The Other Four Letter Word
“I am a better investor because I am a businessman, and a better businessman because I am an investor” – Warren Buffett
Warren Buffett has been vocal about the interlinkages between Entrepreneurship and Investing and rightly so. Likewise, there are two four letter words which are common to both Entrepreneurship and Investing and need to be internalized and optimized for achieving great success across both of these endeavours – LUCK & RISK!
One could argue that Luck is simply out of your hands. Sometimes you have it, sometimes you don’t. Or Risk is that influential factor which either breaks it or makes it up for you. But perhaps there’s more to these elements than just resigning to the fact that they are uncontrollable. So, let’s try to understand some nuances about each of these.
LUCK
As entrepreneurs and investors, we all know about the huge role that luck plays in the difference between success and failure. If not, one needs to reflect deeper. In 2007, Marc Andreessen wrote a blog mentioning that there is a roadmap to getting luck on your side. He referred to a book named ‘Chase, Chance & Creativity’ by Dr. James Austin which outlines four levels of luck and how understanding each one of them can enable us to stack the odds of winning in our favour:
Accidental Luck: This is blind luck. One cannot do much about this form of luck. As they say, it is what it is. You are building a company and out of nowhere there is a government regulation which allows FDI investment in your sector enabling you to access foreign capital. Or you happened to mimic a friend’s investment in your portfolio and it turns out to be a unicorn.
Luck favours action: This is about improving the odds of becoming lucky by doing some action or being in motion. Essentially one is stirring the pot so as to increase the surface area so that when the luck lightning strikes, it is not just accidental as in the first level above but more probable because of one’s action. You are at this networking event. You pitch your startup idea to a random connect and she becomes your first angel investor. Or as an investor you are building your investment thesis on a particular space and decide to take a tracking exposure to a company, the company starts performing well and you are able to double down on your investment.
Luck favours the prepared: This is about noticing what would have otherwise gone unnoticed. As an investor you have looked at numerous deals in a sector. As the next incremental deal comes your way, you are able to make sense of the metrics, compare with normal benchmarks and realize the uniqueness of the deal. Your preparedness makes it happen for you.
Luck finds you: This is reputational luck. You are known for something, a skill, know-how, some way of doing things. There is some uniqueness about you which enables luck to shine upon you when the time is right. You are an entrepreneur who has hit an unsurmountable wall in his startup and needs to shut shop. While you were building, you were keeping your stakeholders in concert of the happenings but unfortunately things did not turn out the way they should have. Next you know that one of your existing investors is willing to back you again and write a cheque for your subsequent venture.
RISK
On the surface, entrepreneurs and investors have a good understanding of obvious risks, for eg: risk of building a startup that falls short of hitting a PMF or risk of investing in cryptocurrency. However, it’s also important to look beyond these quintessential risks to the atypical ones. Understanding and recognizing risks eventually enable entrepreneurs and investors to overcome them.
Mediocrity Risk: This is a risk of being just ok or lacklustre – not bad enough to fail or good enough to be amazing. It essentially entails not getting the best return on one’s most valuable asset – Time. This type of risk pervades through the ecosystem and is one of the major reasons for not achieving outsized success, as humans are wired to settle for mediocrity with time.
Safety Risk: This is a risk of not assuming enough risk. How often we stick to our comfort zone while we are building – let’s not iterate and experiment, let’s stick to our known product and processes, let’s not venture into unknown territories etc. It is important to recognize ‘Safety’ as a risk if one has large ambitions.
Market Risk, Execution Risk & Technology Risk: These are different types of risks that are present in any proposition. Taking market risk means that product/service being built does not have any takers resulting in zero outcomes. Execution risk is generally subscribed to by all investors when one is discounting future expected cash flows in an enterprise. Technology risk is about taking R&D / IP creation risk resulting in near binary outcomes.
Having considered all of this we need to also internalize the difference between ‘Risk Control’ and ‘Risk Avoidance’. As rational beings our endeavour is to reduce losses and increase returns. This is the intuitive part of the puzzle, however not everyone is able to understand whether to avoid risk or to control it. Controlling risk leads to reduction in losses, however avoiding risk would lead to reduction in returns. Therefore, it’s about taking calculated risks i.e. take risks when the payoffs are disproportionately favourable rather than avoid risks altogether. Skilful risk control becomes the winning proposition.
In sum, a common sentiment on luck and risk management that all great achievers echo––– we are bound to make mistakes, however if we our positioned appropriately and our innumerable misses don’t outdo our fewer successes, we will be able to survive, earn and eventually thrive!