#18: The Risk Spectrum: High Risk Case

06/08/2014
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This month sees the final instalment in my articles on The Risk Spectrum. So far we have already looked at low and medium risk case studies. Now we will look at high risk.

High risk is where everything you have learnt thus far is not directly relevant to your business idea, and in addition you are going in to a market you don’t know and which does not know you. This is really where you need to make sure that you have done your research before you start, so that you go in “eyes wide open”. I have two examples for you.

The first one was a lady who, from memory, was a junior in the fixed income operations area of an investment bank. She said that she had a one-off opportunity to turn her hobby into a business. This normally scares me, (alarm bells – potentially high risk) but I asked her to elaborate. Her passion was her garden and she had decided to open a florist shop. What this lady did is quite remarkable.

She identified a town which had no florist in the high street; she further identified there was a vacant retail outlet in a good spot in the high street. She then did some research and found a commuter town where there was a florist in the high street.

She telephoned; a man answered and she outlined her plan, said she was no threat to his business as she was so far away, and she asked whether if she came to see him, he would share his experiences with her. The man agreed and they met.

He told her everything – the mistakes he made; the things he would do differently second time around; how to fit the shop out; where to source materials for the fit-out, and likely cost; how to deal with suppliers and what tricks they played; what margins were available, promotional ideas that worked; dealing with seasonal issues, and how to deal with deliveries.

He explained about footfall count and the average amount people spent; this is hugely important if you think about it, as if you go into a florist you have already decided you are going to buy some flowers – it’s not like going into a clothes shop and browsing. So the footfall count is quite a good predictor of how many people you would expect to come in and the average amount that they would spend.

Armed with this data her next step was to head south and sit in a cafe on the high street, from which she could see her potential shop; she sat there all day Monday, all day Wednesday, all day Friday and all day Saturday. Monday was quiet, Wednesday was market day, Friday was really busy and Saturday was a typically manic high street day. Four different profiles in terms of footfall.

Monday to Friday she also stayed on into the evening, so she could pick up the commuter traffic coming home and see how many of them passed the shop. Now she had the data she could map it against the conversion ratios that the North London florist had told her. She also had the pricing model, and a costing model, so she could now create a set of assumptions from which she could create her financial forecasts and subsequently create a business plan.

She then went to the bank and said she was interested in taking the lease on the property, so that she could open a florist. She showed them her calculations, indicating that her savings and redundancy money would cover 50% of the start-up costs and 50% of the year one operating costs without selling anything and asked the bank to match fund her, which they did.

I can guarantee you that banks are not used to seeing a pre-revenue start-up submit a plan of that calibre with such robust assumptions that could be defended; moreover she had gone out of her way to eliminate, or at least reduce the technical risk.

Contrast her approach with that of an investment banker I met:

He was, articulate, well dressed and supremely confident. He was going to sell his property and move to Cornwall and run a guesthouse. When questioned about whether he knew much about the guesthouse business he said that he had stayed in one. Once.

Enough said.

If anything here resonates with you, or you want more information on high-risk cases and where you stand, please contact me. Or for help that is always to hand, why not read my books From Crew to Captain and From Crew to Captain: A Privateer’s Tale.

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