Want success as an entrepreneur? Focus hard on your ‘affordable loss’
Saras Sarasvathy, an associate professsor of business administration at the University of Virginia, interviewed 45 successful entrepreneurs for her research. Successful in this case means that all of the entrepreneurs had taken at least one business public.
She found two things.
First, instead of focusing on goals, as written down in extensive business plans, the entrepreneurs focused more on the means and materials that they had at their disposal at the time, and then started to imagine about possible ends they could reach with these means and materials.
Second, most entrepreneurs were not thinking things like: ‘I’ll take this business public and make a killing.’ Instead, they focused on what they stood to lose, and the question: can I afford to lose that?
This is what Sarasvathy calls the ‘affordable loss’ principle. You ask how great your loss would be if you failed. If the potential loss seems tolerable, you can proceed to the next step in your venture, like starting your business, or at least taking some time to do market research for your business.
It reminds me of the old business wisdom: “Protect the downside and the upside will take care of itself.” (I don’t know who the original source is – I’ve seen it attributed to Donald Trump, John Paulson and Warren Buffett; if you know, give me a shout).
This suggests that instead of thinking about things like “what great market should we try to conquer”, the process of finding a startup idea should rather be something like this:
- Think about what your skillset is
- Think which marketable ideas or skills you can execute with them
- Check if you can afford the amount of time required to become (ramen) profitable
- Take it from there
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