Manage Those Thrills and Chills
Diosdado (Dado) Banatao, Founder, Tallwood Venture Capital
Risk has always been in my blood, and it's a good thing, too, because I've been an entrepreneur, and now I'm a venture capitalist, helping other entrepreneurs get started. It's a natural for entrepreneurs to take risks.
I've lost probably as much as $350 million in a single day, and I've made as much as $350 million in the same time frame. As a young man, I took a risk when I immigrated to the United States from my native Philippines. Early in my career, as a design engineer for large companies, I used to tell my managers to give me the biggest problems, the most challenging projects.
And when my first company, Chips and Technology, went public, I saw substantial holdings and stock changes every day. I worried at first, but gradually - after about three or six months - I got used to it. When you're sitting on equity, it follows that you can gain or lose large amounts. What can you do?
Well, you can do something, and that is what I am here to talk about. Even as an engineer who loved to create things and make them work, I knew my limits. And I know enough now to impose limits on entrepreneurial risk taking. In other words, while riding the roller coaster - and accepting that it comes with the entrepreneurial territory - I work hard to manage the thrills and chills - as you must.
Although pushing the limits defines the company builder, managing the process gets the companies built. What follows is a look at how to manage the single entrepreneurial trait that appears most out of your control.
Listen to Your Gut
My first piece of advice might sound counter-intuitive: follow your gut instinct. Instincts are unmanageable, right? Wrong! Part of being a risk-taker is listening to - and relying on - your gut. And the reason it's manageable is that, as an entrepreneur learning to listen, you're listening from experience. While there are a lot of intangibles in company building -- a lot of factors you cannot control -- you do operate from a base of control that is your experience.
After a few years in the computer industry, for example, I began to get a feel for what would sell, who the big players were, who would make it in the next three to four years. And as a result, I was able to place my bets more carefully. No data out there will give you that; you just have to go with your feeling that a certain kind of product will click. Your knowledgeable feeling, that is.
I credit gut feeling for my wins in business. I make decisions quickly, because I have the feeling that something is right - whether it is the product, the market or the people. But I had to be in business awhile to get that kind of feel about what will work and what will not work.
Manage Risk to a Plan
Another tenet for controlling risk is to manage to a plan. From the peaks of the roller coaster, that sounds boring, right? Wrong! It's what makes for chills and not crashes. For every company in which we invest, we create an annual operating plan with 500 to 1,000 goals that we want to accomplish for the year. We review those plans very carefully on a monthly basis, noting what goals we have and haven't met.
The ability to change, and change quickly, is inherent in the task of managing to plan. When goals are not being accomplished, we are ready to make quick decisions, as you must be. Use these red flags as benchmarks to change the product, change the people or do whatever you have to do to point results in the direction of your goals.
A carefully charted plan will also enable you to reduce risk throughout the operational side of your business. While I am a firm believer in betting on technologically innovative - and thus risky -- new products, I keep the company's entire other side simple: such as its structure and the procedures in place for getting problems solved. When it comes to running a business, I stick to proven methods.
Minimize Financial Risk
The matter of financing businesses, of course, is where the rubber hits the road -- or should I say where wheels meet the steel and the incline is at its steepest? It's at this point that an entrepreneur's facility for managing risk often spells the difference between an enterprise that makes it and one that doesn't.
When I'm funding a company, for example, I bring in the deep pockets from day one, because when the economy is down -- like it is now - I might have to pass around the hat. If all of the investors are boutique operations, they may just walk away, leaving the fledgling company without the necessary additional resources. Managing risk, in this case, involves asking for enough money up front to ensure that I am able to continue to fund the enterprise.
Managing financial risk also requires saying no on occasion. Consider the now clichéd example of the dot-com fledglings of the late 1990s, with business models that didn't work. Back then, VCs poured billions into anything that moved with a dot-com in its name, and the rest is history. Talk about crashes! While I love technology, we VCs clearly overdid it.
Handling financial risk, therefore, isn't a matter of spending too much or not at all; it's a matter of managing the spending that you do.
As is entrepreneurial risk itself. While I love the challenge of pushing the limits -- going into the unknown and testing myself and seeing if I can do it -- I also respect the danger involved in doing so. And I adjust accordingly. Luckily, I've been right more often than wrong, so I keep on doing it. And I keep on managing it.
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