Successful Entrepreneurs don’t take risks.
Yes, you read correctly. They infact go to lengths to reduce risks.
Gladwell makes a persuasive case through couple of high profile examples like Ted Turner and John Paulson (Big Short Fame) of how they intentionally keep the risks lower so that they increase the chances of their success. He goes on to overturn commonly held beliefs around risk and their downsides.
The article persuaded me. I realized there are four more points for consideration:
A) Keeping the Risk small = Increasing the potential of the Upside
I could relate to this from my Trading experience. The best of traders in the world e.g. Paul Tudor Jones, Bruce Kovner and even Warren Buffet seek to lower their risk first. They don’t look at reward first. They actively reduce risk first. Warren Buffet is famous for saying “Rule No.1 : Never Lose Money. Rule No.2: Never forget rule no.1”
By always looking for low risk ideas, they buy really cheap (ideally when everyone is selling) and then wait for the trade to reverse and shoot for the Stars.
By keeping the risk low i.e. in business, it means keeping your costs low or driving a hard bargain when it comes to acquisitions, you reduce the capital outlay. The subsequent increase pays for itself in multiple times.
Also by keeping the risk small, even if the bet fails, you have lost very small portion of your capital but you learn a lot from the experience. Fast Fail is possible only when the risks are kept small
B) Generating cash from one business to fund another business
The article talks about how Ted Turner used the excess cash from the Billboard business to fund his news station.
This is the classic Warren Buffet tactic. He used the Insurance float generated by Berkshire Hathaway to fund his acquisitions. This not only kept his cost of capital low but also make sure he was not borrowing at high cost and then wondering how to pay for it.
This is the classical approach in the business. Build a Cash cow in the business first. Make the business and the team to be cost conscious, use the pay as you go model. Build, sustain, reinforce and then repeat the cycle. Create a Cash strong business.
Then, once you have a sizable kitty, use it to fund acquisitions or new product launches. Care has to be taken that the new product launches or acquisitions don’t wipe out all the cash
C) “I skate to where the puck is going to be, not where it has been”
One of the greatest Ice hockey players ever Wayne Gretzky once said this.
In sports, then and even now, everyone races to where the ball is or puck as it is called in Ice hockey.
Gretzky used to setup the game in such a way that he would know where the puck would be a few steps ahead of everyone and position himself in the court accordingly. This devastating technique made sure that he was always well positioned so that once the pass happened he was uncontested and score from an unguarded place.
Warren Buffet also popularized the notion by his statement “Buy when there is blood on the streets” i.e. Buy when everyone is selling. It takes guts to be contrarian but a well-positioned strategic move plays off in a big cash pile.
How does this apply to business? Understand what the customer truly wants and not what everyone is doing. I remember once I was National Sales Manager for Acrylics and our lead product was a “Commodity”. Or atleast that is what everyone thought,. Because I had no background to the industry when I came in, I decided to focus on the largest customer (No.1 Paints manufacturer) and what their needs were? While everyone was competing on price, my team worked to understand the total system cost and needs of the customer. This focus helped us in making them our largest customer with ability to increase prices and thus make it one of our most profitable customers.I skate to where the puck is going to be, not where it has been - Wayne Gretzky Click To Tweet
D) Be a predator – stalking increases the chances of success
Related to the idea of low risk is that you get into the habit of stalking the idea (not any person please). You wait for the right circumstances to present itself and then you act. You are not in a hurry. You have worked out the details and made all your risk assessment. You negotiate, you thrust, you parry and only when the financials work in your favor, you close the deal.
This does not mean you procrastinate, this does not mean you lose the plot while you sweat the pennies. It means that the opportunity has to have the best risk return profile for you to act.
All predators in the jungle stalk the cattle or the herd and pick the weakest or best target before racing towards the target.
What does this mean for business? If you are planning to enter new markets or looking for acquisitions, look for the place where you can do the swiftest entry. Remember it is in the interests of the acquired to delay so that they can ask for an increase in the price,. It is in your interest to takeover something whose value is more than the price. Value in a tangible way. So no goodwill valuation or brand image buffers. Cash positive business with low debt in the books is the ideal.
How would you apply this to your business?