Musings on Risk.
I like taking risk. It’s a part of my life, it leads to adventure, stories, and interesting outcomes.
As a first check investor in startups for the last 15 years I’ve had to think about my relationship with risk a lot, and how it applies. Investment is all about risk. The risk you take defines the game you are playing and because it defines the game will also define the outcome.
“Here’s the key to understanding risk: it’s largely a matter of opinion.” - Howard Marks
I’m attempting to define “First Check” writing separately from “Venture Capital” here. First check writers have the least amount of information, and in the grand scheme of things have to take on the most investment risk, because of this, you also have the opportunity to receive that largest reward.
The pendulum of risk fluctuates between two states: Certainty and Skepticism. And understanding the peer pressure of certainty can help you make great First check writing decisions.
A good example is that over Covid, certainty was on “Remote work,” and “Low Capex” businesses, and the skepticism was on “In person” and “High capex” (High cost of things you had to pay for, rockets, nuclear). This is a long way of saying “Certain on software, skeptical on Aerospace.” However if you were a first check writer over Covid - the best place to have been investing would have been Aerospace and Defense for results today.
The attention of the investors is unpredictable, but understanding the guard rails of certainty and skepticism end up being valuable skills. A good question today for first check writers would be “What are people most certain about in tech today?” and then thinking about “where are people most skeptical, but it’s important to build?”
Taking more risk, which means betting against certainty, ends up being where a first check investor gets pricing power and makes the biggest impact. This has been in the culture of Boost VC from the beginning - where can we go to be the most useful with our capital — it’s never about focusing on the current thing for us.
“Risk comes from not knowing what you are doing.” - Warren Buffet
Risk (from a legal perspective which is where I come from) comes from
a) variability (beta)
b) uncertainty
and I would claim (without proof) indeterminability - (things which are subjective such as values . eg inherently cultural)
As such if you look at DeepTech (as per BCG) the tech risk is manageable (save for regulatory bias cough vaccines) but market risk is something that investors due to their broader life experience should be able to make educated guestimates. What you are then up against (given most investment world have access to same raw data) is trying to weed out internal biases ... eg category error. A classic example being WeWork privately being valued at tech multipliers whereas the competitive space was property rental (lease long, rent short).
So an investor then has to tilt odds in their favor ... validating the uncertainties (perhaps with other investors), identifying least resistance in go-to-market, arm-twisting professional network to find early adopters. If you want to be passive, accept the limits (and returns/illiquidity) of being an LP