How Thinking Like an Investor Is the Secret to Launching a Business
Venture capitalism is rife with "what if" stories that are now legend.
An investment of $990 for 45 shares of a garage-based company called Apple after its initial IPO would have netted a VC $394,758 in 2017 dollars, a near 40,000 percent ROI. Similarly, few could have predicted Amazon would become a titan of ecommerce that could deliver millions of products an hour after the click of a "buy" button, but those savvy enough to bet $5,000 early on would be sitting on $2.4 million. High school dropout Erik Finman's $12 gamble in an obscure online currency called Bitcoin in 2011 made him a millionaire at age 18.
Many would argue these investment outcomes are strokes of genius based on luck instead of strategy. In my experience, however, these risk takers were smarter than we give them credit for. They prove a useful mantra: A successful investor doesn't ask, "Will this business work?" but rather, "What happens if it does?"
Investors should never look for a sure thing. Microsoft executive and former private equity partner Tren Griffin's observation that "investors must be contrarians to outperform the market" -- or an investor can't beat the crowd if he's part of it -- is true. Instead, investors should pursue ventures viewed as too difficult or too risky to touch by other VCs.
By no means is intentional contrarianism a new concept for investors (it was an important part of my investment philosophy as a VC at American Family Insurance.) However, I rarely find it in the typical entrepreneur's toolkit. And I believe that, when applied correctly, it can provide important guidance on building, pitching and growing a business. In fact, this risk vs. avoidance mindset framed my decision-making process for founding Clearcover. Here are a few stories from our journey so far.
Set your business apart from Day One.
Investing is all about decision-making, and so is building a business. From the outset, a founder makes countless daily decisions shaping the company for years to come -- who to hire, where to launch, which partners to choose. In addition to decisions geared toward delivering value to customers, founders should also ask themselves, how does this decision separate me from the crowd? Ironically, many entrepreneurs take the ultimate risk by starting a new business, but then shy away from risky decisions in their business's early stages. Unorthodox choices are vital for standing out to VCs and customers alike.
Our "hell yes" hiring strategy is one way that we're betting on this approach. A "hell yes" hire is someone who shows "superpower talent," a talent that solves a specific company pain point. It means hiring for strength, not an "absence of weakness." (Side note: this strategy is an amalgamation of two separate concepts.) I haven't encountered many companies comfortable with this type of talent investment so early on, but it's a forward-looking risk we always highlight in a pitch deck.
Partnerships present another differentiation opportunity. The combination of today's ubiquitous technologies, ease of integration and consumers' open-mindedness toward new brand experiences is one that shouldn't be ignored. Startups can't restrict themselves to defining success as partnering with the "usual suspects" already chosen by their larger, more established counterparts. Evidence that unique partnerships are key to being 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 new lens to partnerships.
Present a clear (and perhaps crazy) vision.
We hear ad nauseum that VCs hit a "home run" investment once every 10 deals. In reality, it is probably closer to one in 50. But, a smart VC understands, with these odds, the magnitude of a single success can far outweigh the frequency of misses. An equally smart entrepreneur will know this when making strategic decisions and when entering the boardroom.
If a founder enters a room of VCs looking to leave with a consensus, it's a recipe for failure. Instead, the goal should be to explore the interest of those with the minority opinion in the room who can clearly see the "what if" value proposition. When pitching, every facet 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 actually works?" This doesn't mean you don't consider the risks. It simply means you don't let the presence of risk distract you from the size of the upside.
Consider Ring -- the video-enabled smart doorbell that debuted during the peak of connected home expectations. After pitching our AmFam VC team, we immediately invested, primarily because the founder's ability to sell Ring's "what if this works" vision. What many saw as a trinket turned out to be the perfect combination of a product consumers aspired to own and a service that gave them peace of mind. Those that let their (reasonable) skepticism outweigh the early signals of how important the product could be missed the opportunity.
Keep building differently.
Here's a quick experiment for the next time your team is faced with an important decision. Before you determine which of your ideas will actually work, assume all your ideas will work and rank them by the impact they'd have on your company. Next, figure out which of those ideas' biggest and best outcomes could be made into a reality and move forward accordingly.
Related: How to Take the Right Risks
This kind of approach shouldn't serve as your solo method to make great decisions, but it can be a useful way to generate orthogonal viewpoints. It also is applicable to companies of any size -- diversity of employee relations, product expansion and partner strategy are helpful for companies big and small.
While the conventional path can lead to success, following a "what if it works?" mindset is one way to optimize for outsized achievement. It'll contribute to your reputation with investors as a change agent and keep you thinking outside the box versus chasing competitors' tails. As Berkshire Hathaway vice chairman Charlie Munger once said, "Too much competency and no gumption is no good."
Always go for the gumption.
Related Video: Don't Be Afraid to Take Risks to Come Out Ahead