Are You Risk Averse? You Could Be the Perfect Entrepreneur
Steven Berglas
, made a point that is worth elaborating upon.
Steve, a man who actually could give shrinks a good name, pointed out correctly that entrepreneurs aren't people who bet everything they own on one roll of the dice.
When it comes to gambling, entrepreneurs will play only if they use their own marked deck," is the way he put it.
There's a reason that 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 a new venture.
That fact surprises many people because if you read the popular press, you might well think that successful entrepreneurs love risk. Faced with the edge of a cliff, according to media accounts, they would prefer jumping off with a homemade parachute made of bed sheets to finding another way safely down.
That's simply not true. They like ropes and harnesses! More specifically, they prefer measured steps as they head off into the unknown and try to start their new venture.
They don't like risk. They accept it as part of the game and then work extremely hard to reduce it to a minimum.
People who have started one or more ventures will tell you: You need to know how much you are willing to lose before you even start thinking about starting something new. And you need to do everything possible to make sure you don't exceed that figure.
Successful serial entrepreneurs adhere to the basic principles of risk management: If you're going to play in a game with uncertain outcomes, 1) don't pay/bet more than what you can expect as a return, and 2) don't 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 acceptable to lose should it not turn out the way you want.
How could this concept work for the rest of us? As you prepare to take action, you need to ask two questions to make sure you stay within the bounds of your Acceptable Loss.
Now the costs we are talking about go beyond the financial. In fact, there are at least five classes of assets at your disposal and at risk
1.
Money
of course.
2.
Time.
3.
Professional Reputation.
4.
Personal Reputation.
No one wants to be branded a loser.
5.
Opportunity cost.
If you are spending time on X, you cannot be working on Y at exactly the same moment, and Y, potentially, could be a far better idea.
And entrepreneurs work extremely hard to limit all five.
It is worth staying with this point for one more minute, since it runs contrary to the image of entrepreneurs as people who constantly "swing for the fences," betting everything they own on new ventures. While that is sometimes true, most of the time it's not. In general, they either prefer the cheapest alternative or come up with creative ways of doing things at little cost to themselves.
And not only are they fiscally prudent, they LIKE the limitations Acceptable Loss imposed. As Joshua Herzig-Marx, a founder of IncentiveTargeting.com wrote on our blog, having a firm handle on your Acceptable Loss "is like walking into a casino with $50 in cash and no credit cards. Knowing how much you can lose, and trusting yourself not to exceed that amount, frees you to have more fun."
Acceptable Loss does not depend on the venture, but the individual. It varies from person to person, and across the course of someone's lifetime. (For example, you may be willing to risk more when you are young, knowing you will have decades to recover should things go wrong; less when your kids are approaching college age and you need to save every dollar you can for those upcoming tuition bills; and then more later on once those bills are behind you.
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 he were to go down the usual path, he would do in-depth research to estimate not only the size of the market, but 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, in part to offset the uncertainty in his situation.
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 all in 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 data base is going to be a huge expense.) My projections show this is the biggest potential market that matches my skill set. And they also 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, someone using the concept of acceptable loss would have a very different interior monologue.
"I am 46. 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 6 months until I get some revenue. In the worst case, and 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, or 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. 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 must be 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."
And as you can see, Acceptable Loss frees you to focus on immediate options that generate more options for the future. This will only work, of course, if you are willing to adjust the shape of your venture. ("I'll do something to serve the recently minted MBA market" as opposed to "I'm only interested in a job-matching service for recently minted MBA with a technology-background.") In other words, if you adapt to your means, rather than remaining fixated on one specific goal you end up having more options to pursue, and money to pursue them.
The takeaway is simple: If you hate taking risks, you are ready to be an entrepreneur (or act just like one within your organization.
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