“Life, business, everything you do, every decision you make – it’s all about risk and reward!”
Bill Kaplan, CEO of FreshAddress, Inc. and founder and leader of the MIT Blackjack Team
In our previous issue of FreshPerspectives, FreshAddress CEO Bill Kaplan provided a bird’s eye view of why making risk management your #1 priority is an absolute necessity for succeeding in a world fraught with risks at every step you take. Utilizing the simple risk/reward framework below, the goal of every business looks easy – move opportunities from the High Risk/High Reward quadrant to the Low Risk/High Reward quadrant.
Knowing your goals, however, is only half the battle; understanding how to achieve these and executing on your plan constitutes the other half! In the balance of this white paper, Bill highlights five business principles that will enable you to focus on the High Risk/High Reward opportunities and re-jigger this risk/reward equation to minimize your risks and achieve unparalleled returns:
- Analyze Everything
- Build a Team, Not a Company
- Never, Ever Lose Sight of the Big Picture
- Always Bet in Proportion to Your Capital
- When You’ve Got the Advantage, Get the Money Out!
Knowledge is Power. One of the keys to the success of our MIT Blackjack Team was that we analyzed and tracked everything and ultimately we knew more about blackjack than anyone in the world. The same is true at FreshAddress – we know more about email addresses than anyone in the world.
With infinite information available at everyone’s fingertips, you need to know more about your niche, your industry, your clients, and your competitors if you want to gain a competitive advantage. Moreover, you need to share this knowledge throughout your company so that every touch point results in a learning experience for your customers. Know everything, track everything, and distribute this information throughout your enterprise and you’ll be amazed by the lack of risk-laden surprises that show up at your door.
Build a Team, Not a Company
If you want to win, successful coaches and sports teams know you need everyone’s eyes on the same prize. To succeed in business, you need to build a team, not a company. That is, you need to align everyone’s incentives to ensure your players (i.e. employees), your partners, and your vendors are all working towards the same goal.
For sports teams, one of the ways to build this team spirit is to have a common adversary (here in Boston, it’s the Red Sox vs. the Yankees). In business, that adversary might be your largest competitor. Moreover, your comp plans, vendor relationships, and partnerships should be structured so that everybody gets a share of the revenues with fixed costs as low as possible. With your business model built in this fashion, everybody’s a winner when times are booming. And when things are slow, you’re still in the money and everybody’s getting their fair share.
This model not only minimizes your risk but also ensures that everybody on your team is doing everything possible to help drive your revenues and bottom line.
The MIT Blackjack Team was structured so that compensation for our managers, limited partners (i.e. investors), players, trainers, and programmers was always a percentage of our profits, which were distributed approximately every six months. At FreshAddress, we use a similar approach, with a monthly net revenue share going to all employees, a quarterly bonus plan based on the team’s goals going to all employees, and relationships with our vendors and partners tied directly to our revenues. When everybody’s interests and talents are aligned, the benefits are endless.
Never, Ever Lose Sight of the Big Picture
Now that you’ve built a team, you need to coach them like a team, keep them in shape, and make sure they keep their eyes on the goal. At FreshAddress we hold weekly “learnings” on our own services, internal processes, new products in the market, industry “buzz”, our clients and competitors, and our up-to-date sales and client numbers to keep our staff as fresh and focused as possible.
On a management level, we hold weekly “Big Picture” meetings to review the strategies we need to employ to bring our goals to fruition. Whatever level you’re working at, it’s very easy to get caught up every day fighting fires, handling operational issues, and managing employee relations or other tasks that can lead you astray. Keeping your eye on the ball is the first thing you need to do if you want to catch it.
Always Bet in Proportion to Your Capital
There’s an old saying in the stock market: “Bulls and bears make money; pigs get slaughtered.” It sounds simple but losing sight of this simple principle has led to the economic crisis we face today. Home buyers took out no money down, variable rate loans in the hopes of making an easy score; banks overextended themselves on poorly collateralized loans and engaged in wildly speculative investments without adequate capital cushions; and the government looked the other way while building up huge deficits it could not afford to cover.
For the MIT Blackjack Team, our betting strategy at the tables was based on the size of our capital base, the level of overall risk we were willing to take (we set this at less than 2.5% chance of breaking even after 1,000 hours of play), the expected advantage (i.e. profit) for the player on each specific hand, and the variability of the possible outcomes for each said hand. By never betting more than a certain percentage of our capital at any given time and thereby lowering our bets as our capital shrank and raising our bets as our capital grew, our risk of ruin (i.e. losing all of our money) was theoretically zero.
At FreshAddress, we venture into new services, acquisitions, and other opportunities in a similar manner. Analyze the opportunity, mitigate the risks wherever possible but don’t bet the farm.
When You’ve got the Advantage, Put the Money Out
You’ve done your homework, analyzed everything, built a team, aligned incentives, and paid attention to your risk level relative to your capital. When the opportunity comes along, you can’t afford not to make your bet. Remember, if you don’t play, you can’t win!
It’s All About Risk and Reward!
Life, business, everything you do – it’s all about risk and reward! Follow the principles above and learn to re-jigger the risk/reward equation in your favor. You’ve got the advantage – now seize the opportunity!