Becoming An Entrepreneur Is Less Scary Than You Think (A Case Study)

It may seem like a distant memory, but it really wasn’t all that long along that working for a large company was the safest thing in the world. You traded a reasonable day’s work for a reasonable paycheck and lived happily after.

Well, that was then, and endless “right sizings” and layoffs are now.

Today, you’d be hard pressed to find anyone who hasn’t thought about going out on their own.

If one of the reasons holding you back is the perceived risk, read on. Striking out on your own may not be as scary as you think, say the people who deal best with an unknown future.

Go Right to the Source

There’s 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.

Yes, of course, the cliché is they always leap before looking and bet everything on one roll of the dice. But in reality that isn’t true. Successful serial entrepreneurs adhere to the basic principles of risk management: If you’re going to play in a game with uncertain outcomes—such as starting something new—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 those entrepreneurs will work for you—providing you understand this is NOT how we were taught to think about risk.

In the predictable world we were all trained in, you spend a lot of time estimating the size of the prize—the financial rewards of pursuing a particular opportunity—and optimizing the plan to achieve what those in the finance community call “the expected return.”

The logic is straightforward and looks something like this:

1. Analyze the prospective market and choose segments with the highest potential return.
2. Develop and optimize the plan for your product or service to achieve that return.
3. Calculate the costs in money, time and resources of achieving your goal.
4. Then discount whatever figure you came up with to account for the fact that nothing is certain.

If you work at a big company, this should sound very familiar. It’s a logical result of years of conditioning designed to “maximize shareholder wealth.”

While it makes enormous sense in a predictable setting, this logic is just silly in the face of the unknown. (We will give you an example in a minute.) If you use this logic there, all you end up doing is making projections…on assumptions… that are contingent on guesses….

Finally you pretend that you are creating certainty by multiplying the whole thing by something less than 100% to compensate for uncertainty in order to end up making seemingly rational decisions.

But the more uncertain the situation—and as a quick glance at the daily newspapers show, the universe seems to get more unpredictable by the moment—the more this math is foolish.

And that explains why entrepreneurs, and other creators use an opposite logic, that of acceptable loss. Instead of focusing on Expected Return—or how much they could possibly make—their attention is on Acceptable Loss—how much they might lose, should things not turn out the way they hope.

Employing the concept of acceptable loss keeps any failures small. By definition, you never lose more than you are willing to.

             Limiting the downside is almost always good

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 data base 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 6 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 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.”