Blogroll
2 Nov 10 Following Your Dreams With a Stop Loss
There’s a lot of talk about “following your dreams” and taking entrepreneurial risks, and I for one applaud anyone who takes the plunge into the great unknown to try to make something out of nothing. I’m sure most who do, even when they fail eventually feel that it was worth it.
But as we all know, sometimes things just don’t work out for us for one reason or another, maybe the timing was wrong, maybe we didn’t get the execution right, maybe we pursued the wrong idea down a blind alley, or maybe someone else was just better. I personally have experience from this, which reads pretty much as “Entrepreneurial newbie mistakes 101”:
Back around the time I was finishing up university I started a business with some friends. That sentence contained the first mistake: At least one of the founders got to go along for the ride simply for being my friend. Then we focused too much on technology and too little on getting customers. And we thought getting funded was the be all, end all goal, so we built a business around impressing VC’s, rather than getting paying customers. And so it went on and on, basically a carbon print of what young kids who are not dry behind their ears do when they get a startup situation horribly wrong.
Wishful Thinking Isn’t a Business Model
My greatest mistake wasn’t the startup in itself though, my greatest mistake was living on wishful thinking for far too long. I didn’t have personal discipline enough to set up clear and time boxed milestones, I didn’t adapt the business direction based on market feedback to generate meaningful revenue sooner, I lived in a fantasy world where I thought by some magic sooner or later something would happen that would set everything on a path to predestined success.
Epic fail. I ended up with a business in need of liquidation, in debt, with a pile of unpaid bills and in a situation where I was stealing toilette paper from public toilettes to be able to buy noodles so I could afford both a clean ass and at least one meal a day. I think I lost about 20 pounds/8-10kg in a matter of weeks due to malnutrition, and I was lean before. Clearly I had let things get out of hand, my wishful thinking had taken me too far down the road for me to manage a soft landing. Had it not been for the good grace of my father and mother coming through for me when I owned up to how bad things where, I would have been in really bad trouble, most likely ending up on the street.
Clearly wishful thinking wasn’t a viable business model or business plan.
Apply a Stop Loss To Any Risks You Take
In financial/investment language there is a concept of “stop loss orders”. In practice this means you set a predefined price below purchase price for a stock you hold at which you simply cut your losses and walk away. It’s a means of defining up front what sort of loss you are prepared to take on an investment.
Though the term comes from stock trading, I think you could and most definitely should use it for most risks you take in life, entrepreneurial risks in particular. Knowing and defining up front what you are prepared to put on the line beforehand will enable you to land more softly than I did in the instance I just described. What your limit should be is probably a personal issue, maybe it’s when you have savings left to sustain you X months on a normal spend so you have time to find a job if things don’t work out, or maybe you can be flat broke and move in with your parents as long as you’re not in irrevocably deep debt. It all depends on what sort of personal safety net you have, how much of it you want to use and how hard a hit you are prepared to take.
But you should definitely make up your mind up front what your worst case scenario is, what the worst thing that you can tolerate is, so you know to quit if you get there, rather than continue on into the abyss.
This may all sound pessimistic, won’t it presuppose failure and undermine your success? I guess that depends on your mindset and perspective. Personally I see it the other way around: if I know how bad the worst case scenario is, I can think “what the hell, if that’s the worst case, let’s go for it!”.
