The Second Principle: Affordable Loss

Taking Risks, Skype, Lego and Golden Chains

Most of us would agree that entrepreneurs are big risk takers. Some of them are willing to follow their idea no matter what. They put huge sums of money in projects. They hope that one day they will make enough profits to cover the initial investments. If needed, entrepreneurs will put everything on the line. But, who can tell that a product will sell, a concept will sky-rocket? Who can predict the future? You never know if your start-up will turn into the stock market’s next sweetheart or not.
That’s why we need risk management. We need Excel, business planning, scenario’s, market research, PowerPoints and what else to discuss and control the variables and to predict how successful we will be. Only after careful considerations and weighing of all the options we will be able to make a wise decision on whether or not to give the green light to a project.
Agree?

Wrong!
Good entrepreneurs are as insecure about returns on investment as anybody else. No one can predict what markets will do, or which disaster nature has waiting for us. So, instead of trying to control what is going to happen, good entrepreneurs just don’t take huge risks. They do take risks, but only to that amount that they are willing to put at stake. Entrepreneurs are willing to take a certain loss in case things go wrong, but they are not willing to lose everything. They are very conscious of what kind of risks they are taking. It sharpens their senses to become creative in finding solutions, opportunities and resources in other places than usual.

This is called the Affordable Loss Principle and is the second characteristic that Effectual Entrepreneurs have in common. (See my earlier post on Effectuation). Let me illustrate this with some cases from Brand Expedition.

“There is no future in making money on call minutes” – Gary Bramall, Skype

Most big telecom operators are making money on the seconds or minutes they can charge you for your call or SMS. And they need to, because telco’s invested heavily in high-tech infrastructure: cables, switches, servers, data centres and the like. The people at Skype recognised that this business model won’t hold for long in the modern communications age.

They came up with a system that uses the same technological idea as did an earlier invention by the Skype-founders, called Kazaa. This file-sharing service is based on peer-to-peer networking. So, there are no central systems on which all files are stored and network traffic is coordinated, but the disks and computers of the users in the network are used. Even when the number of users grows fast, Skype doesn’t need to do big investments in infrastructure. Users bring the infrastructure with them.

 “We greatfully benefit from the knowledge, experience and expertise of our fans” – Per Hjuler, LEGO

Making software is extremely expensive; you need very talented engineers, programmers and testers. At Lego they understood that software was not their core competence, but they saw a market for Lego Mindstorms, sets of the world-famous blocks that allow you to build and program your own machines and robots. So they invited their super-users at a very early stage to co-create the next version of products and software, thus controlling risks and costs.

Co-creation, or even a step further Open Source and Creative Commons, might give an entrepreneur the feeling that he is giving away his original idea and with that his competitive advantage. But sharing is in fact a very effective way to build a community, tap into the creative minds of people outside your organisation and develop your product faster than you would be able to do your self.

“Somewhere there is a point-of-no-return. You want to finish what you started” – Martijn Arets

During the summer of 2009, well before Martijn took off, he had a serious talk with his girlfriend on why and how he would do Brand Expedition. He talked about what it would mean to their relationship (being away from home a lot, traveling on his own), career (giving up a perfectly good job) and financial situation (no luxuries for some time, even selling some belongings). She agreed to support his undertaking and was willing to live with the uncertainties that came with the project.

So, Martijn didn’t just jump into a van and drove off overnight, like some romantic cowboy. In stead he made sure he had a clear understanding of what he would dive into. And so did his partner and anyone else who would get involved. Martijn wanted to know that no one had to carry any consequences that they were not willing to take.

As it turned out, he did have to take some losses. Initially, he figured that he might be able to cover some of the costs by finding sponsors. He didn’t raise all the sponsors he had foreseen. But since he wanted to finish what he started, he considered it an affordable loss and passed the point-of-no-return. He figured his creativity would bring him wherever he wanted. And so he did.

When asked, Martijn thinks that entrepreneurship is not for everyone, although the principles are all clear and quite straightforward. According to him, you should first be able to consciously estimate what is needed to start a business and what you might lose if things don’t work out. Secondly, you should be very passionate about what you are about to do, because that will drive your persistence, resilience and creativity during harder times. Next, you must be a team player, for giving and taking is very important in getting the help you will inevitably need. And finally, you should be ready to give up on some things.

Like those golden chains that tie you to that office chair you are sitting on right now…