Hello coffee (and minimising downside risk)

If you want to get the best coffee in Apollo Bay (and possibly the best coffee west of Lygon St) you'll need to head to Hello Coffee.



It doesn't look much from the outside.


But it’s a great story with a powerful lesson.

It's owned by Gareth and Justin, a couple of dads who met when their kids were in the same class in the local primary school. And it’s located not on the foreshore, but in a shed in the Apollo Bay industrial estate (just follow the signs to the rubbish tip - you can't miss it).

What I love about their story is that it’s a bit contrarian (who starts a cafe in a shed well back from the beach in a beach town), but more so that it’s a great example of minimising downside risk.

This is something that Nassim Taleb talks about in Antifragile (as you might be gathering, I'm a bit of a fan). The simple but profound idea that when you make bets – with your time, money, energy, career etc – you should try to make bets that have a big upside but minimal downside.

Most cafes don't do this. They have an expensive lease and expensive fitout, lots of staff to pay, and a lot of coffee to sell just to break even. The startup cost for a cafe is typically anywhere from $500k to a couple of million dollars. And of course that's the downside risk, that you could lose all of it. The upside is also very limited – for a $500k bet you are not going to get a big multiple of that back.

I was asking Gareth about how much his cafe cost to set up. He told me it was less than $30k. The lease on the shed is $300 a week. They insulated it and painted it themselves. The furniture was donated or picked up on Gumtree. The coffee machine ($17,500 ... the one thing they didn't scrimp on was the coffee) is financed. The main things they had to pay for was the electrician and plumber.

Which all means the downside risk is low. If it doesn't work out, it’s not sending them bust. They're not betting farm on it, so to speak.

Part of the beauty of the cluster strategy in a practice is that each cluster (each offer to market) done properly is like a bet with very little downside. A successful cluster is one that gets to $10k a month. If you run that cluster for a decade that's over a million dollars. That's the upside. (Not to mention it might pop, and become a mega cluster doing $30k - $50k a month, but let’s leave that out of the equation for the moment).

The downside is some time and some social capital. When you launch a cluster, you should take it to market and try to sell it before spending any money on collaterals, design et cetera for that cluster. See if people buy it. If they don't buy it, then fail it before spending any money.

And then repeat. We recommend launching a cluster every quarter. That means over 3 years you can make 12 bets, each with a potential upside of $1M and very little downside. Compared to launching a business where typically you just get to make one bet, with much worse odds.

I know which I like the sound of better.

As they say in The Hunger Games, may the odds be ever in your favour.