Thursday, June 15, 2006

Risk mitigation - the rules of crossing deserts

Being involved in a start-up sounds extremely romantic…well, everything that is not realistic is romantic…Our business is to find the crossing point between romantic and economic…

For me, founding or investing in a start-up is as romantic as committing to join a very, very long and dangerous mission to explore a legendary land that happens to be exactly on the other side of a hostile, unexplored desert. It gets even more complicated than that because this promised land, if it exists at all, will allow only a few to pass through its gates and, since the demand for miracles and other romantic rewards is always more than the supply… there are other 'brave' teams trying to do just that... cross the same desert for the NO-promise that one of the teams may... maybe... get in.

The bad news, most of the teams won’t make it. The good news, there is a big graveyard very close by with plenty of room for everybody….

So, when I’m meeting with young and eager entrepreneurs looking for money, I cannot escape the thought that these guys are actually trying to pull me into to joining them on such a trip... The second thought that strikes me immediately afterwards is “are they aware of this desert thing or do they think it’s actually a day trip across Central Park....?” I’m a bit reluctant to jump in on the opportunity to go on the next desert trip because I have been through similar deserts enough times and much fewer times on the other side… and getting stuck in this desert thing is not romantic at all (and definitely not economic…). I know!

So although my default position is that I'm perfectly OK with staying on this side of the desert (after all THIS IS the Promised Land...) I will definitely join some trips, when I think that the opportunity, people and timing are right. But I have learned my lessons and keep learning them every day - after all a VC has a distributed soul, and my miserable soul is distributed among multiple deserts as we speak…

Here are my rules and realizations for crossing deserts:

A. Challenges. On each venture there are a given number of unknowns – which we like to call ‘challenges’ … the external challenges, those that we cannot influence but if we are fairly good, we CAN predict (a good example would be the whole issue of standardization in a certain market), and internal challenges, those that we can influence and we better predict... (e.g., development risks).

The higher the number of the external challenges, the more we-better-think-twice about this whole if the need is not clear, the market timing and size are a big question, and we are in the cloud regarding the technology direction that the market will adopt, then, maybe we better stay where we are for a while or just go kite surfing…

B. Resources. The longer the route is, the more resources required and the less likely we will be able to make it. Also, in each worthy desert there are a few Oasis’s where we can equip ourselves with food, water, and money from later stage investors!

So what we want to do is, first of all, plan on a SHORT route, the kind of route that will get us to a real milestone quickly. And second, understand from day one what resources are required along the way – between one oasis to another AND ‘til breakeven.

Also, we really do not want to zigzag our entire way to nowhere-land… Unfortunately, zigzagging is inevitable- at least in the beginning. But, if we gather the right intelligence, create the right plan and more than anything, stay tuned to noises from the desert/market and act on them immediately, we are less likely to zigzag and increase our chances to get ‘there’, or at least somewhere, with our planned resources.

C. Edge. We can do everything right and still come in last (or second, same thing...). So apparently, it’s not enough to do it right. We also must do it better than the others.. (The bad news - these others all have the same line of thinking...). This means that we must do everything possible in order to build an edge, and this edge is all about people and the resources required in order to get them. It’s clear that in our adventure we want the best navigators, the best technician and the best cook… and we need them from the start! It should be the same in a start-up:

1. Take enough money at earlier stages to exercise the right plan (and yes, its more dilutive to take money in the beginning.. painfull, i know..) .

2. Bring the best people you can get from day one! (and try to bring only those that are better than you... we shouldnt have a problem here ;))

3. Build the right Board. Choose your investors carefully (Pitango may be a good place to start…), not only brand quality-wise but mainly personal chemistry-wise – they are going to constitute your Board and you want to have a Board that talks the same language.

D. Resource allocation Optimization. Since the challenge is multi-dimensional - both against time/resources and against competition, we need to use all our resources carefully. We don’t want to waste them when it’s useless to, and we do not want to spare them when its time to hit the gas.

The one resource I find people most sensitive about is their equity stake in the company. Hitting the gas means spending money, which means raising additional money, which means dilution, which means “less money in my pocket at the Exit…”. This is true… but we must compare it to the alternatives. …It’s like those gold miners that get stuck in the desert with a pile of gold and will not give some of it for water…the gold is precious only once you are on the other side of the desert but it won’t help you get there– the water will …

E. The ability to go back. Tactically it’s shorter, less resource consuming and safer to stop… think… and then go back a few steps… but mentally, it is so difficult. People prefer to correct a little bit to the right and then again and again…. The ability to go back will increase our chances to move forward in the right direction.

There are times when we want to go back. Period…and the sooner the better.

F. the What-were-we-thinking test. We all make wrong moves all the time. There is one kind of wrong moves that I can live without - the one that when I look backward I say – “what the hell was I thinking then...”

So, before making a decision to go on another desert trip, I try to envision myself a few years later, looking back on my decision…


Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

U r a true story teller..and you know what they say about them!!!z

Anonymous said...

You are also a writer - wow.

Anonymous said...

Rami, for those of us on the other side of the line, with desert-crossing plans and cautious self confidence in our abilities to cross it, the question remains the same.
How can we get to your powerpoint board....and convince you.