aren’t Risk-Seekers — They Just Handle Risk Better
If a founder enters an area of VCs seeking to leave with a consensus, it’s a recipe for failure. Instead, the target ought to be to explore the interest of these with the minority opinion in the area who can clearly start to see the "what if" value proposition. When pitching, every element of the presentation — from the 10,000-foot vision to your plan’s nuts and bolts — should address the question, "What would happen if this really works?" This won’t mean you do not consider the risks. It simply means you do not allow presence of risk distract you from how big is the upside.
Consider Ring — the video-enabled smart doorbell that debuted through the peak of connected home expectations. After pitching our AmFam VC team, we immediately invested, primarily as the founder’s capability to sell Ring’s "imagine if this works" vision. What many saw as a trinket ended up being the perfect mix of something consumers aspired to possess and something that gave them reassurance. The ones that let their (reasonable) skepticism outweigh the first signals of how important the merchandise could possibly be missed the chance.
Here is a quick experiment for next time your team is confronted with a significant decision. Before you determine which of your opinions will actually work, assume all of your ideas will continue to work and rank them by the impact they’d have on your own company. Next, find out which of these ideas’ biggest and best outcomes could possibly be made into possible and progress accordingly.
How exactly to Take the proper Risks
This type of approach shouldn’t serve as your solo solution to make great decisions, nonetheless it could be a useful way to create orthogonal viewpoints. In addition, it does apply to companies of any size — diversity of employee relations, product expansion and partner strategy are ideal for companies big and small.
As the conventional path can cause success, carrying out a "imagine if it works?" mindset is one way to optimize for outsized achievement. It’ll donate to your reputation with investors as a change agent and keep you thinking beyond your box versus chasing competitors’ tails. As Berkshire Hathaway vice chairman Charlie Munger once said, "An excessive amount of competency no gumption is no good."
Always choose the gumption.
Related Video: AVOID BEING Afraid to take chances to TURN OUT Ahead