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What's Your 'Affordable' Loss?

Posted by: Today's Tip Contributor on April 8, 2011

Loss? Are we nuts? Don’t we know your new venture has the potential to make you richer than Warren Buffett?

We sincerely hope it does, but all new ventures involve risk. That’s something serial entrepreneurs—those people who have started two or more ventures—know. And when you look at how they fund their companies at startup, you notice a very interesting thing. They have developed terrific ways to limit potential losses as they start new ventures.

That fact may come as surprise, since the popular press often gives the impression that successful entrepreneurs love risk. But that simply isn’t true. They don’t. They accept it as part of the game and are adept at reducing it.

They do that by never:

1. Investing more than what they can expect as a return.

2. Investing more than they can afford to lose.

Both of those ideas can be summed up with the phrase "affordable loss," a concept where you calculate the potential downside of whatever risk you are about to take—such as starting a new company or some other venture that is going to consume a lot of your time, capital, reputation, and/or other assets—and put on the line no more than you can and are willing to lose in any one of those categories.

The serial entrepreneur’s approach to affordable loss is good advice for the rest of us. So, as you prepare to fund your venture, you need to determine:

1. What are my assets?

2. What can I afford to lose?

3. What am I willing to risk (lose)?

Affordable loss does not depend on the venture, but the individual—which is why the answers to these questions vary from person to person, and may even vary during the course of one’s lifetime. You may be willing to risk more when you are young and have decades to recover should things go wrong, less when your kids are approaching college age and you need to save every dollar you can for those upcoming tuition bills, and then more again later on once those bills are behind you.

Employing the concept of affordable loss keeps your failures small. By definition, you never lose more than you can afford.

Charles Kiefer
Innovation Associates

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