This is an excerpt from Redefining Success: Still Making Mistakes by W. Brett Wilson. Copyright (c) W. Brett Wilson, 2012. Reprinted with permission of Penguin Group (Canada), a division of Pearson Canada Inc.
I enjoy a drive to innovate. I love to do things that haven’t been done before. To do things in ways different from the ways others have done them. No new product or service would exist if someone didn’t have the courage to try something new. But innovation involves taking risks.
The key lesson or aha! experience I got from my entrepreneurship studies was that entrepreneurs are not risk-takers per se (as I mentioned in respect of the decision to start on my own), but rather that they view risk differently. Entrepreneurs have to be confident and tenacious but they also need to do their homework. I think every great entrepreneur thrives on calculated risk. Entrepreneurs simply perceive risk differently.
Risk isn’t something to be feared, it’s something to be managed. In the early days of my first business, Wilson Mackie & Co., Inc., there were times when Jamie and I had to break piggy banks to make payroll. A second mortgage on my home and an operating line of credit got me out of a few tight pinches in terms of covering operating overhead.
Taking Calculated Risks
Early on in the life of FirstEnergy, a client with whom I had developed a close personal relationship offered us the opportunity to finance their purchase of 10 per cent of an oil company operating in South America. I saw it as a very risky investment because they didn’t control the asset, and warned the client against moving ahead. I argued that because he couldn’t control the property, and didn’t know who the partners really were, there were too many variables to make the investment opportunity attractive, regardless of the upside. He thought about it, and decided that the property had too much potential to let pass. Rather than buy only 10 per cent, and based in part on my belief that we could finance assets such as the one he described, he decided to mitigate the risks of minority ownership by buying the whole property! He called me late one Friday to see if we could back the new deal that had finally come together that morning. He needed a deposit of $5-million by the following Tuesday, and so we had to figure out how to finance the deal over the weekend. The client and I spoke a number of times and then met on Sunday to talk through options. He drew out the whole deal on a large cloth napkin (which I still have).
He drew the country, the maps, the oil properties and he explained the exploration upside. Trusting his innate intelligence, and having confidence in my own instincts, I committed personally to invest $1.25-million (which was pretty much the extent of my available wealth at the time), which in turn convinced one of my wealthier partners to commit another $1.25-million. We were halfway there.
Then I went to the rest of my partners and said something like this: We know that no retail client or institutional investor will ever touch this deal based on the facts. The assets are in South America, and the buyers have never operated in South America. In fact, they’ve never actually drilled any oil wells outside of Canada. The father-and-son team doesn’t yet have a CFO. Or a management team. On top of the money they’ve already put into the project, they now need a $5-million deposit by Tuesday. There is no research published by anyone on the company and it has a market capitalization of less than $20-million. We’ll lose the deal and the relationship if we can’t raise the rest. It’s a bet on the father and son. An unconventional bet, for sure. Any interest?
Over the next few hours, my partners committed personally for another $1.5-million bringing us to $4-million in hand. Together, we made some calls, and eventually found four institutional or “private wealthy” orders totalling the final $1-million. The additional financing was leveraged entirely on the strength of our team’s personal orders, which in turn came on my faith in the entrepreneurs we were backing. By the time Monday afternoon came around, we had raised the $5-million. The issuer knew that in the normal course of affairs, this funding would have been almost impossible to arrange, and that we had just made a huge leap of faith in backing them.
Over the next five years, that initial investment grew in value by more than twenty times. As partners, we took a huge risk on a father-and-son team and a foreign project that no one else would touch.
A lot of people (including my partners) questioned the logic of the investment, but for me it was a calculated risk. I trusted the client and believed they could pull it off. I knew that no one else would invest the money they needed. The South America deal was the biggest and most lucrative deal of my career to that point in time.
As FirstEnergy, we effectively became the founding financiers of this company when we helped to raise $5-million when their company was valued at $20-million. And we were the key M&A advisor less than five years later when we sold the company for almost $1.1-billion (yes, that was billion ). Obviously a lucrative relationship for all involved.Report Typo/Error