Let’s say you have a big, ambitious idea that you know can change the world – but you need capital in order to see it through.

How do you get investors as excited about it as you? There’s always the option to make a splashy pitch deck or generate some good press to show off your vision, but if you’re serious about getting investors on board, the best move you could make is adopting an investor mindset.

That’s where Eric Kim’s Risk-Reward Framework comes in.

Eric is the co-founder of the $5B investment fund Goodwater Capital. He’s built a rigorous process to pick a winning investment, and now he’s sharing it to help you determine how to achieve growth for your business.

Want to hone your "investor mindset" skills? Join the upcoming Investor Mindset Sprint.

Step 1: Start with your thesis

Think about the investment you want to make, and ask yourself the following question: “What could this investment be in its end state?”

The answer will be your thesis.

To make sure you’re developing your thesis correctly, you should make sure it reflects three qualities: aspirational, measurable, and achievable.

Aspirational

Are you thinking big enough? You want to envision something beyond incremental revenue growth and imagine a scenario where your company hits a home run. Think five to ten years in the future, and try to imagine the best case scenario.

Measurable

Now that you’ve set your lofty ambitions, drop in some numbers that can back it up. What’s the exact percentage of customer growth you want to see? How much do you want to be worth in five years?

Achievable

Okay, so even though we asked you to imagine the best case scenario, is it actually achievable within the laws of time and physics? If it’s dependent on facing zero-competition, that’s fine, but if it requires a wizard casting a nationwide hypnosis to fall in love with your products, you might want to rethink things.

To give you a sense of how this would world in a real-world setting, we can use Snapchat’s early days as an example.

Their thesis would be: Snapchat will be the best digital community for Gen Z consumers to connect and consume content. In turn, Snapchat will be the preferred advertising platform for marketers to attract gen Z consumers, leading to greater than $10 billion in revenue by 2027.

This is aspirational since it represents a scenario where the company is genuinely thriving, measurable since you can chart growth and revenue, and achievable since $10 billion in revenue represents a reasonable portion of the hundreds of billions spent on digital advertising each year, and the thesis gives a long enough timeline for this to take off.

Step 2: Find your key drivers

What would it actually take to move your thesis from an idea to reality? If you were to actually achieve market domination or unprecedented revenue growth, what would contribute to it? These factors are considered your key drivers.

Identifying key drivers can unlock valuable insights. Here’s how to zero in on them.

Deconstruct your thesis

In the previous step, we developed a thesis that was aspirational, measurable, and achievable.

This means, we can easily break it down into those three portions. Once you’ve completed that, you will need to brainstorm three or more strategic levers that would apply to each portion. These levers will be your key drivers.

In the Snapchat example, we can look at the aspirational portion:

Snapchat will be the best digital community for Gen Z consumers to connect and consume content.

Three strategic levers would be:

Network effects

More people joining means the platform becomes more valuable, so it will snowball.

New product features

If you consistently add new reasons for people to come back to the app, you can retain current users and entice new ones to sign up.

‍Relevant content

Curated content that appeals to the audience can establish Snapchat as a gen Z hub.

When you apply these steps to the remaining portions that are measurable and achievable, you will have a collection of at least 9 key drivers that you can bring with you into the next step.

Step 3: Pick your metrics

Companies are constantly surrounded by metrics. Every time you make (or lose) a sale, you have another piece of data that you can sift through in order to better your chances the next time around.

But when you start to build up a stockpile of data points and trends, it can start to feel overwhelming, and there’s always the possibility that you’ll dive down an irrelevant rabbit hole.

Luckily, in the previous step of the framework we identified a set of key drivers and you will only have to focus on metrics that apply exclusively to them.

Using our Snapchat example, we know that we’ll need to find metrics that address network effects, new product features, and content, so we’d start seeking out items like retention rates or paid v.s. organic growth.

Comparing yourself to potential competitors can help you put your metrics in context, and there are two additional criteria that can help you stay even more focused:

Timing

If you’re dealing with a newer company, you don’t want to compare yourselves to competitors who’ve been around longer, since they’ll oftentimes naturally seem to be doing better on paper.

Instead, rollback the clock and look at their metrics for when they were at your current stage.

Facebook or Instagram could be considered Snapchat’s initial competitors, so we would look at how both platforms were performing in their earlier days, not as the behemoths they are today.

Product-specific

Make sure you’re comparing yourself to the right competitors by looking at the products or services they offer.

While the Gen Z-oriented clothing company Shein might be trying to court a similar demographic, they’re offering a very different experience. Therefore, if you’re Snapchat, it would make sense to ignore them and stick to other social media platforms.

Step 4: Identify your key risks

Now that you have metrics to address your key drivers, you’re in a position to evaluate potential risks.

In this step, you’re going to want to be paranoid. You have a set of metrics applied to each key driver, and it’s your job to identify what could tank them, and in turn jeopardize your key drivers and overturn your thesis.

Let’s apply this to Snapchat.

We previously listed network effects as a key driver, and are using growth rates and customer retention as our metrics.

Now let’s explore what could go wrong. For starters, retention rates could peel back, which in turn would decrease the platform’s value.

Alternatively, growth could continue, but we might see the wrong types of customers joining the platform, like older audiences who would provide less compelling content and alienate our key demographic.

You should continue this exercise with each of your key drivers and come up with at least two risks for each.

While trying to imagine catastrophes may not be the most uplifting step in the Risk-Reward Framework, there is an added bonus that it can help defuse any doubts.

If the risks you identify are unlikely or not urgent, you can move forward with more confidence –  especially if you start to plan ahead, which you’ll do in the next step.

Step 5: Underwrite your risks

Once you’ve identified your risks, you’ll have a clearer vision of pitfalls you should keep an eye on in your metrics, whether or not your key drivers are succeeding, and if your thesis as a whole is at risk.

In this stage, you will research and evaluate your risks to understand their probability and magnitude. From there, you can underwrite them to determine whether you can accept each risk’s price.

In the previous step we looked at Snapchat’s network effects as our key driver, and identified two risks: declining growth and attracting bad-fit customers.

To evaluate these risks, you’ll turn to internal data, outside sources, or even performing your own customer research.

In the latter, you can survey customers and ask them straightforward questions, like “what is the likelihood that you're going to continue to use this product? Why do you love the product, or what would you improve about it?”

To address whether you’re continuing to bring in the right demographics, you can ask them questions that can help you build more consistent customer profiles, like their age, spending habits, and types of content they enjoy.

When you’ve applied this rigor to every risk, you’ll be able to decide whether it’s worth it to keep going, or whether you need to take a step back and reevaluate.

Taking a leap of faith

Your personal comfort-level with risk is admittedly hard to quantify, and even if you perform all these steps to the best of your abilities, you still won’t have concrete proof.

Sometimes, you will need to take a leap of faith. You might not know where exactly you’ll land, but with the Risk-Reward Framework, both you and investors will at least understand what’s at stake, and what’s to gain.

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Want to hone your "investor mindset" skills? Join the upcoming Investor Mindset Sprint.