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What Risk Are You Willing to Take?
And how "edge" comes from knowing the risks you can take that others won't
As an investor, what risk are you willing to take that others won’t? If you reflect back on your investing history, is there a common through line that clearly demarcates investments that went great, and where others went poorly? Was there a single risk you took in a single investment that played out and delivered exceptional returns? Is there one risk you’re willing to take in all your investments that others won’t? If so, that’s your edge.
In today’s investing content explosion (yes, I understand the irony here…) there’s no shortage of frameworks proposed as ways to eliminate risk and drive outperformance. The whole world is looking for arbitrage, or risk-free profits. But great investments rarely work that way. The best investors are experts at identifying the key risk to take, pricing it fairly, and derisking it over time through continued investment, tactical support, and network access. Great investments come from taking risk and being right, not from avoiding it altogether.
Below is a (non-exhaustive) list of some risks (and key mitigants) we like that are common reasons many venture investors pass on a business. I’d love to hear some others people use in their own thinking!
Service Revenue: Early revenue is primarily service-driven, and a venture return depends upon the ability to transfer those early service revenues to recurring, high-margin product revenue.
Key Mitigant: The team has a clear articulation of what needs to be true for making the transition from service to product revenue, with a history of exceeding expectations.
Capital Intensity: The business requires tens of millions of dollars before it can begin to show real revenue or customer traction.
Key Mitigant: The early product is inherently defensible once proven and is being built by an exceptional early team, the risk is primarily engineering-driven, and there is a clear potential high ROIC business by the Series C.
Non-Traditional Founder Backgrounds: The founders come from prior backgrounds or with prior experiences that aren’t from “central casting” (i.e. roles of increasing responsibility at high-growth venture-backed startups).
Key Mitigant: Generational companies are often built by outsiders with non-traditional backgrounds, but individuals with a history of leadership, achievement, and exceptional performance (“n of 1” founders) in any pursuit usually makes for a strong risk-adjusted bet.