This is somewhat related to my post yesterday about taking time off to reflect over my own financial future, and how to manage personal and business financial risk..
If there is something my previous forays into entrepreneurship taught me, it was that blind hope and enthusiasm will get you nowhere. The DRM business I tried to build some 5-6 years ago failed for a number of reasons, but beyond those reasons I failed on a personal level as well: at the end of it, I was nearly out on the street.
Why? Because I did not want to admit defeat, I lived on blind hope, enthusiasm and self-delusion for the last 3-4 months of it. Books on entrepreneurship often emphasize how the entrepreneur in the case study risked it all and came out winning, but they rarely mention those who lost it all: money, homes, and even personal relationships. Well, let me make one thing clear: if they risked it all without managing the risk, they got lucky, that’s all. In my case, I lost pretty much everything, not only what little money I had, but personal relationships too.
There are two qualities that are necessary for an entrepreneur if he is to rely on anything but blind luck: being able to be brutally honest with himself and others, and being able to judiciously manage risk.
Let me elaborate: for a more ambitious venture, its chances of being at least moderately successful may be 2-5% as a whole. But along the lifecycle of a venture, there will always be major and minor milestones of varying difficulty to achieve. Missing one milestone shouldn’t be the end of the world, and almost any new business will make mistakes, miss milestones and have to re-evaluate its business and business model from time to time. This is where risk management comes in: If you think you have an 80% chance of making a milestone, it might be worth risking a lot on it if it is valuable, but if the chance is only 20% it will only be foolish to risk it all.
If you miss a 20% chance milestone and only risked a small piece, you took the risk, yet you live to fight another day if you fail. But if you risked it all, there is an 80% chance that you will be completely wiped out! Given the riskiness and high-stakes of new ventures, living to fight another day and give it another try may in fact be a more valuable asset than hitting any one individual milestone. Why? Because new ventures are more of a process of trial and error, rather than a linear progress of events on a straight path to success.
Furthermore, if you do not manage your risk, and just blindly throw the dice every time, you not only lessen the chances of your business becoming a success, you also increase the risk of finding yourself completely wiped out and out on the street.
Admitting defeat in a single battle isn’t the end of the world, just as long as you live to fight another day.