As an angel investor, I do not start businesses. Instead, I invest nutrients into budding enterprises. When you invest in a new business, there is no historical data to work with. Entrepreneurs start from scratch–with nothing but the all powerful zero that comes with unlimited potential and possibilities.
While the business itself may not have a track record for decision-making purposes; the individuals of the founding team do have a track record in their professional and personal lives. It is this track record I scrutinise when making a decision regarding the ventures I invest in.
The very first thing I do is study an aspiring entrepreneur’s risk profile. What risks has an emerging entrepreneur undertaken in their lives prior to starting their first business? What was the tangible outcome of those ventures? As the adage goes–nothing ventured, nothing gained.
Here, I would like to add a caveat. Some entrepreneurs are fiscally conservative, but are capable of taking on other risks that have led to success. For instance, if an individual has a track record of starting from scratch in different countries in an employment capacity; then of course, this individual will have the capacity to do the same in their business endeavours. In this situation, I will ask myself: what countries has this individual gone to? What are the market conditions like in those territories? What was their recipe for success in uncharted terrains? How did they overcome the challenges the faced?
Other entrepreneurs can take on great financial risks, but do not possess the ability to deal with other unknowns. For example, an individual may invest large sums of money in a budding enterprise; but they may not have the know-how to navigate international markets or create relationships with diverse groups of individuals.
Everyone’s capacity for risk is different. By collating data and gaining an understanding of the risk-profile of an entrepreneur; I formulate a strategy that is in line with their individual capacity to stomach the risks that come with starting and building a new venture.
Play not with dice: no, cultivate thy corn-land.
Enjoy the gain, and deem that wealth sufficient.The Gambler’s Lament, Rig Veda
The second factor I look at is greed. Is this individual greedy? No one will willing call themselves greedy; but this is a common problem for those who are purely motivated by monetary gains. I’m not impressed by business owners who do not keep an eye on the bottom line. Following on from that, I am equally unimpressed by business owners who are willing to do absolutely anything to ensure that the bottomline makes sense (to them, that is).
There is a marked difference between making money and establishing the right fundamentals and structures to create wealth. Money is a neutral force that can be utilised for either good or bad ends. What is the entrepreneur going to do with the money that is entrusted in their care?
On that note, what is enough money? It is pointless to escape the rat race only to recreate that in your own enterprise. Is an entrepreneur only motivated by personal needs and wants; or are they accepting their true soul mission: to be a conduit for wealth creation in the economy, in their industry and in their chosen ecosystem?
In addition to the creation of wealth; entrepreneurs must also think about how they want to distribute that wealth. What are their reinvestment strategies? What do they intend to do with the cashflow that streams into the business? What areas are they interested in reinvesting in?
By ascertaining the direction an entrepreneur’s inner compass is pointing towards, I gain a deeper understanding of their tangible and intangible goals.
The gamester seeks the gambling-house, and wonders, his body all afire, Shall I be lucky?The Gambler’s Lament, Rig Veda
Are entrepreneurs and investors gamblers in disguise? People often ask me–what’s the difference between gambling and investing? Both domains deal with enormous and unprecedented risks.
In terms of total turnover, lotteries are the leading form of gambling worldwide. A rough estimate of the amount of money legally wagered annually in the world is about $10 trillion– and this figure excludes illegal forms of gambling.
In gambling, the outcome of a bet is determined by chance alone. In the case of the lottery, it is purely a random chance event that leads to ‘success’. While strategy does play a role in poker or horse racing, it is of little use when it comes to purchasing lottery tickets or playing slot machines. There is a certain element of thrill-seeking in both entrepreneurship and gambling. The entrepreneur, however, is motivated by building a business. The gambler, on the other hand, has no goal other than a short-term and temporary financial gain.
In a very loose definition of the word, investing in stock markets may be considered a form of gambling. So what’s the difference? What distinguishes the two domains?
The primary difference between the stock market and gambling is that on the stock market; the skill, knowledge, expertise and experience of the investor plays a significant role in the decision-making process. The stock market itself participates in a role that is beneficial to society by generating returns over the long run. Yes, the risk of loss is still there; but the know-how of the investor allows an individual or an entity to make an informed choice that is not contingent on chance alone.
It is the inner compass behind the pursuit of risk that informs the choice that is being made. No true investor ever invests in chance alone.
Gains and Losses
Whoever governs Singapore must have that iron in him. Or give it up. This is not a game of cards! This is your life and mine! I’ve spent a whole lifetime building this and as long as I’m in charge, nobody is going to knock it down.The Late Mr Lee Kuan Yew, Former Prime Minister of Singapore
Entrepreneurs will invariably encounter losses and experience failures. Some of these losses will be financial; others will be of valuable team members; and others will be personal.
The key takeaway I wish to make here is that these losses are not entirely avoidable. Blunders and mistakes will be made. You cannot avoid walking into a manhole unless you know where they are in the first place. As an investor, what I want to see is the entrepreneur’s ability to rise from the ashes after a downfall.
Once an entrepreneur or investor has incurred these losses; they must focus their energy on rebuilding, recalibrating and redirecting the energy of the enterprise.
Unlike gambling, entrepreneurship and investing is not a game. It is not a simulation. We are talking about real life. We are talking about people’s personal livelihoods and their ability to earn a living in this world. Investors and entrepreneurs are professionals–gamblers are not. Gambling is–at best–a past time and an expensive form of entertainment.
Whoever runs a business–or even a country–must have that iron in him. Or he will have to give it up… Or alternatively, the market will not reward his reckless risk-taking and simply put him or her out of business.
26 thoughts on “The Pursuit of Risk | Investors, Entrepreneurs and Gamblers”
An excellent post on the perils of risk and the importance of understanding the different between reckless risk-taking and the true meaning of a taking calculated risk.
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Wow, Helios. This is just brilliant. Must read for all aspiring investors and entrepreneurs.
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Gambling is banned or forbidden in many cultures for a reason. It doesn’t have much of an upside. It’s different with investing.
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Most people don’t understand the difference. An excellent analysis!