From Herd Mentality to Peacock Power: Rethinking Risk
On a call this week, I heard two founders of a social business looking to help disrupt the lack of athlete funding and accessibility in niche sports. Their model was unique. That, they felt, was a problem. Most venture capital investors have a “thesis” that their funders (limited partners, LPs) approve. This thesis defines where they will and won’t invest. This project spanned real estate, sports, and technology. Real estate investors don’t get it, as they want predictable returns built on standard models (commercial or residential rental and sales figures). Sports investors are few and far between, but not mad about real estate. You get the idea.
What about flipping that narrative?
Peacocks live in places with lots of predators (South and Southeast Asia, and a variant in the DRC). Surely wandering around with a vast and cumbersome set of targets isn’t a smart evolutionary move. Yet, here they are, 120 million years later.
PEACOCK IMAGE
The reasons we should fail can be our peacock feathers (credit to Filip Fucic for the concept). What if the founders of the sports ventures stopped saying, “Most investors just don’t get it” (a self-fulfilling negative bias that was writ large on their faces). Instead, start saying, most investors follow the herd, sometimes off cliffs (many examples), others are unconventional thinkers and see opportunities the herd misses. Which one are you? Sure, you will annoy some people and bruise egos, but you might also appeal to those of us (probably most) who think we’re critical and independent thinkers.
Back in our in-house risk, sustainability, and compliance world, there can be so much pressure to do what everyone else is doing. Sometimes that’s sensible. For instance, fraud analytics and ad-hoc audits are highly effective early detection tools. But, some of the big stuff (long policies, that annual e-learning, and a third-party vetting system that even the UK tax authorities might consider complex), does that all work?
How might you suggest doing things differently by leaning into peacock feathers (the hard-won but bright and beautiful things your organisation does, despite risk)? For example, Virgin Atlantic took on the behemoth British Airways by being more expensive, but also a lot more fun. That spirit should translate into the risk function. What are your organisation’s peacock feathers, and how might you leverage them to do tedious/painful risk things differently?
Trick questions
In the investment/business partner triage tool we’re building, we’re being a bit sneaky. Over the past few years, I’ve learned a lot about how our optimism can be our undoing. Some sources suggest 1 in 4 of us will suffer from severe mental health issues in our lives. Yet, until it happens, few think “it’ll be me.” Same for other illnesses and accidents.
We’ve worked on ~15 renewable energy projects this year. In most cases, we identified a medium-to-high fraud risk. Last week, the polished DC lawyer acting as in-house counsel at one such firm said, “We don’t assess, monitor, or train people on fraud as we see it as a secondary risk.” The investor’s eyes widened and whitened rapidly. We moved on and asked about things like monitoring of subcontractors (contract awards, activity onsite, invoicing, etc.). Silence. Just another way of asking about fraud risk.
Back to the sneaky tool. Trade-based money laundering, like other frauds, is also very overlooked in some sectors (agribusiness, metals, commodities, etc.). When our triage tool asks if the investee faces money laundering risks and you select “No”, the logic collapses subsequent AML framework questions. But a few questions later (after some more general third-party questions), we ask about the client risk profile and fraud/transaction monitoring.
The intention is not about a “gotcha” moment; it’s more that we don’t think it’ll be us until people ask better questions. For mental health, “how’s your sleep, eating, stress, etc.?” For our work, we need equivalents - a few binary, more benign.
Here’s a sample of the output in the MVP. We will be opening the live version to a small group of testers and trialists (for free). If interested, you know how to reach me!
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