Here at Episode 1, we loved Daniel Kahneman’s Thinking, Fast and Slow.
It is full of wonderful anecdotes, acerbic wit and invaluable insights for investors and others, in all walks of life. We try to avoid fast thinking as we evaluate opportunities and try to combat our all too human tendency to group think as we get closer to investment.
One small section of the book, in particular, has influenced the way that we interact with our investee companies, especially in the days immediately before and after investment.
Most investors will be interested in how long money lasts and establishing a 100 day plan to ensure that the period immediately post-investment is not lost in an organisational sigh of relief that cash is no longer “too tight to mention”. We agree, but we like to take that sort of thinking a little further.
So, before we invest, we agree with our entrepreneurs what the business needs to achieve within the 12 – 18 month period for which we have provided funding. While there are exceptions, for most companies in which we invest that means being clear about what we need to have proved when the company hits the funding trail again. This varies from business to business. It might be hitting KPI’s around conversion, or customer acquisition costs, replicating initial success in one vertical in a second vertical. Whatever the KPI’s, they are centred on demonstrating to the Series A and B investor community that our company is focused on a market of real scale, that the market loves what the business is doing and that the team is capable of executing and delivering very strong results. In short, the message to the new investors is this: if you give us the capital, we will utilise that capital profitably and effectively and we will grow a significant business.
In the days after investment, we throw a metaphorical bucket of ice-cold pessimism all over the Board and invite the team to conduct a Pre-Mortem. Lets forward-wind 18 months. Lets imagine that we are looking at a situation where we have not been able to raise that new round of capital and that we are therefore looking at a failure. What do we as a group think will have happened, or what will we have failed to do successfully that leads to that dreadful day. What are the internal threats to that success, how might the various market participants react to what we are doing, what are the vulnerabilities around what we are doing.
This exercise generally yields 5-6 mission critical outcomes that we need to avoid in that first period post investment. As a Board, we then monitor each of these threats to the business and think deeply about how our strategy or changes to our market approach might mitigate or exacerbate these risks.
The first time we went through this exercise was with James Hind, Founder of the new-car buying site, Carwow.
Together with James, his co-founder Alex Margolis and David Santoro, Carwow’s CTO, we identified the key risks facing the business over the first 12 months post investment. This informed all the major strategic decisions that James and his team made over the intervening period and when Carwow raised a new round of funding in February this year, we repeated the exercise with the new investors.
We have continued to find this working well as we start to build our portfolio of investments. It will not prevent us making mistakes, but we hope it helps to keep our entrepreneurs focused on the long game and the big themes as they take decisions on a day to day basis.