Risk

One of the strategic differentiators of Schmied Enterprises are low risk solutions.

Why? It is a common anecdote that most Silicon Valley startups will fail. It is not completely true.

However, there are two main reasons of failures. They raise equity from somebody else’s profits. Profits are always less than the technically infinite central bank funding of investment banks. Capital gains of venture capital is spent on acquiring startups. Equity is sometimes invested something spiritual value, like arts. Equity is spent easier than debt that has a fixed repayment date.

The other reason is there is a branch of VC funding that is partly show business. They invest not just in the corporations but the people who build them. They hire coaches, stylists. They do artistic pictures, and they spread the word in the press. Such companies are the pride of Ivy league schools. Sadly sometimes startups are born to fail compared to the cool ones. Show business is part of this branch. It is not competing products anymore, it is racing companies and people for the same slice of show business viewer base.

I was building something different that is not the show business. Ideally green field businesses are founded on debt rather than equity. Many San Francisco startups are built on SAFEs. Consult with your financing professional on details.

Copyright© Miklos Szegedi, 2016.

Green field businesses rely less on the press but rather on their customers and mainstream marketing to grow. If it is not a slice of the fixed show business viewer base, it is less likely to fail. It is growth.

I collected a few ideas for business professionals on how to reduce risks. You can investigate these first before talking to a more expensive lawyer or finance professional.

Inflation is the major topic today. Lowering fixed costs makes corporations more elastic and less affected by inflation. Rentals, leasing and cloud services can all reduce your fixed expenses.

Products with fluctuating and seasonal prices are outside of core inflation, but they can affect the risks of corporations. Food and energy can be extended by adding fixed diversified revenue streams. An additional ADU building can sell snacks, to smoothen the revenue base when gas margins are lower.

Warranty issues, and breakdowns may require expensive insurance. Sometimes insurance is hard to find, like in the case of renewable energy supplies or electric vehicles. A higher debt face value used only when needed, may lower the actual interest rates to be paid. This may replace the insurance costs, except when it is required by law. Consult with a local financial professional, as reinvestment may require extra licensing.

Equipment and software has its own risks. Any asynchronous or complex logic can incur support costs later. Ransomware may leverage these to increase stealth maintenance costs statistically compared to competitors. Make sure you never pay for ransomware. It just fuels them.

Some companies collect debt assets into separate entities. Amazon Web Services is for example separate from Amazon.com Inc. This may be the benefit of value investors.

Predatory investors can be deterred by simple contracts, licensing, requiring red tape only when necessary like just using an LLC instead of a Delaware Corporation.

Vandalism can be prevented by checking neighborhood statistics, or driving around after midnight to see how many law enforcement vehicles are around, or what kind of people show up.

Upstream risks are the risks of commodities. You can check the bulk solar equipment pricing on Amazon as a baseline. A $1100 cost of a kW solar panel and inverters can be spread across 5 years, 365 days and 4 kWh sunlight per day in some places in California. This will give you a baseline of 15 cents per kWh. Obviously higher interest rates and structures can double the net present value of the investment making it rather 30 cents per kWh.

Upstream risks can also be offset by charging batteries, or deploying charging stations on properties with a for-lease sign for a long time. Such property owners probably will value adding some revenue to their mortgage payments with the extra electric grid capacity not used by tenants.

Downstream risks can also be mitigated. Underutilized grid capacity can be used by rental EV vehicles charged, when not in use. ADU Shops can be deployed nearby chargers luring people working remotely for meeting rooms or some focus time.

Capital can be raised through multiple investment banks. Multiple partners usually help to ensure that the contracts are standard.

Governments flooding in debt will eventually allow more capital to flow. Indebted governments would contract the tax base with higher tax rates. They will be more likely to ease regulations to give access to capital and debt markets. More companies will pay more income taxes that help to pay back government debt. This is an opportunity for minority small businesses.

Vis major cases can be handled by extra credit lines. An idea spread by George Soros, a New York investor was to allow zero interest financing while the pandemic disrupts retail businesses. Such a debt facility keeps mortgage payments eliminating the need of refinancing. Refinancing adds to the unexpected expenses when money is needed the most. Also refinancing always adds risks to the original investors deterring them from the markets.

Employment risks can vary. The solution is usually more reliable equipment. Low maintenance and low support cost devices always reduce risks and interest rates.

Offshoring of maintenance may pose risks by the money not coming back in a loop. Paying competitive rates of the originating country helps to reduce employment risks at home and at offshore countries while eliminating current account deficits. This will also limit the pressure on migration and risks on arbitrage as a result.

Please consult with a business, legal, or financing professional for details.

This article was revised on October 28, 2023.