Debt Free

In a note related to the previous post only in that it pertains to technological innovation and the market, I was sent a prospectus for a startup that is undergoing its initial round of investor financing. The firm was started by some PhDs that have developed some underlying technology to link RFID and GPS. They have impeccable credentials, all. The possibilities for this new technology are endless. You don't often get a chance to get in on the first round offering, but typically I'd take a pass on such things. I've seen countless startups that have gone nowhere, fast. I've even been part of couple. This looks very promising, however, for a few reasons.

• One, the firm has some solid IP in this very specialized area, and is developing a nice patent profile.

• Two, they are building basis for what could be a huge, heretofore nonexistent market. This type of technology has countless uses from inventory control to payment systems, in addition to the unimagined uses that are always found for new technologies.

• Three, it found its way to me from a very credible source, that is a heavy hitter in the commercial real estate market. His firm brokers real estate deals for skyscrapers and other huge, commercial and industrial spaces. So it may have some more credibility than others.
  

Even with this going for it however, there is still a very large chance it would, like most startups, either fail, or languish in obscurity for all eternity. Sadly, I'll never know, as I don't have the $50K cash required to find out. That $50K works out to about .19% of the company as it stands now, so it would be worth quite a bit if the business goes anywhere, or is acquired by a larger firm.

It all brings up how different people respond to financial risk. I am fairly risk tolerant, especially if I feel there is a substantial upside. I tend to weight my analysis such that there is a definite risk/reward relationship. If the potential return is greater, I'll take correspondingly more risk. If I had the liquidity to do so, I'd probably pony up the $50K, because I feel the chance for success outweighs the chance my kids' college fund would evaporate. My wife, on the other hand, is considerable more risk averse. She places greater weighting on the potential success or failure of a specific investment, and less weight on it's potential return. For her, and other risk averse individuals, the potential risk can outweigh even a very great potential reward. She'd pass on an investment opportunity like this every time. She's more of the blue chip / muni bond fund type of gal.

All investors perform this analysis when determining how to allocate their resources. We all do the same calculation in our minds every time we make a decision, investment related, or otherwise. Should I cross the street? Well, I can probably make it across to the Starbucks for my Carmel Macchiato and not get tagged by that taxi. I really think the Macchito would taste great right now, and I can run pretty fast, so it's worth it.

Be aware of your risk tolerance and be prepared to either temper it, or expand it's bounds a bit now and then. You might open up to some new possibilities.