Managing Unnecessary Risk
“If you don't invest in risk management, it doesn't matter what business you're in, it's a risky business.”
— Gary Cohn
What Got Me Thinking 💭
📚 John Warrillow | Built To Sell: Creating a Business That Can Thrive Without You
I quit my job and started contracting when my 2nd child was born in May 2019. After my 3rd child was born two weeks ago, the client called to terminate the contract.
I learnt from the chaos of 2020 that everything is subject to risk, including 9 to 5s (e.g. Quibi, Covid Redundancy & Unemployment). Thankfully, I took precautions earlier to derisk my situation. But this made me wonder:
“How often do we tolerate unnecessary risks?”
By "unnecessary”, I mean hedgeable risks (i.e. those we can manage our exposure towards). Here are a few examples in life and business alongside their solutions:
Key Man:
You’re exposed to this risk when someone irreplaceable is essential for the business to function. It occurs in large organisations due to size and oversight. It happens in startups due to insufficient time and resources. It’s like storing critical information on a single USB - losing it places the company’s future at risk.
Solution: Knowledge sharing, clear documentation and collaboration.
P.S. This also applies to CEOs. Companies that can’t function without you aren’t worth anything without you. Selling it is problematic, nor can you focus your attention on other company matters. Don’t hoard, delegate!
Investment:
Risk is a necessary facet of investing - and presents upside possibilities. However, you must ensure it’s not too volatile, and that you don’t lose all of your money.
Solution: Modern portfolio theory says investors should minimise their risk for a given level of return. Therefore, invest in a range of things — differing by asset class, industry, geography, etc.
P.S. This also extends to angel investing.
Product Line:
Niches are excellent for many reasons! However, a single product may encounter a range of issues (e.g. supplier problems, distribution, pandemics, competitors, regulations, etc.).
Solution: Consider branching out within your niche, to offer different products. Contemplate other offerings with good synergies.
Skill Set:
Focus drives excellence within a given field. However, you risk your skills becoming irrelevant.
Solution: Specialise at the intersection of multiple disciplines. Become generally proficient in a variety of things. Never stop learning, and progress with your field.
P.S. Revisit the newsletter on Intellectual Curiosity and read about becoming T-Shaped:
Client:
“Relying too heavily on one client is risky and will turn off potential buyers. Make sure that no one client makes up more than 15 percent of your revenue.”
— Built To Sell
If a single client provides most of your revenue, you risk unexpectedly losing everything. How can you prevent the loss of a single client from ruining your income?
Solution: Work with a range of clients. Build up industry rapport. Offer services to multiple clients simultaneously or turn your service into a product.
Final Thoughts
“Everyone has a plan until they get punched in the mouth.” — Mike Tyson
In Monopoly, it’s easy to think you’re “ahead” until you get hit with unexpected repair bills, income tax, or hotel fees. Feeling unlikely doesn’t remove the risks and their consequences. If you’re unprepared, it can ruin you.
We’ve been tackling a pandemic for the last year — rest assured, anything can happen. Where possible, prepare.
Yes - I’m The Plug 🔌
Interested in becoming a VC Scout? Well here’s a tweet and a lot of useful comments telling you the firms that are looking: Click Here
Word of advice: there are many scout programmes out there, so pay close attention to the compensation.
Looking for the best way to launch a venture business? YC’s early application is open for their Summer 2021 Accelerator: Click Here
Do You See What I See? 🗞👀
A lot happened this week, but here are some highlights:
🦄 Clubhouse Is The New Unicorn | What’s The Community Saying
Clubhouse Valuation - May 2020: $100m
Clubhouse Valuation - Jan 2021: $1bn
This week I’ve seen excitement, frustration and competition. Interesting questions have arisen around equity and diversity, which I may discuss next week. But for me, I wonder how this app will do in a post-pandemic society.
🏦 Monzo’s Founder Leaves | CEO Stopped Banking On Monzo (Get It? 😅)
“Going through a pandemic, going through lockdown and the isolation involved in that has an impact on people’s mental health… I don’t think I was any different, so I was really struggling.”
In 1999, Goldman Sachs had a 50% stake in Alibaba, board control and anti-dilution rights. They sold out in 2004, turning their $3.3m investment to $22m. $18.7m profit is rarely a shame, but it is in this case.
If they held it until now, it would be worth over $100bn — hindsight is 20/20.
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This article is a great reminder, especially in these times of job and financial market uncertainties. The T-shape is gold. It isn't easy otherwise to balance Focus with diversification.