9 out of 10 businesses fail.
Just tell someone you are thinking about starting a business, and likely that is one of the first phrases they will utter in your direction. A well intentioned warning cry to keep you from gambling away your future.
A encouraging friend may hopefully proclaim that you will defy the odds and succeed! You will be the one in ten that “lucks out” and makes it big.
That’s how most of us see entrepreneurship. A big gamble with the odds not at all in our favor. Something only big risk takers do.
All the risk taking was trained out of me early in life. I wanted the safe route. A good job in a boring industry. You show up, you get paid. Sure, I wanted to do a good job. Get promoted. Do all the things. But safety was my calling card. No risk taking for this girl.
But all along I was taking risk. I just couldn’t see it. Risk was hiding in plain sight.
My job was really a system with a single point of failure. One that I had no control over.
It felt safe because month after month that check was deposited into my bank account. Never once did the check not arrive when scheduled. Why would I ever think about doing something that failed 90% of the time?
But now I realize I was looking at things all wrong.Now I know, that you can fail 9 times out of 10 and still win, if you play the right game. Click To Tweet
Our Mind Focuses On Probability
It seems like a crazy idea to do something that succeeds only 10% of the time. No one wants to lose most of the time. But what if the payout for success was huge, and when you lost, you only lost a small amount?
Imagine we had a 10 sided die. We had a one in 10 chance with each roll of falling on a given number (just like the 1 in 10 chance of business success). If we roll a 6 we win. If we roll any other number we lose. Would you play this game?
Winning vs. Losing
I couldn’t tell you if I would play unless I knew how much I could win and what it cost to roll each time. If you could win $1 million for each time you rolled a 6 but it cost you $1 each time you rolled any other number, wouldn’t you keep playing until you won? You wouldn’t really care that you lost most of the time.
How fast would you scrape together as much money as you could to roll as much as possible?
Forget probability. Think expectancy
Expectancy is probability times payoff. In the game above it’s clear that you have positive expectancy.
$1,000,000 x 10% = $100,000
$1 x 90% = ($0.90)
$100,000 – $0.90 = $99,999.10
If something has positive expectancy, if you have the ability to stay in the game long enough, your risk is reduced to almost zero.
What if we changed the numbers? What if when you rolled a 6 you won $100,000 and any other number you lost $15,000. Would you play this game? Gamblers would. You shouldn’t. It has a negative expectancy. The only way to win this game is through luck.
$100,000 x 10% = $10,000
$15,000 x 90% = ($13,500)
$10,000 – $13,500 = ($3,500)
So how does all this relate to entrepreneurship? It all hinges on whether you are playing a positive or negative expectancy game. You don’t want to rely on luck to win. Set yourself up for the win from the start.
Stack the deck
The first rule is don’t lose! Super obvious, right? But that isn’t typically the first thought in our head. We tend to think about how much we can win. Successful business owners think about all the ways they can lose first. Not because they are a glutton for punishment. They want to change the expectancy equation. When you think about what can go wrong, you also think about how you can prevent that from happening. Or if it does happen, how can you course correct. You lower or eliminate the cost of each non winning roll.
Rule #1 – Never lose money. Rule #2 – Never forget rule #1. – Warren Buffett
Know the numbers
When we were playing the dice game, I gave you the numbers before you rolled. What if the numbers were only revealed after you rolled? How long would you play that game? You might be convinced there is a roll that will pay you $1,000,000 only to discover that the big win was $10,000 and it cost you $20,000 every time you lost. You have to know the numbers before you can decide if you should play.
Stay In The Game
The market will ultimately decide if your business fails or succeeds. The key is to stay in the game long enough to figure out what the market wants and how to deliver it with the right numbers. Play the game long enough and success becomes the most likely outcome.
Prepare for failure but make success the most likely outcome.
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