Be afraid, be very afraid (of the bank)

A friend just sent me an email saying he was thinking of getting a line of credit from the bank, where they will almost certainly demand that he sign personally, which can put him at risk a lot more than he wants.  My response:

Hi Mark, something to consider:

 See if you can borrow from a "person", not a bank. It is easier than you think.

 Even if the paperwork is EXACTLY the same, here is the difference: When something goes wrong (note i didn't say "if" - things go wrong way too often to not provide for it), the bank cannot work with you; the nice guy who gave you the loan has moved on, or there is a different loan committee, etc.; remember, there is no such thing as "the bank" -- there are only the bank employees you happen to deal with.  No matter how much they want to help you, they need to keep their jobs and not get in trouble, so they are not likely to try something "different" just so the bank can make more money; even if the bank loses money, that's okay as long as "it ain't their fault".

But-- you can almost ALWAYS make a deal with an individual: "uh, we can't pay you back on this million dollar loan, but how 'bout we give you 50% of this $3M building with an option to buy it back within a year for $1.2M"?

Get the point?-- great deal for him, keeps you alive.  Banks can never make that kind of deal.  The magic that will save you when things go wrong is most often in the thought given to the structuring before the deal goes down.  

The Millionaire Next Door? Yeah, right...

More and more I am becoming aware that the success of a business has a lot more "luck" in it than most people realize.  I am defining luck here simply as things beyond your control, whether those are factors you know exist (but don't know which way they will go) or factors you don't even know exist.

If your goal is the process of going for it, so you are having mucho fun whether or not you and your company make any money, then for sure, you are ipso facto successful -- until your inability to pay the bills and endure the polite disdain of your more successful acquaintances force you to quit and get a real job.

But if your goal includes a certain level of financial gain (and the shiny toys), then be wary about putting too much reliance on the traditional "Millionaire Next Door" keys to success.  You know the ones: hard work, perseverance, etc.  Why?  Because the entrepreneur living next door to you on the other side is likely to have those same admirable traits, except that he's broke (and conveniently not mentioned in the book).

Just be aware that sometimes a lot of what makes a venture succeed is beyond the control of the owner.  Of course you can't be lucky if you aren't in the game, but you have to figure out a way to stay in the game when things don't go your way.

How?  Limit your downside.  Do it objectively, by imposing very simple rules on yourself.  Some of the rules I have seen are so simple they are simplistic. For instance: "When I lose $10,000 I quit." or "If I don't show a profit in six months I get a daytime job and continue for another six months in the evening, and if there is no profit at that point, then I quit." or "I will only buy houses that are in this neighborhood".

There is a reason that you want your rules to be simple and definite.  It is very, very difficult to limit the role that your emotions play in your supposedly rational decisions.  If you set up complex rules, it is too easy (and too tempting) for you to interpret those rules to come up with the answer you viscerally want; after all, you are going after this with heart and soul, right?  But if you will, in a moment of before the fact clarity, realize that when you are in the middle of things, you will probably be (too) emotional if things don't go well, then you have to -- before you get "involved" -- resolve to follow whatever simple, unambiguous rule or rules you laid down and committed to during one of your rare earlier moments when you were thinking objectively.

What percentage of whether you make it is beyond your control (and awareness)?  We don't know; that's the point.  But we still have to make decisions in the face of that uncertainty, and we have already decided we are going to be in the game, so here are a couple things to consider:

#1. Scalability and Uncertainty (luck, good or bad) tend to go hand in hand.

If something isn't easily scalable, then there is room for a lot of people to make a living at it.  Accountants, attorneys, psychiatrists, etc. only have a certain number of hours they can work.  Those professions resist attempts to scale.  There can be thousands of people who are better than you are at what you do and you can still make a good living.  The role of luck is much smaller in these enterprises.

Musicians, authors, artists, junkyard operators and trash collection companies are in another category.  At one time their endeavors were  thought to be individual and local.  When I was a professional musician, we looked down a bit at other musicians who had a day job; now almost all of them do; venues that used to host five piece bands now have one person playing along with pre-recorded tracks, or simply use a DJ.  Trash collection companies and junkyards have been "rolled up" across the country and a lot of those industries are controlled by just a few players.  Knowing what you are doing in these businesses often isn't enough to be successful.

At the farthest end of the scale are the Google type enterprises.  Wild, wild returns for the few that make it, but virtually nothing for the rest.  Ask 99% of the actors in the Screen Actors' Guild.  They are easy to find; at least one is apt to come up to you with a smile when you sit down to eat at any civilized restaurant in New York City or Los Angeles.  His first question will usually be to ask you what you would like to drink.

#2. Live to Fight Another Day.

If you are really swinging for the fences and it will take all your money and all your time for a potentially huge payoff, and if you are comfortable that if you don't make it you can be on your pauper's deathbed and still be content, then by all means, go for it.  But if you are like most of my friends (who like their toys), find another way to do it, or don't do it at all.  Maybe look for an investor who will put up some money for half of that dream of a Google-like payoff, or bring in somebody else who will work his rear off for half of the dream, or sell the idea to somebody else with you sharing a percentage of things --- if they work.  Do something, but be reluctant to bet everything on that hundred to one shot.

Why?  So if things don't work out you can live to fight another day.  Many of the people with whom I deal, whose businesses are doing well, understand that instinctively.  Many of them are on their third or fourth ventures.  That means that their previous (financial) failures didn't knock them clear out of the game.

I am NOT deprecating what they learned from their earlier experiences.  But, to re-state the point, they not only had to have good ideas, work hard, etc., they also had to be lucky.  Being lucky simply refers to something good happening over which you had no control.  And they couldn't still be in the game after having failed several times unless their earlier failures still left them intact enough that they could try, try, try again.

Like others, I now believe that Adam Smith (Wealth of Nations) didn't quite get it, that the free market doesn't reward hard work, discipline and sacrifice as much as doing all those things really just puts you out there where you can be lucky (or unlucky).  We seldom hear much from those who fail, but many of the winners are only too happy to write best selling books showing "why" they succeeded, glibly assigning retrospective causality to their being fortunate enough to throw craps six times in a row.

If you are bright, hard-working and have good ideas, then by all means, go for it.  And if you are happy being a starving artist, then enjoy; you have "made it".  But if you want to maximize the chances of also being lucky financially, then figure out a way to be in the game more than once.  Look at venture capitalists.  They are in a hundred games at the same time.  The downside of each venture is limited, and they have NO idea what the upside is, but since they are just fine with keeping score in dollars, they know that the points they score ($$$) from the one winner can overwhelm the losses from the other ninety-nine.

Thoughts?

What the Web 2.0 Really is... cool

This is a video that, with no dialogue, per-se, will teach you more about the web than reading an entire book -- you may not be able to articulate what you learned right away, but when people talk about the Web 2.0, you will understand what they are talking about.