I’m Still Not Pissed
You may remember the “not pissed” person from season 3 who had identified a problem that we weren’t in a position to solve. The takeaway was that this person was right, but not right right now. Because in a perfect world, we’d solve every apparent problem. But the world, as we all know, is not perfect. We have finite resources, trade-offs, opportunity costs, and oh-so-many other contexts, and that’s why many problems can go unsolved for some period of time.
This reality came to light in another context again recently when I got a call from someone we know running a business he’d recently acquired. He had the opportunity to make an aggressive investment that he was pretty sure would pay off great. The context, though, was that the business was already mildly levered from the original transaction and he’d have to borrow more to fund this investment. While he was friendly with the bank and thought they’d play ball, the maturity on his line of credit was around the corner. The worry was that if he borrowed and made the investment and it didn’t play out as he expected, the business might violate some covenants on the debt and the bank might non-renew the line of credit. This would put the business in the precarious position of now needing to do everything it could to get back into compliance and those efforts could be counterproductive with regards to helping the new investment pay off.
I told him I didn’t think he should do it, which frustrated him (but he was “not pissed”). That’s because he was “pretty sure” the investment would immediately start paying off great. Given that context, what was the move?
“Well, how pretty sure are you?” I needed to know.
“Pretty pretty sure,” he said. “Like 75%.”
“But not 100%.”
“Not 100%, no. And there is a chance, due to circumstances outside of my control, that it could go really poorly.”
“Ok,” I said. “If it goes really poorly, are you betting the company?”
“No, not at all,” he said. “But I would need time to recover.”
And that was the key point. When we dove in there, he estimated that the business might need 9 months to get itself back onto really sound footing and that while it was doing that, it didn’t need to be risk managing a concerned bank that might pull or change the terms of its funding. So where we landed was that while this was a good investment risk to take, it wasn’t perhaps a good investment risk to take right now. From an order of operations standpoint, the path forward was to renew the line of credit and then take the investment risk. Then if the investment went poorly, the business would still have the time it needed to course correct before an outside actor could change its course.
This is a simplified example, but it’s to demonstrate the point that when it comes to taking risk, timing matters. One aspect of that is asking are we prepared to take this risk? And I think that’s pretty commonly done. But another is asking that if we take the risk and it goes poorly, will we have the time we need on the other side to recover? This, I think, is less common, but more important. Because if you have the time you need to recover, you may not need to be as prepared, which might lead to more risk and therefore potential more reward.
– Tim