"I don’t know whether to go ahead with this idea. There is an upside, but also so much risk”.
Not a week goes by without me hearing this from a client.
So let me tell you a story.
A couple of years ago, my husband and I walked into a Better Place dealership, considering buying a fully electric car at full price, bank loan and all. But we never went ahead with the deal. My husband, the ultimate risk-avoider, couldn’t sleep knowing he would need to take on a loan for a car, whose future was uncertain. But we still loved the car.
Fast forward a few months. We walked into the same dealership and signed on the same dotted line, this time for a pay-as-you-go lease option with an NIS 20,000 ($5,000) deposit. We were ecstatic.
Until the company went belly up. Four days later. Before we got the car.
As of this writing, we never got the car or our money back.
Yet there is an important business lesson to be learned that you can apply to your business.
Our two Better Place scenarios are a perfect example of business concept called affordable loss. It means identifying the worst case scenario for a business or a project and then deciding whether to take the risk considering that the worst case scenario can become a reality.
For us, the worst case scenario was Better Place going bankrupt. Six months ago, we decided that we were not willing to stake the full price of the car taken on as a loan no matter how much we liked the car. The second time around, we took a calculated risk. We knew a bankruptcy was possible, but signing a lease was a risk we could afford. (We might have miscalculated the worst case scenario – a Better Place bankruptcy before we are supplied with the car - but that’s a different story).
A solution based on affordable loss is different from how most business owners make decisions. Often people calculate the expected return and then make the decision based on how much they stand to gain. The results can be catastrophic, especially when you risk more than you can afford to lose. And it doesn’t apply only to money. If you have ever invested all your time, energy, and emotion into a project only to see it fail, you know the depth of disappointment I am describing.
A decision based on affordable risk cushions you against catastrophic failures. All too often we get to hear about people who invested all they had into a business venture and then, when troubles hit took out additional loans to keep the company afloat. In the end, the families were left with a huge debt they had no means of paying off. Obviously, this is not something you want to happen in your business.
How to Make an Affordable Risk Decision
- Identify the worst case scenario for your project. What is the most you stand to lose?
- Calculate the greatest amount of resources (money, time, emotional energy) you can afford to invest in this project, so that even if your worst case scenario plays out you will not be left stranded. Try to imagine now what will it feel like if you fail. Can you live with this failure?
- If you decide that you can afford to invest these resources in the project, forget the failure and go for it.
- Keep a positive attitude. The failure calculation is only an initial cautionary step. Your belief in the project and in your ability to pull it off is an essential part of your success.
Have you ever invested more than you could afford into something? Please share your story.