Thinking In Small Bets, And How To Get Started.
There’s some times in life when you need to take the plunge. Committing to a life partner. Raising a child. Doing your first skydive. These are all occasions where you are either in, or you are out.
These occasions though are rare. But most of us think in this binary way about projects, passions, or hobbies. We think we have to carve out a vast amount of time to put our all into something, or it’s not worth doing. I call this ‘big bet thinking’
There is nowhere more proliferated with examples of ‘big bet thinking’ than entrepreneurship. The rhetoric is deafening. Eat shit for 3 years. Put your all in. Work 80 hours weeks. My YouTube feed is full of this big bet advice. We hear the success stories of Elon Musk, Steve Jobs, Gary Vee etc. we see how they risked everything and it paid off and we are told that if we are willing to expose ourselves to this level of risk, and if we commit to our mission, we too can achieve this success.
I’m not denying that going all-in on big risks is probably required to found a billion-dollar company, but when we are honest with ourselves, how many of us actually want to own billion dollar companies? Most people want financial freedom, to be able to work on something they are passionate about, and to not get colon cancer. All these things can be achieved without having to make a big bet.
In fact, if your life goals aren’t completely astronomical, I’d argue you’ve got a far better chance of achieving them through ‘small bet thinking’. Let’s demonstrate this through simple probability.
You have a fixed amount of resource a year. Time, energy, cash, these are the building blocks for any entrepreneurial endeavour. Big bet philosophy would dictate that what you want to do is put all of this resource into a single endeavour. If you stay the course long enough, you will find a way to make it work. I don’t believe in certainties when it comes to entrepreneurship, there are just too many factors outside of your control. Let’s say that if you take a big bet, your chance of achieving a return of 10 ‘value points’ is 50%.
On the other hand, you could use that energy to make small bets. This year I’ve made 5 of these. (1 YouTube/ solopreneur business, 2 Kickstarter projects, 1 ‘proper’ tech startup and 1 crypto startup). Because I’m putting in less time the chance of success is lower. The potential payout is also lower, let’s say 2 value points, for the same reason the chance of success is probably lower, say 25%.
Applying these probabilities, the big bet mentality will, on average, yield you 5 value points over 10 years. However, if you were able to make 5 small bets in your first year, and 3 in every subsequent year (32 in total) your average return would be 16 value points.
Of course, the numbers assigned to these bet types are arbitrary, but hopefully, you can see the general logic stands, if your ambitions are moderate, you are likely much better off placing lots of small bets, rather than committing to one huge project.
How To Get Started Making Small Bets
Create The Business, Don’t Run The Business
When most people hear that I have 5 different side projects, they immediately wonder how I balance it all. This is because people mistake having equity in a business, for running that business. Clearly, it would be impossible to run 5 businesses.
The secret is you don’t really need to run a business to have equity in it. If you have the idea, find the right team (we’ll discuss this later), create the initial momentum, and put some time in every week to oversee the business, this will be enough. My general strategy for creating a business looks something like this
- Have an insight into a business opportunity.
- Find some mates who would be a great fit for the business, get them on board with a good slice of equity (perhaps foolishly I usually just split this down the middle)
- Work like a dog for the first month getting the initial momentum going.
- Put a process in place for the founding team.
- Put in max 5 hours a week into the business as it ticks along, obviously some weeks you need to put in more, but this is the exception.
The beauty of this approach is that you are focusing on the highest leverage work (having the idea, connecting the team, getting the flywheel turning). Leaving the lower leverage work (the actual running of the business) to those who are more suited to it.
I could and probably will write articles on how to properly execute these higher leverage activities, for now, my only advice would be to get into the habit of reading widely. Broad reading will help open up your world to the infinite possibilities before us.
Get The Right People
I can’t stress enough how important it is to have the right people supporting you if you are going to be placing multiple small bets on different projects.
For me, the right person to support a project isn’t necessarily the most intelligent, the most experienced or the most skilled. You just need someone who you enjoy working with, and who has a real passion for the problem you are looking to solve.
I recently started a project to create a cycling shoe with cleats that is stylish enough you could wear it to a restaurant without anyone batting an eyelid. I’m working on this with a friend who is mad about cycling. He doesn’t have experience launching businesses, gaining initial traction or viral content creation, but he does have something far more important, a passion for the space.
Look at your friends, all of them will have at least one passion that they know more about than 99.9% of people. A lot of them will also be curious about starting a business in that space. Help these friends connect the dots. Help them get started on a project, put in the time to support them. Do this and you’ll add enough value to deserve some equity of the business that they end up running.
Prove Hypothesis Early
If you are taking multiple small bets you want to fail often, and fail early. You always want to be protecting your most precious resource time, as each bet you are invested in has an opportunity cost. Each bet you say yes to means you are saying no to another bet.
Because of this, it’s vital you prove your hypothesis’ as early as possible before you invest too much into a project, and ultimately then fall victim to the sunk cost fallacy. With my first Kickstarter project, myKanban, we engineered the product to a high degree before we started running ads. We knew the tolerances of each component down to the mm, we knew the materials, the costs of goods and how we were going to source each part. Getting all this information took months of work.
When we ran ads we used our mockup and got some great results. But this could of just as easily gone the other way. We could have put all this time into designing the product, only to figure out further down the line that we couldn’t sell it for love nor money. We got lucky, and I breathed a sigh of relief when the results of the ads looked positive.
With my second Kickstarter project, we are rushing to get an ad out in 2 weeks. We have no idea how to build the product, or how much it will cost. For now this doesn’t matter. All that matters is are people interested. Will people click on our ad and register interest to buy when it launches? I’m much happier with this approach as we are preventing ourselves from over committing to the bet. We are assessing whether the project has got legs in 3 weeks before going down the expensive and laborious process of product design. And if it doesn’t? Well that’s fine I’ve got no shortage of small bet ideas, we can just move onto something else…