Investing 101: Risk management is poorly understood and even more poorly applied.
Here’s a simple framework I use to manage risk.
Imagine a barbell - weights at either end with a thin bar in the middle. In my opinion, risk is best managed in this way.
Here’s a simple framework I use to manage risk.
Imagine a barbell - weights at either end with a thin bar in the middle. In my opinion, risk is best managed in this way.
For me, early stage risk is at one end of the barbell and liquid, public market risk is at the other. In the middle are growth rounds, converts, PIPEs etc. ie anything that isn’t the other two.
For every $100, I divide it into a 45/10/45 allocation in the barbell.
For every $100, I divide it into a 45/10/45 allocation in the barbell.
Now here is the hard part...in the early stage bucket, I divide the $45 into 10 years because that’s how long it takes for an early stage deal to get liquid. I also need to hold back 1/3 for reserves (investing your pro rata in future rounds).
This leaves me with $3 to invest every year. At the early stage, there is a lot of failure - the loss rate is high so I would probably target 20 deals a year or a deal every two-three weeks or $0.15/deal.
At this point it‘s clear: I need to have a bias to ACTION.
At this point it‘s clear: I need to have a bias to ACTION.
If the team is good or the idea is good or both, I quickly rip the money in. I don’t overthink it because I have created a framework to manage the risk and allow myself to be lucky/right.
At the other end of the barbell, however, I try to do 5 deals with a <=3 yr payback.
At the other end of the barbell, however, I try to do 5 deals with a <=3 yr payback.
This means $9 per deal. Wow that’s a lot which then makes the opposite obvious: I need to have a bias to INACTION.
The bigger the check, the longer I take and the less prone I am to do anything.
The rest is opportunistic.
The bigger the check, the longer I take and the less prone I am to do anything.
The rest is opportunistic.
How can you apply this framework for yourself? Start by figuring out what your liquidity needs are and what sits on either end of the barbell.
Eg my barbell is based on stage. Yours may be based on sector (healthcare vs tech vs crypto) or instrument (Credit vs equity).
Eg my barbell is based on stage. Yours may be based on sector (healthcare vs tech vs crypto) or instrument (Credit vs equity).
No matter what it is, it’s not reasonable to invest without one. Doesn’t mean you won’t have losses or that the markets always go up, but there should be a spreadsheet somewhere with allocations and a plan...
Good luck!🍀
Good luck!🍀
• • •
Missing some Tweet in this thread? You can try to
force a refresh
