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The best advice I ever gave and the $25M I didn’t make from it

It’s not every day you help make someone $25M. Well … some self-important advisor types might claim they do this every day before morning tea, but rarely can we directly attribute something we have said or done to massive value creation. This is not an admission around a lack of impact, but rather a recognition that there are often many contributors and circumstances that combine to create wins, and our roles are more diluted than perhaps we care to admit.


Over two decades ago, I asked one question that directly led to a successful investment decision. My question resulted in a 180-degree change of direction, the result of which was reported in the press as around $25M of upside. I have no idea if this is accurate or not, but it is not overly relevant to the story. Let’s just say that lots of money was made.


I remember the conversation vividly. I was walking over a bridge in a foreign city, discussing the new business model of a very early-stage start-up. It was in fact pre-start-up. It was merely a business plan. I say discussing, but it was really more about me listening. My friend was listing the numerous reasons why the business model appeared to be flawed, why it wouldn’t scale and why the economics didn’t appear to stack up. It was almost as if he was trying to talk himself out of it.


Here was my one question:


"Would you prefer to invest in an A grade idea with B grade people, or a B grade idea with A grade people?"


Asked in this way, the answer is pretty obvious. B grade people with an A grade idea will find a way to screw it up, while A grade people with a B grade idea will find a way to evolve it and give it every chance of success.


The reality is that we don’t always know what constitutes an A or B grade idea. We like to think we know, but even the best VCs have a low hit rate. Still, we pretend that we can evaluate an idea purely on merit, applying our intellects to reason out what will be successful and what will not. Of course, if it were that easy, we would all be billionaires, either having started or invested in mega businesses. Yet, in the corporate world, we cling to the absurdity that we can apply our smarts and rationally predict where we can achieve step change growth.


I recall my friend nodding his head when I asked my question and a different look crossed his face. I could feel him evaluating the person behind the start-up, someone we both knew well. In a matter of seconds, I could see that his entire line of questioning had shifted. The more educated and senior we are, the more we tend to think that we have the answers off the back of experience and expertise. My one question took my friend outside of his intellectual frame of reference and pushed him to reprioritise his investment criteria.


I was a young 20 something, without a lot of spare cash, so I didn’t end up investing. Had I applied my own advice, I would have done quite nicely.


I see this similar pattern in virtually every client I serve. They tend to hero the power of intellect and smarts. We value those who can problem solve and find answers. Those people would never have backed the start-up. They would have poked the same holes in the business model that my friend was poking and concluded that the model was flawed. And it probably was. I doubt any massively successful growth idea has ever been conceived and executed in the exact same way. So why when it comes to step change corporate growth do we agonise over the business model, trying to determine if it is going to scale and create value? Imagine if we put the same rigour into determining in a corporate setting who is going to put their bits on the line and be the A grade team?


We rotate people in and out of corporate growth ventures, assign executive sponsors, and perhaps even incentivise initiative owners, and yet the rigour with which we do this is nowhere close to what we reserve for the so-called intellectual process of evaluating the business model. More often than not, the A graders in the business are busy running the core cash engine and are rarely spared for speculative growth plays.


My friend completely changed his investment rationale. He backed the founder and he made a lot of money. He reminds me of this conversation every time I see him. If only I was 10 years older when the idea came along, and I could have been first in like he was. I didn’t make $25M, but I did learn a valuable lesson. People are the difference. Great ideas are just that … ideas.

 

Sahil Merchant A proven entrepreneur, an innovator, and an expert in agility, growth and new talent. Founded and built McKinsey's digital and data practice in Australia and New Zealand.

 

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