August 14, 2019
By Greg Warnock
We are all investors. If you consider the real meaning of the word, “investment”, I think it is accurate to say that we are all investors. An investment is an allocation of a constrained resource with the anticipation of a greater benefit in the future. The critical ideas are “constrained”, “anticipated” and “future benefit”.
If you have an unlimited supply of something, then you never have to choose between consuming it or using it for some future purpose. A magic seed bag that refills every night means I never have to choose between eating or saving for next year’s planting. No choice, no investment.
If the benefit is anticipated but not guaranteed, it is an investment. By implying risk, anticipation represents the second critical test in an investment. Arguably, since there are so very few things that are guaranteed in the future, most things we do are investments.
Finally, the benefit has to be in the future. This concept of deferment is the last key part of the investment. It’s the famous marshmallow test presented to children. Take one now or wait and get two later—current enjoyment postponed for greater future enjoyment.
In my life, I have been an investor in the traditional sense, I have allocated money, first my own, and later, the money entrusted to us by limited partners. We’ve put this money to work in companies that had the potential to return the investment many times over. In most cases, we made smart investments. In a few, the returns failed to meet our expectations. Regardless, this is the scenario that people think about when they think of investing.
I think this is too limited. Well before I invested any money, I was still investing. Everyone does. We invest our ideas, effort, time, money, trust, and credibility. We are all well-served to apply concepts of investment in our decision-making as to where we deploy our resources.
The most relatable constrained resource is time. The way we think about it, the way we talk about it, and the way we use it all highlight our awareness of its finite nature and the associated opportunity costs. As in everything, context is important in making decisions to invest. If I chose to spend 4 hours a day playing basketball, you would be right in thinking that I was not investing my time. I was spending it for pure enjoyment at the risk of a pulled hamstring. But in a different context, this expense could be seen as an investment. If you are a young Michael Jordan, just cut from his high school basketball team, burning hours each day practicing fundamental skills and building muscle memory is an investment. It’s an investment with outstanding returns.
Once you make a decision to invest resources, there is the question of “anticipated future benefits”. It really breaks down into two variables. First, there is the anticipation or expectation. You invest your time, money, reputation, etc. You must have some sort of expectation of the benefit of this investment. What are the odds? How can you minimize risk and maximize utility?
In financial markets, we are skilled at assessing risk and applying discounts to reflect them. In life, things are not so clear but there are some truths that can guide decision making. The company one keeps is often an oversized influence on the outcomes we see. We hold this as a principle that shapes our team at Mercato. As a companion to the growth-stage entrepreneurs, our team is composed of advisors and operators with practical experience. In our experience, we know the growth stage can be risky. Because we have a core of stage-experts, we can reduce risk through collaboration with entrepreneurs.
Because of our perspective and stage expertise, we also help growth-stage companies use time and capital more efficiently than they might on their own. At Mercato, we are built and focused on co-navigating through this exciting but often challenging time as quickly and safely as possible. This serves to reduce risk but also accelerates the anticipated future benefit.
We invest the capital entrusted to us but we also understand that entrepreneurs are choosing to invest their time and energy with us as partners. Of course, our fiduciary responsibility to our LPs is our highest responsibility, but we have found that the best way to do that is to act as a good investment partner to our entrepreneurs, sharing experience and resources beyond capital. By providing an in-kind return to our portfolio companies, we can improve the odds and the speed of an in-market return to our investors and our entrepreneurs.