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Two Ways for Entrepreneurs to Manage Risk and Avoid Losing Their Shirts
Author: Andrew Neitlich
One habit that separates successful entrepreneurs from unsuccessful ones is managing risk. This article suggests two important tactics that every entrepreneur should lock in place in order to avoid losing their shirts.
First, set a stop loss and don’t invest a penny more than your stop loss. A stop loss is the amount of money you will commit to the business before calling it quits. If you reach your stop loss, it is time to move on to other opportunities.
For instance, the best gamblers bring a set pool of money to the table and quit if they exhaust that pool. Meanwhile, less sophisticated gamblers keep adding money to the pot, thinking that they will eventually catch up. It is these gamblers who lose their houses and families and are addicts.
In my case, I have started around 10 businesses. Two have failed, and could have ruined me if I hadn’t set a stop loss in place. In the first case, my partner and I had a brilliant concept for an online subscription-based service that we thought would make us rich. $160,000 later and we were still struggling to get customers. But we had set a stop loss and decided to move on to other things.
Similarly, I also started a professional mixed martial arts league, setting a stop loss at $150,000. The first show lost $10,000. The second show lost $40,000. Rather than continue, I saw that I’d only creep closer and closer to my stop loss at this pace, and just shut the business down. This was a difficult choice to make, because the business was fun, stroked my ego, and enhanced my status in the community. But the bottom line numbers didn’t justify continuing, and the bottom line should come before ego in business.
To set your stop loss, consider everything you need to invest to get the business started. Then double it. In each of the above cases, despite the due diligence I did, unanticipated expenses and delays still came up every time.
Second, spread your risk. Ask people with a stake in the business to contribute capital, time, or resources. For instance, in the fight promotion business, I did my best to find investors among beer wholesalers, famous fighters, equipment vendors, and people serving the MMA fan demographic. If you can’t find people to share the risk, then it is likely that your concept or business model is not very sound.