A risk I can afford to take

DiceHey everyone.

You might have noticed that things have been a bit quiet round here for the last few weeks. The main reason for that is that I’ve ended up starting a big engineering project and it’s quite involved.

In fact, I think I might have accidentally started another business. 🙂

This news is quite exciting in and of itself but it also illustrates one of the strengths of my methodology for living without a job so I thought I’d take this opportunity to write about it.

Opportunity knocks

The long and the short of it is that, a few weeks ago, I had a meeting with a potential client about helping him fix some firmware in a half-finished electronic product.

With the limited amount of information I had at the time, I gave a ‘finger in the air’ guess of what it might cost to get the product to market. It was (for a one man business like his) a big number.

The guy nearly fell off his chair sideways. This estimate pushed the product idea a long way outside the risk profile he was accustomed to working with.

At this stage, it seemed that I had killed this product idea with my high guesstimate of the cost of completing it and my potential client would remember it for years to come as ‘just a nice idea’. However, completely out of left field, he presented me with an interesting proposition: he asked me to joint-venture on the product with him for a 50% stake.

My (pretty much immediate) response was

Thanks for an interesting chat, but… I’m afraid I’m not interested.

At the time, this seemed like the only sensible answer. I mean, I’m not interested in becoming fabulously wealthy and there’s plenty of freelance engineering work to allow us to pay the bills, so why would I voluntarily take on the stress of a high-risk venture?

I thought

No, stick to your guns Andy. You don’t work too much and you’re more than comfortably off.

But then I went home and thought about it…

The proposition

My prospective client business partner had put something like this on the table:

  • He knows exactly what he wants the product to do (i.e. the problem is well defined)
  • He has 40+ years’ experience in the market and has an excellent reputation (to the point of minor fame) in the niche industry in which he works. I know this is true because I already knew who he was before ever meeting him.
  • The product is intended to be retrofitted to systems which target customers already own. He built many of the original systems, knows where the customers are and is on first name terms with many of them.
  • He is willing to pay all out of pocket expenses necessary for development and manufacturing. I would only have to risk my time.
  • The product is intended to be low-volume and high margin. Each unit sold will net each of us around £1000 in profit.

I went over the whole thing in my head and it seemed to actually represent a really good opportunity. The absolute worst outcome for me if I took this on was that I might sink 6 months of labour into development only to never make a single penny in profit. I would not be required to risk any financial capital.

On the other hand, if the project was even modestly successful, it could leave me with a low-maintenance income stream which could be a nice supplement to my freelance income. Permitting myself to dream a bit, there’s even an outside chance that the product could do well enough to make me a life-changing amount of money. I think that the latter scenario is very much a long-shot but the possibility exists!

The work would also fit around my freelance commitments (there’s no massive rush to complete the project) so I wouldn’t have to turn off all other income whilst I worked on it either.

Having considered all costs and benefits, it seemed like I should at least put in enough work to get the product to prototype stage so we could try and get some advance orders.

So I sent my new partner an email with the subject line Screw It, Let’s Do It… and the rest is history. I’m now spending pretty much all of my time working on a prototype for our new product.

But anyway, enough about my new business and back to the moral of the story.

The ability to fail

I was chatting to a very good friend last week. In a lot of ways we’re very alike as we’re both driven, ambitious and passionate about engineering. But when it comes to money, we are polar opposites.

I’m a saver with lots of autonomy, whereas he lives to the full extent that his comfortable professional salary will allow and saves nothing. And before you ask, yes, I have presented all of the available arguments to him about why golden handcuffs are for suckers, but unto each his own.

The conversation was actually about houses. My friend is just in the process of committing himself to a large mortgage whose affordability is based on the premise that the currently prevailing interest rates will last forever.

I pointed out that I found it strange that he was willing to take on the concentration and interest rate risks associated with buying as much house as he can afford but that he’s always been extremely hesitant to take on any risks outside ‘the norm’ such as actually trying out some of the business ideas we’ve been bouncing around for years.

My friend brushed off the notion that buying as much house as possible with a big mortgage in the current environment is even slightly risky. However, he made a very telling remark about why he has never taken the plunge and tried out a small business idea despite the fact that he’s very interested in doing so (and definitely driven enough to succeed).

He said

Well, you know, if I inherited 20 grand or something and knew that I could pay the mortgage and feed the kids for the next year, I’d be in there like a shot.

And there it is. Neatly summed up in a nutshell.

The reason why being a saver, a person who everybody thinks is ‘paranoid’ and ‘risk averse’ actually gives you something that ‘normal’ people will never have: enough risk tolerance to always be able to take juicy opportunities as they appear.

Hedging

The conversation I had with my friend illustrates my philosophy perfectly. I have designed my life so that I’m never in a box.

It’s a lot easier to be an opportunistic entrepreneur when you’ve built a good hedge against failure. If the opportunity which, let’s be honest, has just fallen into my lap had instead fallen to my friend, there’s no way in hell that he could ever take it.

He wouldn’t have the time. He works 50 hours a week. He has a family, so there’s no way he could fit in any other big commitments outside work.

He also has no liquidity so there’s no way he could simply take 6 months off and absorb the risk which such a course of action would entail.

The irony of the situation is that I think my friend would enjoy the fruits of a financially successful business far more than me as my material wants are extremely modest. However, I’m always going to be the one who is actually in a position to jump on opportunities which have massive upside potential, simply because I have oodles of spare time and enough cash on hand to be able to tolerate not earning any money for reasonably long periods of time.

I did point out to my mate that the ’20 grand’ which could open up the door to a smorgasbord of opportunities to actually get rich (using society’s definition, not mine) wouldn’t necessarily have to be inherited, but I don’t think that the level of ‘self-deprivation’ required to amass a modest amount of savings is particularly attractive to him.

Downshifting is only one option

So, I’ve had an interesting month.

I’ve started another business which I couldn’t have foreseen 5 weeks ago. I’ve also had my convictions about the synergy between living reasonably frugally, saving and taking entrepreneurial risks reinforced.

But the thing that really stood out to me was the conversation with my friend who lives month-to-month (paycheck-to-paycheck for you Americans).

I think he’d really enjoy the lifestyle that earning , let’s say, £10k per month would afford him. However, he will never be in a position to build such a life due to the lack of risk tolerance inherent in the way he earns and manages money. Whereas, little old me who can be perfectly happy spending £3k per month (for our family of 4) is the one who has the opportunities because of being happy to live like that.

So if anybody reading this balks at the idea of living like my family do, then please don’t let that persuade you to ignore my message. Maybe you should consider being reasonably frugal temporarily, just until you get yourself into a position where you can take opportunities with high upside potential without worrying about what will happen if you fail.

This, ironically, is probably the best way of building a sustainable high-income, high-spending lifestyle!

Of course, my new project may very well flop. But, who cares? Nobody’s going to starve!

Other resources

Here are a few bits and pieces which you might find helpful if you want to get yourself into a position to be able to take opportunities as they arise.

How I quit the rat race – my free 6 part course detailing how I transitioned away from life with a full-time job

Our money – The Tank and the Taps – How to manage money if you want to take entrepreneurial risks

Rolling a boulder over a hill – It’s hard to get your ducks in a row, but probably worth it!

Your turn

How about you?

Have you found opportunities easier to come by/take since you’ve built a solid financial foundation?

On the other hand, is there something you’d really like to take a risk on but your finances are getting in the way?

Don’t be shy – leave a comment.

 


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[Image “Cartoon Character Hamster Exercise” courtesy of saphatthachat at FreeDigitalPhotos.net]

8 thoughts on “A risk I can afford to take

  1. Hi LL,

    Firstly congratulations on taking the step to joining your new business partner in his venture – worst case is nothing comes of it you have only lost time, but you will no doubt learn something from it – no matter what that be it will help you in the future I am sure!

    Very telling from your friend about the “I need to pay the mortgage” – I accept we have a high mortgage, however I am putting in place (slowly!) mechanisms to allow the payments to come out of re-earned interest rather than needing to pay.

    I have had it explained previously from someone who also spent all their paycheque – they are investing in themselves, and £10,000 today is worth less than it will be in a few years whilst they continue on their career path.

    I’d rather have the cash in the bank personally!
    Cheers,
    FiL

  2. Thanks for the update, Andy! Looking forward to hearing more about this project as it takes off or flops; either way, you’ll surely have a good story for us. It’s a great motivator for me as I start to take on more side hustle work and see how this (coupled with a tad more control over spending) can become a very happy, self-reinforcing cycle that will ultimately replace the daily grind. Cheers!

  3. What you’re describing has many parallels to what Taleb Nassim refers to as optionality – relatively minor downside (personal lost time) versus potentially unlimited upside (passive income stream from a business). Yes, it’s a gamble, and the odds are probably against you, but you only need one of these options to come good, and you’re sorted for life. Good luck.

  4. Congratulations on your new business opportunity! As you said, there’s basically no downside capital risk, so why not? You’ve put yourself in a wonderful position to take advantage of opportunities as they might arise and your friend is stuck in the rat race and it appears he either doesn’t realize it or doesn’t care.

    There’s an expression, that may be American, but it takes money to make money. I think you’ve proven the point well and I suspect your poor friend will learn it well enough in time.

    Congratulations!

  5. Hang on – Would you have been willing to invest say 25k in the business?

    If yes then all good

    If no, then I don’t think your treating your time and your capital equivalently

    That isn’t totally rational

    I would argue Jon’s comment above is wrong, there is potential capital downside equal to the lost earnings over whatever time period it ends up being. That isn’t really any different to investing a lump of cash and then losing it.. With the former, you’re giving up a chunk of time in the future, with the latter you’re giving up a chunk of time from the past.

    In other words, when making the risk/return decision, you do need to incorporate the opportunity cost of lost earnings.

    Not a reason not to go ahead and do it of course, if you still like the look of it..

  6. Hang on (part 2) – I’m now 2/3 through harry browne

    Ironically, I’ve just read chapter 23.

    How does entering into a 50/50 partnership square with the advice given in the libertarian manifesto?

    At odds, I would say..

    Have you considered this angle?

    However, it looks like you are possibly getting the better deal, so maybe its a good move. You being in the stronger position is, as you point out, due to you having capital on your side.

    It sounds like he’s in a bind because he’s short of access to capital to finance the project in ways that don’t require him giving up a big chunk of equity in the business.

    Maybe, if your prospective partner had just read the book he wouldn’t have been so keen to offer those terms?

    It’s a good job he doesn’t read your blog 😉

  7. Glad to hear you are still alive and kicking 🙂

    This sounds like exactly the sort of thing NN Taleb talks about in his books where you find opportunities with little downside but massive upside potential. Yes as you say it is a long shot but it could pay off big time. Good luck with it!

    I’m nearly at the point you are I think. Maybe one more year (yea yea I know!) of building up cash reserves and then I’d be comfortable with quitting the main job to take some more moonshot type projects on.

    If I don’t speak to you before, Merry Christmas and looking forward to seeing what 2017 brings you.

    Cheers!

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