Tagged: prediction

risk and its appreciation

It has taken a season to vet lawyers and accountants and assemble all the pieces for a business proposal. Could it be faster? Of course, but not given the current financial landscape and my lack of qualifications (being a math teacher doesn’t open up a world of connections in the adult world…). That’s three months of no income. I’ve read about other start-ups that haven’t had revenue for a couple of years, and they even have the audacity to promote a ‘lean’ business methodology. That’s not lean, that’s starvation-lean! And since they are heralded as successful on linkedin, it means they are being patronised by a parent company, and for me that’s cheating.

In business speak, I am now investor ready. Now it involves facing risk, or the perception of risk.

some basic math

The history of risk makes for fascinating reading, eg Against the Odds. I have always been drawn to the particular conceptual framework around probability. Three things stand out. First, teaching young minds probability is a real eye-opener. Any adult takes for granted that flipping a coin produces a 50/50 chance, getting an Ace of Spades 1/52. But this wasn’t God-given; this is mathematical application, and it doesn’t come naturally to young minds. Why not? Second, probability is contained within statistics, and I hate statistics since it is overly applied and misapplied. Third Bayes Theorem, something I have dived into over the years, and still have not been able to ‘tame’.

At the core of probability is time, at least for the applications that attract my attention. It is the perception of future events, a way to enumerate possible futures to help guide present decisions. This is fine for certain mechanical systems, eg cards shuffled in a deck. But not that useful for a system which involves consciousness. Just look at the Prisoner’s Dilemma, and thats a simple case. Its the capacity of participants to second-guess outcomes which elevates such systems beyond the complexity of purely mechanical systems. Whether it is a class of kids, or investors playing on the stock market, complex dynamics. Chaos Theory 101.

what is a business plan, after all?

It took me months before I realised what it is, or at least half of it is. Costs. A business plan is primarily a summary of future costing. It is the basic burn-rate of a company over the coming year, at least. That’s half of it. The other half is smoke-and-mirrors.

Whatever anyone says, a business plan attempt to forecast future adoptive behaviour — will people buy the thing or not? Sure, if your company is a new brand of ice-cream, there’s reasonable data out there to base your figures on; stock only one line on the shelf versus three wide, will influence whether the tub is picked up or not. But introducing the very notion of ice-cream is quite another — Steven Johnson’s mentions this in his excellent series which also makes for fascinating viewing.

When it comes to innovation, genuine market-creation, forecasting adoption figures is entirely speculative. Appreciation of risk is nowhere near a mechanical affair. And yet, it may have an equivalent level of simplicity to it, especially when faced with lack of evidence.

so how does an investor decide what to invest in?

I only know one bone fide entrepreneur who managed to win £110k from an investor match funded by Welsh government after months of stressing; within the year, the money was gone and he had established his original invention wasn’t viable — and he was going for a second round! A consequence of our current enterprise system is that once people invest, especially government bodies, it is hard to pull out until they get their return. Which results in investors and governments being reluctant to enter an investment relationship in the first place, introducing more checks and compliance tests at the outset, thus inflating initial costs. A nasty feedback loop.

This is biggest problem, as all entrepreneurs know, the stepped investment route. Originally, I asked for £30k, but this has grown to £60k, and it has been suggested I put together a £125k business proposal to reach the ‘lower boundary’ entry for VC’s. Again, what happens is that while the vast majority of entrepreneurs are ‘genuine’, wily ‘serial entrepreneurs’ know how to stay on the treadmill, just look at this outrageous trail of mayhem.

The consequence? The entrepreneurial scene, for investors, is like the stock-market. Few invest in the actual product or service of a company, it is merely a numbers game where stock goes up and down. The only difference being, perhaps, investors are betting on people, not companies. More like horse-racing gamblers than poker-players. And as a 45 year old ex-math teacher, I’m not the youngest horse in the paddock.

ok, what’s the simple answer?

It comes down to this: Has it been done before? If not, can it be tested, and how much will that cost?

Ecosquared is simple. Very very simple. And it is entirely natural. Given our current state of institutionalisation, however, it appears ‘counter-intuitive’ to the point that it is invisible. I watched Mel Gibson’s Apocalypto last weekend again, for all its flaws it is a truly remarkable blockbuster; have you come across the invisible ships proposition? A Gift-Economic evokes a similar response from members of a 3,000 year culture based on a transaction-economic.

Captain Cook's Risky Endevour?

Captain Cook’s Risky Endevour?

First and foremost, it takes an acute mind to see Ecosquared. Certainly, I have found paper to be a terrible medium; however, I do find that everyone I engage ‘gets it’ in person. Still, this requires effort because it is mistakenly understood as ‘an idea’ rather than ‘a tool’. Once we get a prototype, and people experience it, even a child will get it — why? because we all grew up in a gift-economic, its entirely natural.

Second and more importantly, it takes courage to appreciate it. For an intellectual, this means admitting how new it is. Experts find this hard because they make their living based on what they do know. For an investor, this means acting on it, ie investing.

Most investors want to know how they are going to get their money back. Which is entirely reasonable for most kinds of investment — new brands of ice-cream say. However, with market-creation, as we have shown above, the rules are different.

We got first prototype running for under £1500, and I use it to track my engagement with people. Didn’t turn the light bulb on with investors. So, approaching the end of £3k and close to second version prototype. It will be clunky, chances of it going viral are slim, but it will reveal a glimmer of its potential. To the right people this will be enough. Enough for a £60k experiment which might show a greater acceleration than any bit of technology in history.

And besides, in a gift-economic, risk is a misplaced factor. I will leave that for another post to describe.