How to start a business rationally?

There will be no magic pills and secrets of successful success in this article. I don’t know how to become the second Steve Jobs or how to make money on a Bentley in 3 months. But something is within my power. I can talk about what mistakes and cognitive distortions stand in the way of a budding entrepreneur.

Meet – This is Roma. Roma, like many aspiring entrepreneurs, while drinking author’s coffee writes a business plan on a napkin. In Roma’s frame, a macbook would fit well, but a loan for a macbook was not approved.

What can we say about Rome? He is almost certainly an optimist. Research showedthat small business founders are, on average, much more optimistic than middle managers.

Roma: Luck is always on my side!

Optimists are less prone to depression, more cheerful and easier to communicate. This makes it easier for Roma to attract investors and motivate employees. Well, the main advantage of optimism, of course, is attitude towards failure.

Roma: Failure is just an experience!

But there is danger in the fact that most start-up entrepreneurs are optimists.

According to Rosstat statistics 92% of new businesses close in the first year, and 96% in the second (with a caveat: I’m aware that “tax optimization” affects the statistics)

Roma: so what? It’s all about losers, EVERYTHING will be different for me!

A survey in America showed that 60% of start-up entrepreneurs answered the question: “what are the chances of success for an enterprise like yours” (in reality, about 35% of them survive for 5 years). This is almost double the increase. But when asked what your personal chances of success were, the vast majority (81%) rated their chances at 70%. At the same time, a third generally answered about 100% confidence in their success.

Roman: What did you expect? If you are not 100% sure of success, then there is nothing to start! A real entrepreneur is a person who believes in his idea no matter what. There can be no doubt, what difference does it make who is there and what they think?

Such an approach cannot be called rational. In practice, optimism is not self-confidence, but self-confidence. Interestingly, entrepreneurs on average Not more risky than other people.

Roma: what are the risks here? This is a 100% working idea!

It’s just that optimism allows them to ignore the risks. Moreover, the stronger their optimism, the greater the risks go unnoticed. And if it seemed to you that I was trying to dissuade you from starting a business, this is not at all the case. I just want to point out that the “starting a business no matter what” approach is the exact opposite of a rational approach. After all, it is at the start that it is most important to correctly assess your prospects.

Roma: oh yes, you will never start like that. So you can plan indefinitely, the world is changed by people who are able to get their butt off the couch and make a result.

Sometimes decision making is urgent. But as Hans Rosling says, it’s important to remember that situations like this don’t happen all that often. He calls this distortion the illusion of urgency. Do you know that the average age of an entrepreneur in Russia is 39 years old, and the average age of starting a business is 37 years old? Data for the world go in the range from 40 to 45 years. And this is not a reason to rush to open, even if you have crossed this mark.

Roma: And what do you suggest that I postpone until this age?

Of course not, I just offered to clarify if there is a real urgency? Just think about what is better, to spend time assessing the prospects or then to spend time and effort on sorting out the problems that the illusion of urgency creates? After all, this is exactly what makes you invest in unpromising projects. And if they are not, then take loans, borrow from relatives and borrow from bandits.

Roma: Are there bandits now? I wouldn’t like to have to be.

Urgency is exactly what professional scammers love to put pressure on. It touches some common flaw in us, we all dislike missed opportunities. However, it is important to remember that these possibilities are often as illusory as the urgency.

Roma: well, I was choking, let’s say you convinced me, what do you propose?

Oh, you’ll love this. I suggest think like an investor.

Roma: I hope in crypto?

Ahem. Not really. I mean that it is worth looking at the prospects of the future enterprise from the outside. What is the potential income (or better yet, the range of income), what are the chances of generating this income and what investments, including time and effort, will it require? I came up with a joke: an irrational investor is a philanthropist.

Let’s use a hypothetical example: if you are offered to invest 100 thousand candy wrappers, and with a 50% chance of getting 400 thousand, is this a good deal? You know how to checkmate. expectation?

Roma: Well, there was something like this at the university: 50% * 400 thousand is equal to 200 thousand

Yes, and if you accept such an offer 100 times in a row, then on average you will do as you usually say x two.

Roma: Wow, that’s good advice. Now I will sit down and write a detailed plan of income and expenses. So you need to choose chairs for employees …

Stop stop stop, it’s not worth it. Haven’t you watched my video about planning error?

Roma: no, what is there? Some kind of nerd?

In short, it says that if you calculate income and expenses and write a plan, then the result will be worse than if you just look at the average results for the market and take them as the basis for estimating.

Roma: What do you think, uncle, am I average?

No, you are an individual. But if I were offered to invest in you, then considering you average would be a more winning strategy than studying a list of your estimated income and expenses.

Roma: what about my unique business model? I’ve been looking for it on the Internet for an hour, isn’t it worth considering?

Rather, do market analysis, talk to suppliers and customers, and listen carefully to how they assess the income and prospects of your competitors. Shell geologists looking for the best locations for oil production corrected their confidencewhen they were given to study the reports of their predecessors. When you think about your future venture, you usually forget that its success is determined, among other things, by the actions of competitors and changes in the market. So go into the field and show your energy and creativity in gathering information about future prospects.

Roma: ah, nothing to myself, but I thought you would offer to count everything on a piece of paper.

Of course not. A rational approach is not about formulas and numbers, but about reality. When making a decision, you must first collect a sufficient amount of undistorted information, and only then make a decision. Don’t make a decision and then figure out why it’s right. Warren Buffett says that decisions are usually made with 80% of the information available. He means that you should not wait for 100%, but pay attention, 80% cannot be collected in 5 minutes on the Internet.

Roma: what if I found out everything and realized that the niche is the bottom and there is not enough sense in opening?

Well, see for yourself what level of risk is acceptable to you. Someone is playing in the casino, by the way, there will be a video about this.

Roma: But the alternative is not to change anything, is it? And she scares me even more!

This is a false choice. Thanks for reminding me. Probably should have started with that. Perhaps one of the biggest mistakes is to lock yourself into such false dilemmas. When deciding to go into business, people usually consider one particular idea, proudly calling it a niche choice. Few people are embarrassed by the lack of proper choice. Imagine such a situation. Two investors choose different strategies. The first one chooses one random startup and invests in it. The second looks at least a dozen, and chooses the most promising. The startup of the first investor may succeed, and the best startup of the second investor may fail, but statistically we still expect the result of the second investor to be better.

Roma: yes, but I can’t evaluate all niches and all businesses, I don’t have enough life. And if I could, it would be better to open niche courses.

I agree, so in practice there is some reasonable balance between how many alternatives and how deeply it is worth evaluating. But after all, when choosing an apartment or a car, and even a phone, you don’t take the first option that comes across. It is hardly worth doing otherwise when making such an important decision.

Roma: Listen, all this certainly sounds convincing, but have you started a lot of businesses yourself? Or are you a couch theorist?

My experience here is not so important. I already said in the video about evidencewhy the history of an individual is much worse than statistics and research. Imagine the situation, we ask a hundred people to flip coins 10 times in a row. Some of them will roll much more heads than tails. But this does not mean that we should ask them for advice on how to throw more eagles. Moreover, in the case of coins, where there is no correlation between skill and result, we will almost certainly see that the next rolls of the tossers will be worse. (I talked about this in a video about regression to the mean pretty detailed).

Roma: Wait, that is, you want to say that the personality does not affect the result at all?

No, I didn’t claim that. However, we can statistically assess how such a factor as the personality of the leader and management style affects the success of the business. Moreover, this has already been done in studies 2003 And 2007 of the year. It turned out that the correlation coefficient between these indicators is equal to 0.3 at best. Without going into mathematics, if there were no correlation, then 50 successful companies out of 100 would be managed by strong leaders (and the remaining 50 by weak ones). But with this correlation coefficient, 60 out of 100 successful firms are managed by strong leaders. And it’s actually quite significant, but not as much as the success stories tell us.

Roma: but wait, what about all these shelves filled with books about success, is it really impossible to learn anything from them?

The main reason this kind of literature exists is what Nassim Taleb calls narrative distortion. We really like stories with clear cause and effect relationships. However, such stories are always compiled in hindsight, and no one is able to see in today’s students the new Larry Page and Sergey Brin. Because a lot of people who did pretty much the same thing didn’t become the founders of Google. In science, statements like “something happened for such and such a reason” require separate evidence. And many successful people, even if they sincerely want to help others and not make money off the book, are rarely able to separate where their skills played a role and where their luck played. When everything that happens to a person is attributed to his personality, this is called the halo effect. So we think: “he is successful because he is hardworking and knows how to win over people.” But the predictive value of such observations is extremely small, because if he is successful and at the same time lazy and has a bad temper, then you can easily come up with a convincing story about how this helps him.

Roma: Damn, yes. Well, well, but does no one study which strategies of companies are more successful? I’ve read a couple of books here about how to build a business.

Oh, the second half of the shelves with business literature is littered with these books. It’s our brain’s way of protecting itself from unpredictability. I really want clear and understandable advice on how to do it and what we will get for it. For example, the book Built to Last by Collins and Porras describes an analysis of management practices, corporate culture, and strategy. The bestseller In Search of Excellence does the same. I think you read something similar. What could be better than comparing unsuccessful strategies and the most successful cases? However, the performance of all the top firms cited in these books has declined in the long run. And the results of all the worst increased. And if you still watch the video about regression to the mean it will become clear to you why.

Roma: wait, but in the business courses that I bought, everything is told in a completely different way. And they have two students who have built successful companies.

Wow, how many students didn’t build anything?

Roma: I don’t know, they don’t talk about it, but just in case, they brand such students as mediocrity

I mean, Bayes’ theorem teaches you to think something like this: out of a thousand random people who try to build a business, on average forty create companies that have existed for more than 3 years (I voiced the statistics above). This means that out of 1000 graduates of these courses, more should succeed. This is not yet proof of a causal relationship, but already evidence in favor of buying courses.

Roma: Yeah, I got it. But you are comparing those who started, and without these courses, people might not have started. You need motivation to start a business! Where do you get motivation from? I was told to take a Mercedes loan on the course. Obviously, I will have to pay off the loan and then I will earn this money. True, the loan was not approved for me, they said I have not yet closed loans for this course and the iPad. But on the other hand, I actively use affirmations and put this same Mercedes on the wallpaper to connect the visualization. And I signed up for a marathon of desires.

Listen marathons of desires fulfill the desires of only their organizers. And that’s not all, but only material. You still write the Declaration: they say I undertake to make money on Bentley in a year and show it to relatives and friends so that it would be a shame not to make money.

Roma: Oh, finally good advice

Wait, wait, I was joking. Pumping extrinsic motivation is itself a distortion. You understand that advertising is not objective and tries to show the product only from the best side. Business courses also advertise you doing business. But such a decision is still better to make independently assessing the risks.

Roma: Yes, I don’t like to assess risks, is there really no guaranteed option?

No, guarantees are not about entrepreneurial activity. You have to work with uncertainty. Not always, but most often, in business you can choose only two of the three options: low entry threshold – high profitability – low risks. Do you have a lot of money or very cool connections?

Roma: yes, no

Then you have already chosen a relatively low entry threshold. Next, you will have to choose what level of risk is acceptable to you. Think of high reliability as buying insurance. You can’t help but pay money for it. Like I said, think like an investor. They do not at all consider every investment as reliable and unique. If the mathematical expectation is positive, then you can already work. Of course, each person has their own normal level of risk. We usually perceive losses more strongly than gains. Imagine: you are offered to play heads and tails and give 1000 rubles if you get tails. How much do they have to give you for the eagle for you to accept? Usually people fluctuate between one and a half and two and a half thousand. That is risk aversion ratio they have from 1.5 to 2.5. If you take advice and think like an investor, then a hundred on top also looks attractive. After all, you play this game a hundred times and on average you will earn good money. So failure is not an experience, but rather just part of a strategy in uncertainty. Of course, if the loss of life or health is at stake, then little amount can interest you. But this risk is often as illusory as the urgency.

Entrepreneurship has significant advantages beyond those real and illusory ones that popular culture extols. Businessmen, after all, have a huge impact on the lives of others. And if you firmly decided to embark on this path, that’s cool. The main thing is that your decision is yours and the path begins with taking risks and responsibility, and not with the purchase of rose-colored glasses. Good luck!

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