How to choose a business partner
I am sure everyone loves investing in projects, whether technology startups or mining cryptocurrencies. Every project has its ups and downs, and you will only learn when bad things happen. I consider myself lucky enough to experience both the good and the bad sides of business partnerships, laying out a few lessons with concrete examples.
- It's a multidimensional problem
Choosing a business partner is not just looking at how good the friendship is between us, but a combination of several dimensions like finance, reliability, performance, risk, and so on. The number of dimensions can be infinite, but only a few of them applies to some types of businesses.
Furthermore, these dimensions interact and affect each other. For example, suppose you are happy to take a considerable risk. In that case, you might want to deploy rigorous performance tracking and focus on exit strategies in bad situations to mitigate the risk. Otherwise, if you take on a project with low risk, you may want to focus more on increasing the rate of return on your investment.
2. Performance over Promise, a.k.a Calling the bullshit
In my opinion, people promise means nothing if real historical data do not back it up. There is no reason for me to trust your 99.9% uptime promise if I haven't seen your historical data of running such a system in the real world.
People like to come up with excellent numbers, but one way to call it out is go deep into the implementations and keep asking questions. If you could request historical performance data, that's even better. Sometimes, you will find that they might grab those numbers from someone else mouth because it sounds convincing.
For example, one vendor comes in and says it costs $X to renovate your house in 2 months, and that's all you got, either agree or not. What you should have done in this case was: a) ask if he has done something similar before and the data about how it was done, and b) require a detailed plan on how it would be done step-by-step. If you have not done this beforehand, what's going to happen is that random problems pop up in the process of doing the project. For example, they might realize they have no storage to temporarily store the existing furniture while renovating the house to put it back later. And they will blame the "unexpected", while they could have planned for it beforehand.
3. Look at the founders!
People and company culture are what decide a company's success or failure. Therefore, you can infer the company's future performance just by analyzing the founder's behavior and mindset.
A founder that treats your partnership as a part-time job suddenly can't be any good since most of the time, he will be busy and ignoring your attempt to make the partnership better.
People also have their priorities changed. For example, they might be very dedicated to their project during covid-19 since they have nothing else to do, but after that, they get back to their favorite job, leaving you with no support. Or, people might drop the business altogether once they get married, and so on. Make sure you take future personal events into account.
Sometimes, you can follow your gut; if you feel this founder or their relatives keeps bullshitting and overpromising on other projects, in their relationships with other people, or not providing any value, then it's very likely that he will do the same on your project!
4. How risky this is?
I usually manage risk financially by the percentage of my portfolio spent on this vendor. For example, I might spend 20% of my money on vendor A while 3% of my money on vendor B.
If the risk is negligible, then congratulations, you can just forget about it and focus on more important projects.
As the risk increases, you need to develop backups and mitigations. In the case of mining cryptos, the risk is enormous because it's big money, non-tech part-time founders, unreliable vendors, and so on. Therefore, we should impose mitigations in the first place, both on ourselves and the vendor, which is discussed in the following sections.
5. Mitigate risk by raising the bar
I used to think that customers don't have a voice in changing other businesses' products; we either buy what they got or find something else. But I was wrong...
Take Google, for example; they assess every 3rd party tool they want to adopt by sending out checklists, asking implementation and security questions, and doing many assessment visits. After that, they have a list of requirements that the vendor must comply with to proceed, and they spend time and effort to be compliant!
You need a good brand or big money with promises to do this. So, as an investor, I think I always have to come up with a package that my vendor wants.
As another example, EMEA governments make cloud providers decide to develop custom solutions for operating cloud locally in EMEA countries. This happens because these governments want to run all their critical industry workloads, such as Finance, Government, Healthcare, Airlines etc. and created such a great deal.
On the other hand, VN unilaterally demanded cloud providers to store user's data within the country, without giving any incentives other than banning these companies out, which actually do more harm than good.
If you keep doing this long-term, you will not only avoid bad vendors but also build a solid personal brand because people will know that every business partner you choose is the good one since they must pass a certain threshold and assessments. Therefore, businesses might come to you for the partnership to get this implicit certificate that 'they must be good if they work with you. Same situation when Google is adopting 3rd party tools.
6. Mitigate Risk by better decisions
Raising the bar is only half of the equation, you could also apply mitigations from yourside to make your life easier.
In the case of super risky investment such as mining, which involves unknown founders, no historical data, and big money, you should invest a lot of effort in setting up monitoring and set up mechanisms to resolve underperformance cases and improve the systems over time (if the vendor is collaborating well). Otherwise, you need to prepare a backup (switching vendors if they deny to collab).
You can also try splitting down the initial investment to collect more data and facts about the business before committing more. For example, you could start with buying 3 mining machines, let them run for half a year so that you can collect all the data you need to decide whether you want to do larger investment later. This is less risky than buying all 15 machines at once.
You can also decide that the pricing scheme should be dynamic (e.g. you only pay for the service you receive based on monitoring) rather than static (e.g. you pay a fix amount every month). This is because you don't know how good the operation is, and there is a very high chance that they won't live up to your expectations.
When it comes to sunsetting the mining operation because the cost overweight the profit, you can decide whether to stop the machines completely, or keep running them until you find someone who wants to buy the machines. At first sight, it seems stopping saves more money because you stop loss. However, there is a risk of machines being easily tampered or swapped by people when not running, and I believe there is a high chance that we will lose even more when this happens, since they usually replace components with broken ones. Therefore, the better decision is to keep them running, which means you lose money, but you will lose more if you turn them off.
7. When to wrap it up
No projects should go on forever without a specific deadline and exit strategy for 2 reasons: a) Priority and the world changes rapidly, so at some point, it definitely does not make sense to invest in this vendor/business, and b) you cannot do budgeting without a time period.
Let's go through the mining crypto example. When we decide to go into this business, we should think of when to exit because, in 2 years, cryptos will switch from Proof-of-work to Proof-of-stake mechanisms, rendering all of the mining machines useless. Also, with the two-year deadline, we can calculate how much money we must save each month to afford the project.
8. Chaos Engineering
Chaos Engineering is a technique to test production systems by putting them under a lot of stress and constraints and see if they survive.
This idea can be extended to business partners and vendors by asking them about hypothetical situations and making them create detailed plans for each. This helps us assess their ability to deal with hardship and spot bullshits. Make sure you put these plans in the contract, so they stick to it.