Smart risk management could be tricky, but not entirely impossible.
When we look at an investment, we need to understand these 4 core elements:
- What we are to invest in
- Who we are to invest in
- When we are to invest in
- Why we are to invest in
What we are to invest in
Part of smart risk management is to understand what we are to invest in.
We invest in a startup, a fund, an accelerator and so on.
We need to understand the implications of our investment and fully comprehend what we are trying to achieve by doing so.
“Stupid money”, as we like to call it here, is useless in the long-run.
Startups, funds, accelerators, etc. need the right partners on board.
Putting money in a market which we have yet to figure out usually leads to failure.
We may shine away from any future investments altogether.
Clients almost always come to us asking “how do I know that investor is right for me”.
We always say that we vet each investor individually so as to avoid “stupid money” and having the wrong people invest in the wrong business.
Who we are to invest in
As important as it is to understand the market, we also need to understand the players, or more specifically, the management.
The team which makes the startup, the fund, the accelerator, is as important as the product at hand.
If an investor doesn’t get along with the team (or certain members of it), the investment is doomed to fail.
Prejudice and misperception of a team member based on past experience are the driving vehicles of unnecessary frictions.
They may lead to rescinding of any future promises and offerings.
If we don’t get along, we shouldn’t bother putting any money in (or not ask for any either) – we’ll lose it.
Having said that, not putting money in the right team’s hands because of prejudice could also lead to a huge mistake.
When we are to invest in
Another important element is to understand when we are to invest in.
Is the price right?
Can it be scalable?
Is the product sustainable?
Nick Jaworsky, CEO of Circle Social Inc., a marketing agency as well as an enthusiastic investor, says that “the key to any good investment – a house, a stock, or a business, is buying at the right price. You always want to buy for less than it’s worth.”
He explained it a little more, which got us thinking about this.
Do people even know how to conduct smart risk management when investing?
It is important to understand if it is the right time for such an investment and that we understand how long it may take until we see the fruits of it (if any).
Why we are to invest in
As we delve into the pitch decks, the P&L statements and the overall market at hand, we need to understand why we are even considering this investment.
Are we looking to be the first in the market?
Do we believe in the product/market/team behind it?
Are we doing this just because everyone else is doing it?
The last reason almost always leads to failure, as it shows we haven’t followed the first 3 core elements:
We should always be calculating the risk at hand; not in terms of should we take risks or not, but why we are taking them in the first place.