Tag: execution risk

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The Tale of Two Risks: Market and Execution

market, flea market, farmers market

Folks coming out of school and/or are still in school often ask me how they should break into venture. It’s surprisingly a timeless question. The goalposts change every era. And as the signal-to-noise ratio and regression line oscillates in bull and bear markets, young professionals chase a moving target.

That said, while my opinions will likely change when the facts change, as of now, this is my best proxy for a timeless answer. Market risk versus execution risk.

Let me elaborate.

Early in your career, you should take market risk. Bet where others are not willing to bet. Or have the same starting point as you do. If the starting line is even, it’s all about how much faster you can run compared to your peers. And if you can outlearn them, ideally because of internal drive and motivation, you’ll be the incumbent in the space in the future.

Execution risk is what you pursue as you grow. Your network, your expertise, and your experiences make you a more robust executioner. You’re an incumbent. You’re a juggernaut. There’s no reason to focus on this risk when you’re younger because you don’t have an unfair advantage here. In fact, you have an unfair disadvantage. Others more senior to you have a better network, more expertise, and have done more reps than you have.

Steve Jurvetson recently shared the only rule of business that is inviolate. “Take any company that is large or top three in their industry. They will never lead the charge to disrupt that industry.” He goes on to say, that even in recent years, Google didn’t fight to change search until OpenAI. Apple is innovative outside their core business, but never in their core business. So as a result, innovation needs to come from the bottom. People who are willing to take market risk.

Similarly, in venture, as a young VC, you need to build your own thesis. For as long as you are investing on the basis of someone else’s thesis, you are competing on execution risk. And every VC who’s older, wiser, and more connected than you are on that thesis will out-execute you.

So… the risk you have to take is betting on a brand new thesis. That no one else is pursuing. No one else is investing by it. And that… is market risk.

The above is no less true if you’re an emerging GP. Your fund lacks the resources, likely the connections, the experience, the talent, and the ability to out-execute your incumbent on your incumbent’s thesis. The solution is to just not play when they have the home field advantage.

It’s why thesis and the question “Why does another venture fund need to exist?” matter so much to LPs betting on new fund managers.

Photo by Kayle Kaupanger on Unsplash

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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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#unfiltered #18 Naivety vs Curiosity – Asking Questions, How to Preface ‘Dumb’ Questions, Tactics from People Smarter than Me, The Questions during Founder-Investor Pitch

asking questions, naivete vs curiosity, how to ask questions

Friday last week, I jumped on a phone call with a founder who reached out to me after checking out my blog. In my deep fascination on how she found and learns from her mentors, she shed some light as to why she feels safe to ask stupid questions. The TL;DR of her answer – implicit trust, blended with mutual respect and admiration. That her mentors know that when she does ask a question, it’s out of curiosity and not willing ignorance – or naivety.

But on a wider scope, our conversation got me thinking and reflecting. How can we build psychological safety around questions that may seem dumb at first glace? And sometimes, even unwittingly, may seem foolish to the person answering. The characteristics of which, include:

  • A question whose answer is easily Google-able;
  • A question that the person answering may have heard too many times (and subsequently, may feel fatigue from answering again);
  • And, a question whose answer may seem like common sense. But common sense, arguably, is subjective. Take, for example, selling losses and holding gains in the stock market may be common sense to practiced public market investors, but may feel counter-intuitive to the average amateur trader.

We’re Human

But, if you’re like me, every so often, I ask a ‘dumb’ question. Or I feel the urge to ask it ’cause either I think the person I’m asking would provide a perspective I can’t find elsewhere or, simply, purely by accident. The latter of which happens, though I try not to, when I’m droning through a conversation. When my mind regresses to “How are you doing?” or the like.

To fix the latter, the simple solution is to be more cognizant and aware during conversations. For the former, I play with contextualization and exaggeration. Now, I should note that this isn’t a foolproof strategy and neither is it guaranteed to not make you look like a fool. You may still seem like one. But hopefully, if you’re still dying to know (and for some reason, you haven’t done your homework), you’re more likely to get an answer.

Continue reading “#unfiltered #18 Naivety vs Curiosity – Asking Questions, How to Preface ‘Dumb’ Questions, Tactics from People Smarter than Me, The Questions during Founder-Investor Pitch”
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The Different Types of Risk a VC Evaluates

Photo by trail on Unsplash

Founders take on many different types of risk when creating a business. Subsequently, investors constantly put founders and their businesses under scrutiny using risk as a benchmark. In broad terms, in my experience, they largely fall under two categories: execution risk and market risk.

Finding Product-Market Fit and “Idea-Market Fit”
Where I first introduced the dichotomy of market and execution risk in the frame of idea-market fit.

Some Background

Contrary to popular belief, VCs are some of the most risk-averse people that I know. As an investor, the two goals are to:

  1. Take calculated bets, via an investment thesis and diligence;
  2. And de-risk each investment as much as possible.

From private equity to growth equity to venture capital, more and more investors are writing ‘discovery checks.’ Typically, funds write checks that are 2-4% of their fund size. For example, $100M fund usually write $2-4M initial checks. Yet, more and more investors are writing increasingly smaller check sizes (0.1-0.5% fund size). In the $100M fund example, that’s $100-500K checks. This result is a function of FOMO (fear of missing out), as well as a proving grounds for founders before the fund’s partners put in their core dollar. Admittedly, this upstream effect does lead to:

  • Less diligence before checks are written (closing within 48-72 hours on the extreme end, and inevitably, more buyer’s remorse);
  • Less bandwidth allotted per portfolio startup (even less for startups given discovery checks);
  • And, inflated rounds (and therefore, inflated startup valuations).

The Risks

The risks for a startup investor are fairly obvious, and so are the rewards. Effectively, an early-stage investor is betting millions of dollars on a stranger’s claim. But not all risks are the same.

In the eyes of a VC, an execution risk is categorically less risky than a market risk. Furthermore, even within the category of execution, a product risk is usually less risky than a team risk.

Execution Risk

Why are more and more early-stage investors defaulting to enterprise over consumer startups?

Two reasons.

  1. Enterprise startups often run on a SaaS (software-as-service) subscription business model. There will always be recurring revenue, assuming the product makes sense. For an investor, that’s foreseeable ROI.
  2. It’s an execution risk, not a market risk. Often times, an enterprise tech startup is the culmination of existing frustrations prevalent in the respective industry already. And therefore, have reasonably stable distribution channels and go-to-market strategies.

Eric Feng, formerly at Kleiner Perkins, now at Facebook, used Y Combinator’s data set at the end of last year to illustrate the consumer-to-enterprise shift.

Using discovery checks, and playing pre-core business, VCs can evaluate team risk. Between the discovery check and their usual ‘core checks’, VCs can also test their initial hypotheses on their founders.

As a startup grows, especially after realizing product-market fit, market risk becomes more of a product risk. Best illustrated by market share, product risk is when a product fails to meet the expectations of their (target) customers. It can be evaluated via a permutation of key metrics, like unit economics, NPS, retention and churn rate. There is an element of technological risk early on in the startup lifecycle for deep tech ventures, but admittedly, it’s not a vertical I have my finger on the pulse for and can share insight into.

Given that VCs are either ex-operators or have seen a breadth of startup life-cycles, VCs can best use their experience to mitigate a startup’s execution risk.

Market Risk

Market risk requires a prediction of human/market behavior. And unfortunately, the vast majority of investors can predict about the constant evolution of human behavior as well as a founder can. What does that mean? Founders and VCs are walking hand-in-hand to gain market experience. It, quite excitingly, is an innovator’s Rubrik’s cube to solve.

Market risk is frequently attributed to consumer tech products. In an increasing proliferation of consumer startups, consumers have become more expensive to acquire and harder to retain. Distribution channels change frequently and are determined by political, economic, technological, and social trends.

In Closing

Every VC specializes in tackling a certain kind of risk. But founders must quickly adapt, prioritize, and tackle all the above risks at some point in the founding journey. As Reid Hoffman, co-founder of LinkedIn, famously said:

“An entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.”

Happy hunting!

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