Conviction vs Risk: What Happens if The Founders Are Right?

Managing downside and ignoring upside is risky business

In my first week on the job at Main Sequence Ventures I learned an important lesson about investing. We were assessing an opportunity and founding Partner Bill Bartee kept asking one question. The question was, “What happens if the founders are right?”.

This has become an important question for us when we review opportunities as a fund. What positive impact could this company have on the world? How big could it be?

The frame through which we look at an opportunity defines what happens next. We are focused on a possible win rather than dominating the consideration by worrying about a possible loss. Humans generally weight the avoidance of bad things over the pursuit of good things. If the frame is the upside potential, the process reveals whether the team can get there and what we can do to make that more likely to happen. If the frame is downside potential, then we find a long list of risk that makes most opportunities look unattractive.

The secondary effect of a downside frame is what happens to the founder when the questions are asked. Founders find themselves adjusting their perception as they squeeze into the frame. As they remove the risk in their planning and perception, they make their business a bit smaller, a bit less interesting, a bit less likely to succeed.

A downside frame leads to great opportunities being missed or made smaller and that is the biggest risk of all.