Never cross a stream with an average depth of 4 ft…

I was sitting at the table with investors interested in putting some capital into one of the companies with which I’m working.  The questions were around assumptions – are the assumptions you’re making in the business sound?  What happens if they’re wrong?

And the answer by the entrepreneur (okay, Lu Cordova), was fabulous.  “Never cross a stream with an average depth of 4 ft, it’s the variance that will kill you.”

What she meant by this is understand your variances, understand the best and worse case scenarios of all critical factors to your company.  I know you believe you’ll do $75 M in revenue in year 2, but what happens if you don’t?  What happens if you don’t close this round of funding?  What happens if the CEO you hired turns out to be a schmuck?  Run your model with the most plausible scenario, then the best case, then the worst case – and see what happens.  If you can stay afloat in a worse case scenario, you do well both in business and with fundraising.

Know your variances – it will keep you from drowning.  Great lesson by Lu.

2 thoughts on “Never cross a stream with an average depth of 4 ft…

  1. isn’t that scenario planning? shouldn’t that be part of any business plan?

    On the variances, i have a different take. Sure I won’t cross the river with depth variance nor will I fly an airline that says a 1% chance of fatal accident. But is it essential that the plan must have positive NPV even in the worst case (however low the probability is)?

    As long as the venture realistically considered the scenarios and their probabilities, a positive expected value of all the scenarios should drive the decision.

    Of course it depends on the risk appetite of the investors. For an investor looking at multiple projects, they are bound to pick a project that not only offers a higher Expected Value but with a risk profile that matches their investing philosophy.

    I wonder if any plan could stay afloat in the worst case scenario!

    Like

  2. My tolerance would be a lot less.
    Especially when I’m crossing one in my 4×4 (and u don’t know if any big “holes” are out ahead of u)

    U could wade it but then thats a bit similiar 2 ‘guessing the future’ in investment/business-land

    Lal

    Like

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