Losing Can Be Useful, If You Learn To Get Good At It

Successful entrepreneurs are crazy risk-takers, right? Not so much. The best know precisely how much they can lose—and what they can gain from the process.

Here's news that won't stop the presses: doing anything in the unknown entails risk. Given that, you need to decide how much you can afford to lose before you get under way. There is a way to keep those losses to a minimum and guarantee that if you fail, you fail quickly and cheaply while learning a lot. (And, after all, that is the second-best outcome.)

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.

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 or bet more than what you can expect as a return, and (2) don't pay or bet more than you can afford to lose.

Both of those ideas can be summed up with the phrase "acceptable loss," a concept in which 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 acceptable to lose should it not turn out the way you want.

How acceptable loss works

As you prepare to take action, you need to ask two questions to make sure you stay within the bounds of your acceptable loss.

• What can I afford to pay to take the next step?

• What am I willing to pay to take the next step?

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: This is the most obvious, of course. Getting a new venture up and running can be costly, and you don't want it to be, if there is any way to help it.

2. Time: You want to guard your time just as much as you guard your money. And just as you have a dollar figure that you think would be "acceptable" to lose, you want to have a time limit as well. ("I am willing to give this idea up to six months to see if it will work.")

3. Professional reputation: If you are seen as someone who doesn't anticipate obvious problems, or who can't conserve resources and use them properly, that failure can seriously hurt you in whatever you do next. You may find it far harder to raise money or even to get another opportunity. Damage to your professional reputation can be a huge loss.

4. Personal reputation: Moreover, one of the primary sources of resources for your venture comes from your family and friends, and you certainly don't want to waste their money (and your good graces), especially if it comes from your in-laws. And all the time you will be spending on the new venture will keep you away from kith and kin, so you want to choose whatever you plan to do extremely carefully to make that loss of spending time with them worthwhile.

5. Missed opportunities: If you are working to start venture X, you cannot be working on venture Y at exactly the same moment, and Y could potentially be a far better idea. You want to be mindful of what you are choosing not to do and you also want to recognize other forms of opportunity cost: The price to be paid for not acting right away—someone else might conceive and implement your idea. And the price to be paid for inaction—you might spend the rest of your life in a job you hate or miss a great opportunity to make a once-in-a-lifetime contribution.

Starting with few resources

Just think about all the technology companies—Hewlett-Packard and Apple among them—that began, at least metaphorically, in someone's garage.

And not only do they often start on the proverbial shoestring, serial entrepreneurs commonly do not do much traditional research before getting underway. Instead they often take a prototype to the nearest potential customer and, in an attempt to receive an order, describe in elaborate detail the ultimate features and benefits.

Why? You learn a lot by how those potential buyers react. You find out where the obstacles are, what questions customers and potential customers have, and what you could charge. You might even get some cash. So the market research is actual selling. And the fact is that until someone buys your widget, the idea for creating a new company is imaginary. Not until the first sale is it real.

Winning by losing

The concept of acceptable loss can provide more opportunities to start new businesses for the simple reason that you are likely to get more times at bat in the same elapsed time. Why? First, there are lower costs to get under way, so you can start sooner.

Often this means you get the market's "reality check" sooner. Second, because of lower costs, you can stay in the game longer and can rapidly adjust as you proceed. At any point in the journey, if you decide it isn't going to work, you quit. That also limits your loss. Both those elements mean that if you fail, you fail fast and cheaply. That frees up resources—both time and money—for you to try something else.

Even if you start a new venture and get to the end point—defined as reaching the limits of what you were prepared to lose—the decision to quit (either because you no longer have the desire to continue or the market isn't interested in what you have) isn't fatal, since you didn't risk more than you could afford. It is simply time to regroup and think about what you want to do next.

Entrepreneurs like to get started quickly with the means at hand. How they can start quickly is really pretty simple: when you want something and your next step is within your means and within your acceptable loss, the most natural thing in the world is to act. Under these circumstances, it is really unnatural not to act.

This is the secret of seasoned entrepreneurs and why they seem so impulsive. They drive the cost of their next step down to the point where it makes no sense not to act, given that they imagine accomplishing something they want. They construct and play a game in which no one decision is likely to be fatal and where moving quickly and correcting mistakes as you go along are more intelligent than overthinking.

The recipe for acting quickly is really pretty simple: make sure that this is something that you want and get creative to devise an acceptably inexpensive next step with the means immediately available to you. If you do these things, the next thing you will find is that you are taking action.

Reprinted by permission of Harvard Business Review Press. Excerpted from Just Start: Take Action, Embrace Uncertainty, Create the Future. Copyright 2011 Leonard A. Schlesinger, Charles F. Kiefer with Paul B. Brown. All rights reserved.

[Image: Flickr user Luigi Anzivino]

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1 Comments

  • Gregg Freishtat

    Great read.  Having founded, funded, and built 4 VC backed started from inception to sale I can fully endorse this post as being spot on.

    Gregg Freishtat
    CEO, Scribit