Risk and The Non-Answer

A lot of asking questions as an investor is about evaluating the how of someone’s answer more than the what. A lot of what I look for is the non-answer. The non-answer is dangerous because it fails to articulate and quantify risk.

Venture capitalists evaluate risk. The discussion of a company can cover a lot of ground. When we get the discussion right, it really boils down to our ability to articulate the risks associated with a deal and evaluate them.

The key to successfully identifying and evaluating risk is frank discussion with an entrepreneur. If you can’t talk about the risks of a business with the person driving the business, who can you talk with them about?

That’s why I dislike the non-answer.

In the answer to the question, “what kind of traction do you have,” the how of the answer is as important as the what. An Internet entrepreneur who dodges this question worries me. It means that either the traction isn’t there, they don’t know the answer, or there’s something to hide.

Same with, “with the customer base you have, how do you scale?”

While I can evaluate someone’s approach to scaling given my technical background, I am not the best person to do so. That’s why I try to evaluate the how. A brush-off or a lack of directness in answering this question worries me.

“But I’m afraid to talk about the risks to my business, because the investors might not like them…”

The good investor, the investor you want to work with, will identify many of the risks to your business with or without you. The best entrepreneurs identify the risks to their business themselves, think about them, and discuss them with their potential investors.

They seek help. They say “I don’t know” when that’s the case. They surround themselves with people who remove risk.

It takes a lot of guts to have that discussion. But since we’re in the business of evaluating risk, it’s a productive discussion that we like to have.

Beware the non-answer. It doesn’t remove risk. It creates it.