How to Start a Business–Today
There is a reason seasoned entrepreneurs don’t think of themselves as risk takers, even though everyone else does. They have developed terrific ways to limit potential losses as they start new ventures.
They adhere to the basic principles of risk management: If you’re going to play in a game with uncertain outcomes–such as starting a new business–then you never:
1) Pay/bet more than what you can expect as a return, and
2) Pay/bet more than you can afford to lose.
Both of those ideas can be summed up with the phrase Acceptable Loss, a concept where you consider the potential downside of whatever risk you are about to take–such as starting a new company or some other venture that is going to consume a lot of your time, capital, or other assets–and put on the line no more than you find it tolerable to lose should it not turn out the way you want.
What has worked for these successful entrepreneurs will work for you–providing you understand this is NOT how we were taught to think about risk.
I used this example in a book a couple of years ago. Let me reprise it here to underscore the difference about what used to work (and no longer does) and what to do today.
Let’s see how Acceptable Loss plays out in practice.
Consider the case of a man in his mid-40s who is thinking about quitting his high-paying job to start his own company. If our potential entrepreneur were to follow the typical reasoning governing risk we have all been taught, he would do in-depth research to estimate not only the size of the market, but also all the risks and challenges he might face (competitors, changing market conditions, etc.). The more potential risks/challenges he believed he was up against, the more money he would raise, to help offset the uncertainty.
Given all this, he might say, “I’d better do a business plan. (Months, maybe years, pass while he does research and prepares the document.).
At the end of that time he says, “it looks like I need $1 million total to start my idea of creating a service that matches recent MBAs who have a scientific background with high-tech employers. (Creating and maintaining the database is going to be a huge expense.) My projections show I’ll break even in two years. I can put in $100,000, which is all the money I have saved and can get from family and friends. So, I need to raise another $900,000 before I can start. That’s assuming I can live without a salary for two years, and that I’m okay giving up all the money I would have made at my day job.
“Let me think about that over the weekend.” (Some 72 hours later:) “Okay, I’m in. Let me start raising that $900,000.”
In contrast, for someone using Affordable Loss reasoning, the idea of getting underway is far more important than having a fixed goal, because they understand they have no idea of knowing ahead of time whether their idea will truly work as imagined.
So, their interior monologue sounds like this:
“I am 46 and I am just not certain how long I am going to have a job. I’ve always wanted to be my own boss. By drawing on my own resources, and borrowing from family and friends, I have $100,000 I can commit to finally going off on my own. I need $50,000 for expenses and $50,000 to live on for the next six months until I get some revenue. In the worst case, the company I start goes under and I lose every dime. If that happens, I’m out the $100,000 and go back to my old job–if it is still there–or I get a different job within the industry and figure out a way to pay back everyone I borrowed from. I am willing to risk that. If I end up losing the money, so be it. It won’t be the end of the world.
“But, if I don’t take this risk now, when am I going to do it? I don’t want to wake up 20 years from now and be one of those people who talk about ‘what might have been.’ It’s a sad thing to have regrets about something you wanted to do but never did. Even worse would be being fired 10 years from now when I will probably be too old to be hired by anyone else.
“My family is on board with me taking the risk, and while I know every new venture is a crapshoot, I feel pretty good about this. I am going to do it and adjust on the fly if I have to. My basic premise is right. There is an unaddressed opportunity to serve the MBA market. I think the job matching idea has a lot of promise, but if it turns out a website is better, or a newsletter or whatever, that’s what I’ll do, once I am underway.”
I doubt there is any reliable formula that can provide security when venturing into the unknown and make it more likely for a particular effort to succeed. But there is absolutely no doubt that Affordable Loss will reduce the cost of failure (should there be one).
If you fail, you fail cheaply. That means you still have some resources left to fight another day.
