Jess Larsen – You Should Never Speculate When Investing

Feb 9, 2021

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Jess Larsen started his finance career on a mergers and acquisitions team with Citi. Later he founded several businesses; the three companies he currently co-owns are Graystoke Investments, Graystoke Advisors, and Graystoke Media.

Jess was previously the Director of Special Operations and Intelligence Agencies practice for the management consulting firm the Arbinger Institute.

Ten years ago, he co-founded a charity called Child Rescue Association that combats child trafficking through prevention campaigns, aftercare support, and undercover rescue missions.

You can listen to him regularly on his podcast, Innovation & Leadership with Jess Larsen.

“Cash flow is king.”

Jess Larsen

Worst investment ever

When Jess was in his twenties, he left Southern California and went back home to Canada, where he started an energy-focused private equity fund. Then some friends got him and his small group of friends into a deal with a billionaire. They co-invested in a company with exclusive rights to bring renewable energy technology for small hydro from Europe. The company had big deals tied up with guaranteed investment contracts from the Ontario government.

Jess, his brother, and his partner did their due diligence, and everything was smelling like roses. The group decided to invest two and a half million dollars into the company.

Failing to have controls in place

One thing that Jess and the other investors failed to do was to verify what sort of a person the CEO was. They also did not have controls in place to determine how the CEO should use money from investors. They optimistically just assumed the guy would do what he said he would do.

Instead of using the money to install the first unit, which could make the business cash flow positive, he started 12 other projects just to claim he had a good portfolio going. He thought this would make his portfolio more attractive for fundraising. So while the CEO was chasing other projects, he ran the business out of money.

CEO manages to get more funding

Interestingly, somehow the CEO got a $50 billion public company to co-invest with the company. Jess tried to warn the new co-investors about how the CEO was running the company, but they chose to trust the CEO and invested $4 million. True to Jess’s prediction, the CEO squandered $4 million into useless projects that were not part of what he had promised his investors.

Lessons learned

Do not forget to think about the downside too

Do not get too excited about the upside that you forget to think and prepare for a downside. Think about a scenario where your investment goes sideways. What if you need to remove the CEO or minority shareholder? What is the process to follow? Factor in such essential details before you sign on the dotted line.

Cash flow is king

When you are cash flow positive, you have a runway to make mistakes, experiment, and still survive, and have another swing at entrepreneurship.

Do not let over-optimism make you forget about risk management

The over-optimism that turns somebody into an entrepreneur can sometimes be a hindrance in being an investor. It can make you relax and forget about managing your risk.

Andrew’s takeaways

There is no hack, shortcut, or secret to building trust; it builds over time

Do not just trust anyone right off the bat or after working with them for a short while. Always remember that trust is built over time.

Ensure there are controls within the company you are investing in

When investing in a company, ensure that controls within the business and on the money are strong. During your research process, find out if the accounts are in order and are updated regularly and on time.

Be careful about concentrating on growth at all costs

Growth for growth’s sake, and growth at all costs, often just end up in disaster. So when investing in a CEO, go for one who not only focuses on growth but on risk management too.

Actionable advice

Think of a higher return opportunity if you are looking for predictable ways to become financially independent.

No. 1 goal for the next 12 months

Jess’s number one goal for the next 12 months is to work closely with real estate brokers to get off-market real estate deals that meet the Howard Marks and Warren Buffett contrarian investment by buying current cash flow at a discount.

Parting words

“If you are willing to learn solid financial tools and techniques, you can improve a lot of other people’s lives.”