2 Types of Business Risk and the One I Choose EVERY TIME

Summary

• Business success hinges on two primary risks: execution risk and idea risk, with environmental and regulatory risks also being factors.
• As Dr. Mosey of Acquisition.com, generating over $100 million annually, my goal is to make business concepts more accessible, helping more people avoid poverty.
• Often, new entrepreneurs miscalculate the payoff for taking risks, overestimating rewards and underestimating both the likelihood of failure and associated costs, especially in terms of time.
• Jeff Bezos' philosophy emphasizes betting against conventional wisdom, noting while you're often wrong when taking bold risks, the few successes can cover many failures due to business's long-tail distribution of returns.
• I recommend that newer entrepreneurs target "boring" businesses with established demands, to minimize the idea risk and focus on execution, refining business skills because if the venture fails, it's on them, not the market demand.
• Entrepreneurs struggle with determining when to push a failing idea versus when to pivot to something new, balancing risk and opportunity, and this can be a tough call, especially without knowing whether the issue is the idea's viability or their execution.
• Discussing with my software entrepreneur friend, we contrasted our views on risk: he chases big visions, whereas I focus on accumulating wealth to enable grand accomplishments in the long term, preferring to minimize risk.
• In portfolio theory, like venture capital, it's the outlier successes that compensate for numerous failures, but for individual founders, sinking years into a failure is much costier.
• I point out the importance of acknowledging the "graveyard" of failed big ventures and argue for a more conservative approach, aiming for sure things and minimizing risks.
• Success isn't just about big wins; it's about consistently winning smaller bets over time, allowing compound growth. Controlling for idea risk and focusing on execution risk increases the likelihood of success.
• Wealthy individuals I know look to nearly eliminate risk and only engage in ventures where they are likely to win, such as The Rock launching a book with high chances of becoming a bestseller due to his massive audience.
• Assess situations by assuming everything that can go wrong will but still work towards a viable path to success, which may not lead to 1000x returns but can reliably create wealth and a comfortable life.
• By choosing lower-risk opportunities with proven demand, focusing on execution, and avoiding pitfalls along the way, entrepreneurs can optimize for success in their journeys.

Video

How To Take Action

I would suggest focusing on minimizing both "idea risk" and "execution risk" to achieve business success. Here's how you can start:

1. Pick "Boring" Businesses:

   • Go after businesses with established needs like weight loss, skill development, or customer acquisition.
   • This approach lowers idea risk since there's proven demand.

2. Refine Execution Skills:

   • Your success relies more on how well you execute, not just the business idea.
   • Continuously improve your skills in sales, marketing, and operations.

3. Learn to Assess Risks:

• Be realistic about the likelihood of success and the costs involved, especially time.
• Don't overestimate the rewards; acknowledge and prepare for potential failures.

4. Decide When to Pivot or Persevere:

   • Evaluate if the struggle is due to the market not wanting the product (idea risk) or due to execution (execution skill).
   • If it's the idea, consider pivoting. If it's execution, find ways to improve your approach.

5. Weigh Opportunities by Probability of Success:

   • When faced with two opportunities, choose the one with a higher chance of success even if it offers lower rewards.
   • A string of smaller, successful bets can compound over time, increasing the likelihood of wealth creation.

6. Control for Risks:

• Like wealthy individuals, try to enter ventures where the chance of winning is very high.
• Examples include launching a product to an already established, large audience.

7. Plan for the Worst:
   • Assume things will go wrong and figure out how you can succeed under those conditions.
   • By doing this, you create a viable path to success that is less reliant on luck.

By selecting lower-risk ventures with clear market demand and concentrating on fine-tuning your execution, you optimize for long-term success and wealth creation.

Quotes by Alex Hormozi

"Outside returns often come from betting against conventional wisdom, and conventional wisdom is usually right"

– Alex Hormozi

"Big winners pay for so many experiments"

– Alex Hormozi

"We all know that if you swing for the fences, you're going to strike out a lot, but you're also going to hit some home runs"

– Alex Hormozi

"In business every once in a while, when you step up to the plate, you can score a thousand runs"

– Alex Hormozi

"Most newer entrepreneurs I think would be better served going after boring businesses that have established needs"

– Alex Hormozi

Full Transcript

business the first is the execution risk the second is the idea risk now you could maybe make an argument for a third being you know environmental risk regulatory risk things like that but i would say big picture is does the idea fundamentally work you know is dr having strangers drive kids around in cars is going to be a really good idea uber right or creating lockers for cats is that going to be a good idea i don't know right or am i going to be able to execute the idea itself and if you don't know who i am my name is doctor mosey i own acquisition.com it's a portfolio of companies that over 100 million a year i like talking about business stuff and hopefully making fewer people broke in the world makes me die happy okay so i was having a really good conversation with a friend of mine uh who's a software entrepreneur he's had three or four software companies none of them have really hit and he's about the same age as me and he and i sit in very different financial positions at this point in our life and we were having a really in-depth conversation around this topic which is appropriately measuring risk and so one of the issues that i see with a lot of newer entrepreneurs is that they overestimate the payoff for a risk and underestimate the cost number one and second is they overestimate the likelihood of success they're going to have and they underestimate the risk in terms of the likelihood that they fail and i think this is really interesting because he and i were discussing the first quote that i have that's kind of it's in the intro of my book uh by jeff bezos i'll read it to you right now outside returns often come from betting against conventional wisdom and conventionalism is usually right given a 10 chance of 100 times payoff you should take that bet every time but you're still going to be wrong 9 times out of 10. we all know that if you swing for the fences you're going to strike out a lot but if you're also going to hit some home runs the difference between baseball and business however is that baseball has a truncated outcome distribution when you swing no matter how well you connect with the ball the most runs you can get is four in business every once in a while when you step up to the plate you can score a thousand runs this long tail distribution of returns that's why it's important to be bold big winners pay for so many experiments jeff bay says and so the thing is is that there are two big costs when you're making these risks one is you've got the money and things like that but i think the biggest cost is time and so if you think about portfolio theory which is uh for example like venture capital vcs though let's say they take 50 companies on and they're betting the fact that one of those 50 companies is going to you know 100x and pretty much carry the return to the entire portfolio and for the vast majority of the other ones they will either go out of business or basically not really do anything spectacular and so for the vc for the venture capital the investor it makes sense to take this approach because they're going to get very good returns uh using you know you know using this this method whereas if you are one of the 49 you know founders who has pretty much all of their net worth invest in this thing and it takes five years of your life away to only fail it can be harder to swallow and so he and i have had very different careers and lives and it's because we we value risk differently now he would say that he is not interested in making money and he just wants to do something really big and really cool i tend to be more money focused uh or money money driven whatever you want to say because i think that the accumulation of money will allow me to do really cool things later on in my life and when i say later i mean like you know give me 20 30 years um of doing this and i think we can do that now the reason that i want to bring up this topic is because picking the business that you're going to go after i think is a very important question that you're going to ask yourself and you have to understand that you're probably going to fail many times before you are successful and one of the hardest questions in entrepreneurship and this is also one of the things that came up in the conversation is when do i push or when do i pivot right when do i keep pushing what do i keep persevering on this idea that's not quite working and when do i pivot and it's one of the hardest questions in entrepreneurship because you don't know whether it's you or the idea and that's what's hard because sometimes it's like how many great business ideas have the founders have abandoned six inches from gold where they just needed to push a little bit harder and they were going to have the breakthrough and i hesitate to talk about the subjects i think most people just don't know how to push at all and so you know i put that as a big caveat now when we're talking about business in general i and this is my difference from my friend i prefer to only go after ideas that i think have virtually no risk of not being ideas that people want which then leaves only me as the variable the execution risk that it can be done well it can be well businessed right and so i think in a lot of ways this is just alex's two cents most newer entrepreneurs i think would be better served going after boring businesses that have established needs right so people want to have you know businesses want more customers people want to make more money people want higher paying jobs people want to have skills that are valuable people want you know to lose weight people want entertainment like these are all things that are not going to change over time and so what that allows you to do is hone your skills at business because you know if it doesn't work it's only you it's only your fault if it doesn't work right and so because the problem is that having the perspective from which to make a judgment on whether you have product marketfit can be i think a much harder decision of when to push and when to pivot right and as a total side note because i think this is really interesting i think there's three big questions that are really dichotomies that um you have to manage as an entrepreneur right one is one to push in one to pivot the second is how much do i consume versus how much do i invest right because you're going to be living your whole life if you always forgo the immediate satisfaction you may reach the end of your life and never have enjoyed anything right so there's a little bit of a balance there that you have to strike right and it probably shifts over time but there still means that there's some level of consumption even early on in your life and at the same time you also don't know if you're gonna live tomorrow right and that's where it gets really interesting and uh it's a personal question right and the third is is kind of the balance between like how much do i you know delegate uh to other people versus how much do i do right because you gotta do something and you can delegate everything right like and so there's there's balances here and so today it's just about the the push and the pivot uh and idea risk versus execution risk and so for the newer entrepreneurs you probably suck at business and that's okay and that's because you're new which is totally reasonable totally acceptable and of course you should suck because it's hard and a lot of people do it right if you want to be in the top one percent it's one percent of people that means you have to beat 99 other people out of 100 in order to be the top one percent which is only 400 thousand a year right not only it's a lot of money right and so the thing is is that instagram makes everyone feel like if you're not making money lg you're poor which is not true you can save 400 000 a year for not that long and uh and have a lot of money you know what i mean and so anyways back to the point if you're picking businesses the difference that he and i had is that his mentors always went super super big they wanted to go change the world and whatnot but what i don't think we see or appropriately risk or value is the graveyard full of people who went big and struck out and i think is an interesting caveat to this jeff bezos gives this example and i want to dive into it in a little bit more detail let's let's zoom out for a second let's eliminate jeff bezos elon musk warren buffett from the names that you have in your head if we were to think what would be required to be number one in the world at a thing right you'd have to have the natural proclivity right because if you're competing against everybody the people who are gonna have natural advantages based on genetic code upbringing whatever are going to they're going to win more right so that'd be the first thing we'd want if we wanted to create this person who's going to be likely to win number two is they'd have to have a tremendous amount of skill right so they'd have the natural proclivity the the nurture that created an environment where they had work ethic to pursue the skill right so they have to be very very good and then third they'd have to be lucky right because if you think about a whole bunch of people like imagine everybody who's born really you know has his natural tendencies or proclivities towards these activities right and then does a ton of it in terms of volume so they get very good what then separates them luck right the people at the very very very top have all the all of the things aligned comma and luck and so it's interesting that he has this quote around risk um because one of the things that's unique about bezos and even elon right and this is probably a further discussion on business strategy overall is that they've had virtually limitless access to capital right like as in they can basically raise money endlessly to fund these risks right and so the equation that he said which is imagine you go to vegas casino and there's a there's a table that has a 10 chance of winning but you get 100 times payout when you do right if you can play the game on an unlimited time horizon then you absolutely should just play as played as many times as humanly possible right but most of us do not have unlimited spins right and that's where this gets more interesting and so if you were to imagine a dollar as a year of life okay that you have in your entrepreneurial career and let's say to build something really epic would take 10 years and that's like minimum you know what i mean like facebook was 20 is 20 years old now right which is kind of insane to think about i think it's 20 years old is it 20 years old i feel like it's 20 years old it's pretty old 15 years old it's pretty old right let's just say 15 right if you want to build something epic which means and how long does it take to test the idea before moving on right that's another big question like how long does it take to really give it your all on a thing and so we were having the discussion and he said i think we should say 35 would be you know you have 35 years of life and uh you know how long do we do we chunk and we agreed on five years as a mid-ground because it takes 15 to really you know see something all the way through if we said 15 was the chunk that didn't seem realistic because it doesn't take you 15 years to find out something doesn't work right um and so it's that about so we said five was the was the number you can come up with your own right and so a more realistic way to see this right would be uh you know you've got a one out of ten shot at 100 times payout but the minimum bet is five and you've got 35 bucks interesting right the conversation changes now let's say that you're now 15 years in let's say you bet three times you lost all three times which would be reasonable that would be expected that you'd lose three times you could even lose all three of the first times but now you're 15 years in and you have still no money huh how do you feel about yourself right how do you feel about your skill what's your reputation all these things kind of weigh in you know what i mean this is why i think this is a really interesting discussion and so i will give you my two cents because he and i disagree on these things because i have the perspective that all the people that i know the wealthiest in the world eliminate risk so that's what they do they control risk they they virtually eliminate they figure out ways to play the game in new ways where they cannot lose right i'll give you an example if the rock came out with a i'm trying to think of something he hasn't come out with because he came out with apparel and whatever let's say he came out with uh let's say he came over the book right let's say let's see the rock writes a book maybe he already has written a book i don't know and he writes a book what's the likelihood that it's not a bestseller virtually zero right it's virtually zero so he's basically limiting the risk because he controls another variable she has a massive audience right and you can build that deliberately and so when we think about these things the richest people that i know control risk and only play games where if they wait they win and my friend has not taken that approach and he's like hey i just want to go big or go home and the thing is is that he's gone home more than he's gone big and so i uh i will give you alex's two cents and you can choose to do what you want with it and i'll just explain my views on risk i tend to go with the highest likelihood bet and i tend to if i have two bets let's say one where i have a 10x payoff for a you know one out of two shots right which would be a two to one risk adjusted return all right if you're curious you just multiply the pay off by the the by the likelihood or if that's a 5x sorry i've messed that up but you get the idea you multiply the payoff by the percentage likelihood and if i had an equivalent risk adjuster return in another one but i had a higher likelihood of achieving it so if i had a 5x that i or a 6x that i thought i had a 4 out of 5 chance of getting versus a 10x that i had out of the math on it but whatever a one out of two shot at getting i would pick the the four out of five shot that had a lower upside that's me and i think part of that is because the games that are set up that way are usually going to be just execution risk businesses and i feel like i can i can pay that down in other ways right i can pay down that risk so i can virtually nothing's guaranteed but i can virtually guarantee the outcome and so my goal is to string as many of these virtually guaranteed upsides in my favor for a long enough period of time that i let compounding work because compounding on a long enough time horizon creates the outsize return and so the idea is how can i play how can i get as many w's in a row and as few ls as possible for a long enough time horizon so that i create the outside's return comma and get delivered pretty cool and and stress-free or not stress-free but like a pretty cool life along the way right now if we played the game the way that we talked about earlier where you have the 35 years that you can bet and you're three bets in you're 15 years in and you don't have anything that can be pretty hard hard on your ego hard reputation maybe you learn bad habits like there's a lot of things because you won't know especially if there's an idea risk that's at hand like is it me or was it the idea right and so for that reason i'm in favor of the significantly lower risk and he and i were you know talking back and forth he's like you know what i've observed from you is that you just you go for the sure thing and that's a hundred percent what i do that is i've always gone for the sure thing and then i just continue to try and trade up the upside of my sure things right so the first short thing you can have is a very high paying you know income job and then the next sure thing would be like if i were to quit a job i would make sure that i had more income for my side hustle probably where i believed it would be very reasonable for me to get that you know within a very short period of time so then i would you know make maybe that switch and then i would look at you know all the opportunities that existed and think okay what are these things uh on a risk-adjusted basis and this is again where people make it you know errors like just assume like you have to take the negative assumptions and i'd say like the the better i get at this at thinking this way the more i i continue to make which is i'm gonna assume everything goes wrong what then do i make right and so if you can just say like assuming none of the good things that you think are reasonable are going to happen happen can you still win and i think when you think that way what happens is you give yourself room to be pleasantly surprised and exceed expectations but what happens is when you set up the game that way where you're like i'm assuming these are the five things that i think will happen and will go right but i'm assuming none of them are gonna go right do i still win and if you can still win then that is an opportunity worth pursuing in my opinion and so that's um that has been the approach that i have taken which is how can i virtually eliminate downside risk how can i eliminate idea risk and how can i and when i say virtually eliminate downsides i meant to say the execution risk so how can i eliminate idea risk by only going after things that people i already know want and then how can i stack the chips in my favor like the rock where if i want to write a book i want to make sure it's a best seller no matter what right how do i do that and then think about all the things that can go wrong assume they go wrong and then think what would i do in order to still succeed even with all these things going wrong and then i think when you take those actions you may not hit the thousand x return but let's paint a different game that you could play so let's say you could play there's the two games one was the one that jeff bezos outlined right which you got uh you know one out of ten shot at getting 100 times payoff the game that i prefer to play is how can i get a 3x payoff with a 95 chance of certainty and i still have the same 35 right minimum bet well i'll bet 5 and get my 3 and then i'll bet my 15 i'll get it and i'll be at 45. and then i'll bet my 45 and i'll be at up there we go i'm already at 120 or whatever it's already got my 100 times payoff by thinking about it from a risk-adjusted basis now it's not going to be sexy it's not but if you double or triple or 5x things enough times you get to the 100x very quickly and you can do it with limited downside knowing that you've controlled for the idea risk and have only focused on the execution risk which is yourself and so that's how i've thought about risk with opportunity that i thought i would share with you because it was a really cool conversation um i hope i hope it gave you some light in terms of uh at least how i think of things um and maybe some of those ideas uh could serve you so mostly nation love you guys i don't deserve you but i love you for being as awesome as you are leave questions in the comments for uh for future vids they're really helpful for me um and i'll see you in the next one mostly nation you guys are the best and if you could do me the biggest favor in the entire world click the like button comment below so i can answer more of your questions in the videos and make sure that i'm not just making stuff out of my head but answering the questions you guys actually want like comment i'll see you in the next vid