Here is something that caught our eye this week:
Thoughts on appropriate risk
The world of small business involves risk-taking.
In acquisitions, we work with limited information. Small businesses often don’t have the cleanest financial records, so we do the best with what we’re given. Operational data may be non-existent. If it does exist, it is not likely to be presented in a user-friendly format. We try to mitigate that risk by being very personally involved in diligence and through conservative valuations to provide a margin of safety if we make a mistake in our underwriting process.
In operations, we have limited bandwidth and capital. Without great (if any) historical data, most decisions based on operational data are (at best) based on a few years of data. When embarking on a new endeavour—new geography, new industry, whatever it may be—we’re not hiring teams of consultants to evaluate every possible idea, strategy, or opportunity. We do our own work with what we’re given. We mitigate risk by putting systems in place to gather useful data, hiring people who make thoughtful decisions based on limited data, and by testing new ideas with limited upfront capital commitments, so when we’re wrong, we haven’t lost too much money.
On the topic of risk, we recently read a Seth Godin blog, aptly titled Appropriate Risk:
We talk about risk like it’s a bad thing.
But all forward motion involves risk. You can’t find a risk-free way to accomplish much of anything.
Appropriate risk has two elements:
The odds of it working out are commensurate with the benefits.
The consequences of being wrong don’t eliminate your chance to try a different path next time.
We don’t try something simply because there’s no downside. Instead, we intelligently choose projects where the downside is understood and the work is worth doing.
Thinking about the downside associated with any given idea comes very easily to us. It’s often easier to dismiss an idea than to consider what might happen if it works out. For us, it’s a constant struggle to reasonably calculate the odds of the upside when making big decisions. That’s why we always focus on taking risks that might hurt us if they don’t work out—but definitely won’t kill us. From this perspective, it’s unlikely Chenmark will ever be a “bet the farm” type of company. It’s just not in our DNA.
That said, we have still figured out how to take the types of risks that feel right for us and move our company forward in our chosen space. After all, an object in motion stays in motion…and an object at rest stays at rest. And we don’t want to stay at rest.
Have a great week,
Your Chenmark Team