Get All Access for $5/mo

How Thinking Like an Investor Is the Secret to Launching a Business Hint: It has to do with embracing risky investments, not avoiding them.

By Kyle Nakatsuji Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

Graiki | Getty Images

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.

Related: The Foundation of Success Is Taking Disciplined Risks

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.

Related: How to Take Risks That Win (Almost) Every Time

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.

Related: Entrepreneurs Aren't Risk-Seekers -- They Just Handle Risk Better

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

Kyle Nakatsuji

Co-Founder and CEO of Clearcover

Kyle Nakatsuji is the co-founder and CEO of Clearcover, a car insurance provider.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Branding

ChatGPT is Becoming More Human-Like. Here's How The Tool is Getting Smarter at Replicating Your Voice, Brand and Personality.

AI can be instrumental in building your brand and boosting awareness, but the right approach is critical. A custom GPT delivers tailored collateral based on your ethos, personality and unique positioning factors.

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.

Business News

Apple Reportedly Isn't Paying OpenAI to Use ChatGPT in iPhones

The next big iPhone update brings ChatGPT directly to Apple devices.

Business News

Is the AI Industry Consolidating? Hugging Face CEO Says More AI Entrepreneurs Are Looking to Be Acquired

Clément Delangue, the CEO of Hugging Face, a $4.5 billion startup, says he gets at least 10 acquisition requests a week and it's "increased quite a lot."

Business News

Sony Pictures Entertainment Purchases Struggling, Cult-Favorite Movie Theater Chain

Alamo Drafthouse originally emerged from bankruptcy in June 2021.

Growing a Business

He Immigrated to the U.S. and Got a Job at McDonald's — Then His Aversion to Being 'Too Comfortable' Led to a Fast-Growing Company That's Hard to Miss

Voyo Popovic launched his moving and storage company in 2018 — and he's been innovating in the industry ever since.