Dirty Secrets - How Pros Handle Risk
The elephant in the room.
Here is some bad news that nobody talks about. As an individual business owner your risk of loosing everything you’ve put into your business is much higher than you think.
Yesterday I was lucky enough to sit down with a successful venture capitalist. He is a small guy as venture capitalists go. Out of the 10 resurrections and 3 start-ups he’s been in with, he has had 3 winners, 4 break even and the rest were losers. By looser I mean he did not get his investment back. He shut the companies down or sold them for a buck. This is a successful businessman because he is able to spread his risk across a range of situations.
According to this fellow the following is the formula venture capitalists use when dealing with going concerns who are in trouble, bankruptcy or close to it. Across a portfolio of 8 rescued companies venture firms will make 35%. 80% of that return will come from 2 companies. 3 or 4 others will give the rest. 2 to 3 will fold with a complete loss of investment. This is considered standard in the venture capital industry across thousands and thousands of investments.
When it comes to pure start-ups the odds are worse. 5 of 10 will last 2 years. 2 of the 5 will last 5 years. 1 in 10 will make it.
How many companies do you own? How many start-ups can you afford to undertake?
The bigger players spread their risk across many opportunities. They also look to the people involved in each venture. In almost every great success or complete failure the determining factor is the person in the primary leadership position.
As the owner of a single business how do you mitigate your risk? Be financially smart. Don’t spend more money then you absolutely have to and then cut the amount in half and then wait until someone is screaming bloody murder. If you can live 5 years you may learn enough to about being business smart to be successful. If you don’t think you can do that, find a job working for someone else.
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POSTED IN: Business Plan, Finance, Starting Up
2 opinions for Dirty Secrets - How Pros Handle Risk
hhcv
Jul 19, 2007 at 10:44 pm
I wouldn’t call this a ‘Dirty Secret’ as much as following an age-old adage; ‘Don’t put all of your eggs in one basket.’
Perhaps, the only ‘Dirty’ part to this approach is that it is often at odds with the black & white (and clear cut) business-world view of the naive or new entrepreneur.
b5media - Summer Business
Jul 23, 2007 at 8:33 pm
[…] from Small Business Boomers explains how the pros deal with […]
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