Here, we discuss two more questions asked by entrepreneurs
Where do I begin? What kind of risks should I be aware of before stepping out?
DashInsights by ‘Dash’ Dhakshinamoorthy
IN my previous column, I discussed the two questions often asked by entrepreneurs, revolving around the importance of attending events and if there was any merit in living up the entrepreneurial life.
In that article I put forward the concepts of the credibility gap and the importance of focus; being open to serendipitous encounters; and developing a healthy swagger.
In this article, I explore two other questions often asked by aspiring entrepreneurs: Where do I begin? And what kind of risks should I be aware of before I step out into the unknown and turbulent world of venture creation?
I continue using the fable of two senior monks sitting in a boat in the middle of a deep river teaching a young apprentice monk to ‘walk on water’ by knowing where the stones are. The stones we will be examining in this article are called the plunge decision and affordable loss.
Getting ready to step out of the boat and place his foot on the first rock which exists but is unseen, the apprentice monk asks, “What, sirs, should I know now before I take my first step into the unknown? How should I prepare my mind?”
Senior Monk 1, with penetrating eyes, speaks slowly to let his words sink in. “Your mind is a tool. You need to first learn how to use it like one and not get carried away by its dictates.”
“Having become aware of the nature of the mind, you will need to learn how to do the doable and then push further. To do this, begin with your basic means. Know who you are, what you know and whom you know,” continued Senior Monk 2.
The first step is to know you. The second very important step is being honest with what you can afford to lose.
Principle 1: Start with your means
Entrepreneurs start with their basic means. Rigorous entrepreneurship research carried out on experienced entrepreneurs informs us that they begin with three basic means within their immediate control.
For the typical successful entrepreneur, they are: Who he is, what he knows know, and who he knows.
In who he is, the entrepreneur is aware of his strengths, his limitations, his values and most importantly, he is not anchored onto any single mental model of problem solving.
He has a well-developed and confident way of shifting gears. Like a golfer who perceives the terrain and then decides which club he is going to use in his game, the entrepreneur is confident of shifting his mental gears to use the most effective tool available to him to advance his venture.
In what he knows, the entrepreneur is aware of his domain expertise and also his interests. He is also ready to stray and learn new knowledge, which he will eventually use to connect to benefit his venture.
In who he knows, he closes his credibility gaps on an on-going basis.
With these means, the entrepreneur begins to do the doable and then pushes it!
Becoming aware of these means and ready to constantly review, revisit and reinvent them, the entrepreneur is now ready to take the plunge, as our apprentice monk is, to step into the water.
Principle 2: Affordable Loss and Plunge Decision
Many years ago, I attended a talk in Penang by a once-entrepreneur, now corporate employee. He was sharing his wisdom of failures and how to handle it.
He said, “I raised US$1.6 million (RM5 million) from the government and other parties for my venture. Things did not go well, the venture failed and we lost all the money -- and here are the lessons ...”
It was an entertaining talk, no doubt, but I left feeling, “I could have failed cheaper!”
These are types of stories that put off many young people who do not have the connections or the wherewithal to raise money for their ideas. They get discouraged from becoming an entrepreneur. “How am I going to find the money to implement my idea? My parents are wage earners, I don’t have rich uncles or property.”
Corporate employees contemplating the entrepreneurial life are also paralyzed by this kind of talk – “Ah, I have bills to pay, kids to school and mouths to feed. Entrepreneurial life is not for me, even if I have a good idea.”
These are also the types of stories that reinforce the myth that entrepreneurs are risk takers.
Entrepreneurs are risk takers, yes, but they don’t leap before they look! Some say, they take “calculated risks.” Agreed, but what do they ‘calculate’ before they take the plunge? In entrepreneurial parlance, the decision to step into the life of venture creation is called the plunge decision.
Conventional MBA-type reasoning says that their calculation would go like this: “I need around $500k to start my venture. I hope to break even in two years. I have around $50k (credit card plus savings) to invest in the venture. I need to raise the remaining $450k before I take the plunge … this is even before I take into consideration the opportunity costs of forgoing my two years’ salary.”
If this thinking is employed, the plunge decision requires an almost accurate prediction of all the factors before the decision is made, and even then, what the entrepreneur arrives at is only a guestimate.
The assumptions are based on external factors not within the entrepreneur’s control. The assumptions can be rendered asunder by sudden changes in the environment.
So, checkmate. Risk capital providers will also shy away from investing in entrepreneurs who want all the money upfront before they take the first step to act.
Now let’s have a look at the reasoning that informs the plunge decision. This thinking goes like this: “This is my dream come true – something I wanted to always do. I think I can afford to take two years and invest my $50k in trying this out. In the worst-case scenario, I will lose the money and be back in the job market in two years. So, what they heck, let me do it.”
Here the entrepreneur has worked out what he can afford to lose.
“So are you saying all the tools such as the as the Net Present Value (NPV) of future earnings, etc., are useless?” you may ask.
No. The above tools are useful to inform the entrepreneur about the upside potential of the opportunity he is pursuing, provided everything goes according to plan. The affordable loss principle helps him determine his downside.
Affordable loss is more concrete and is not based on the fuzzy estimation of future events. Entrepreneurs can be motivated by the upside but to actually step out of their comfort zones to launch their ventures, they need to face up to the realities of what is it they can lose and lose comfortably.
This is what it means to take a “calculated risk.”
It is observed that wanna-be-entrepreneurs using the affordable loss reasoning are more likely to take the plunge than the conventional thinking wanna-be entrepreneurs.
So this knowledge can be used as a powerful mind-set change tool to inspire more people, including corporate people disillusioned with their respective corporate lives, to plunge into an entrepreneurial life.
Rooted in this thinking is also the concept of “fast fail” – failing and learning the lessons of failure quickly and cheaply within the affordable loss boundaries.
Affordable loss can also be used as a powerful tool to encourage angel investors to invest in young start-ups. Many a time, high net-worth individuals shy away from investing in tech start-ups because first, they don’t understand tech; and second, they think it’s all very risky.
By determining what they can afford to lose, these investors can be persuaded to change their attitudes in investing in start-ups.
Venture capitalists (VCs) maximize returns. By the time they get into the game, we assume the venture is well on its way to gaining traction and its theory of the business proven. The VC can then invest to take the venture to its next level where the maximum returns assumptions are a little less fuzzy.
So, start with your means, do the doable, understand what you can afford to lose, plunge and push further!
Dash has been an entrepreneur for the last 20 years and is also a start-up evangelist with connections to more than 100 start-up ecosystems around the globe. He is the founder of StartupMalaysia.org and co-director of the Founder Institute in Perth.
You need to know where the stones are
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