When it comes to the future, what we don’t know far exceeds what we do. It is uncertain. But that doesn’t mean we don’t try to prepare. As investors, we spend a lot of time evaluating potential risks during diligence and of our portfolio companies. But when considering future vulnerabilities in 2019, we could not have predicted the large impact events of the last few years.
While we identified the “known” risks, such as regulatory timelines, technology risks, customer adoption, or competitive landscapes, we were certainly not seriously weighing the possibility of a global pandemic, or a land war in Europe, or how inflationary pressure might impact the ability to raise capital, or the failure of a 40-year old lending institution to the start-up sector. These are Black Swan events.
I am a big fan of Nassim Nicholas Taleb, who calls himself a philosopher, trader, and writer. He has written five books that all explore the topic of black swans in different ways. In his work, he defines a black swan (an event that is unpredictable, has a major impact, and is rare) and discusses why these events will increase in the future. But perhaps most importantly, Taleb explores how we can create a framework that minimizes vulnerability to black swan events while offering opportunities to disproportionately benefit from them.
Black swans can be both positive and negative, from the terrorist attacks of 9/11, the 2008-09 financial crisis, and the 2011 Arab Spring, to the inventions of agriculture, the alphabet, the printing press, and the internet. By understanding the structure of a black swan event and taking certain organizational steps, we cannot only make ourselves more resilient to the impact of black swans but take advantage of the positive outcomes. Antifragile is the term that Taleb coined to describe something that is not just resilient but actually benefits from the volatility of black swans.
How to Become Antifragile
So how does a person, company, or institution become antifragile? Taleb provides four strategies: Look for or invest in optionality; make investments with open-ended payoffs; invest in people, not business plans; and make sure you are barbelled.
Look for and invest in optionality.
These are investments in which you have the right, but not the obligation, to participate. Making many smaller investments that don’t require follow-on investments if they don’t pan out enables an organization to focus on the winners and abandon the losers. This is easier said than done. Failure at anything, whether a product or a small investment, can be financially and culturally challenging for an organization. But having the ability to make multiple investments and walk away from some subset of them has to be a structural component of an antifragile organization. A few examples of companies that have successfully built this into their DNA are 3M’s 30/4 rule, where 30 percent of the company’s profits come from products launched in the last four years, to Google’s policy that up to 20 percent of their employees’ time can be focused on passion projects.
Make investments with open-ended payoffs.
Look for investments with a capped downside and uncapped upside, or an asymmetric payoff structure. These are investments where you risk losing a maximum of 1x of your original investment but have the potential to make ten or 25x that amount if the investment is successful. For example, Facebook acquired Instagram in 2012 for a billion dollars, and next year, Instagram is expected to drive 52 percent of Meta’s $50 billion in ad revenue.
Do not invest in business plans. Invest in people.
When we invest in business plans, we tend to invest in one specific outcome or opportunity. But it takes talented people to find the optionality or the hidden gems in an opportunity. With AWS, Amazon didn’t set out to launch a cloud storage business. But once they built the tech, employees saw the opportunity to create a lucrative revenue stream and were empowered to start a business after demonstrating the financial case. Today AWS drives most of Amazon’s operating profit.
Make sure you are barbelled.
This means having the core of your company, or 90 percent or so of your efforts or assets, in safe investments and putting 5, 10, or 15 percent of your resources in maximally high risk/high reward opportunities. That way, if any (or even all) of the risky/asymmetric investments fail, you are not putting the entire organization at risk of blowing up.
With these four rules of thumb, I would challenge executives in private and public companies to think about positioning themselves to take advantage of the opportunities in today’s market. The pattern of innovation and investment of the past few years resembles the tech boom/bust of 2001 and the clean-tech boom/bust of 2011. Since the beginning of 2022, we have watched private and public capital markets retreat and watched some of the recent darling IPOs fall from their peaks. Funding in the food and ag space has certainly tightened, and some are questioning whether the initial spike in investments was just a fad and if there is money to be made long-term.
But as funding recedes, companies are forced to get more creative, build businesses with less capital, and find new ways to go to market. Some of the most valuable companies in the world today have emerged from the dot-com boom/bust and the clean-tech boom/bust. The increasing capital costs made existing and new entrants find ways to develop innovative business models, technology, manufacturing methods, and commercial mindsets to build revenue-generating and ultimately profitable businesses. Both sectors have matured and have since seen impressive runs in value creation.
The future for food and ag is similarly bright. The sector is experiencing its 1.0 moment, but the innovation I see today is increasingly creative. Four or five years ago, the question was whether we could achieve major technical breakthroughs in the food and ag space, such as farm robots or cellular-based proteins.
Today we know we can create those technologies, and the focus today is doing so more efficiently. Entrepreneurs are finding ways to reduce capital and operational expenditures while accelerating customer value-add, improving unit economics, and mastering go-to-market plans. I have never been more excited or more bullish on the opportunities that today’s entrepreneurs and leadership teams are pursuing to make the world a more sustainable, healthy, and just place while generating excellent returns for their stakeholders.
