Why Pessimists Win
I’ve got a pretty good idea what makes you tick. Given your entrepreneurial bent you must be a serial optimist. It’s a trait both necessary and vital.
But optimism has its limits. According to the small business stat-keepers, just half of new ventures will still be in operation five years down the line.
What is likely missing among the half of businesses that don’t make it is a healthy dose of clear-eyed pessimism.
A Slow Burn Is Your Best Weapon
Great business ideas can’t grow into great businesses if there’s not enough cash to get them through the early gestation period. And the problem for optimistically wired entrepreneurs is a propensity to underestimate how long that’s going to be.
You’ve no doubt run the numbers to come up with your venture’s burn rate. But exactly what are you basing that burn rate on? I’d venture this is where your optimism can work against you. Ask any entrepreneur who had to close up shop what happened and you will get some version of “I just didn’t anticipate how slow the ramp-up would be.” There are all sorts of variables at play: overshooting on the level and growth rate of revenue, underestimating on expenses, a longer-than-expected lag between when you bill and when clients deign to pay, to name just a few.
Run the Numbers
My advice is to re-run your business plan numbers plugging in assumptions that are 25% less optimistic. Ratchet down revenue by at least that much, adjust growth expectations that much, and budget 25% more for your fixed costs.
That’s obviously going to speed up your burn rate to a point where your cash runway is going to look uncomfortably short. Good. If you’re doing this proactively in the planning stages of launching your business you may have just saved your business.
Now is the perfect time to adjust your business plan accordingly so you will be able to launch with a sufficiently long runway. Maybe you need to spend another six months or a year socking away more cash before you launch, maybe you rent less space and worry about growing out of the space when the time comes, not now. And maybe you bring in more investors so you can launch with a bigger capital base. The goal is you make those tradeoffs now so your runway at launch is plenty long enough to give you a solid chance of success.
Don’t shrug this off on the assumption you’ll deal with cash flow problems when the time comes. Trying to extend your runway when you’re already barreling close to the end is a dicey proposition. Asking investors or banks for money when you need it most is never a great bargaining position, and if you’re scrambling to come up with cash to keep the business running you’re going to be pulled off of the very thing that your business needs at that juncture: you fully focused on growing the business.
One of the most powerful management tools comes courtesy of 17th century mathematician and philosopher Blaise Pascal. Pascal’s Wager, as it has come to be known, is all about asking yourself two questions: What if I am wrong, and what is the consequence if I am wrong? For entrepreneurs, those two questions can be a powerful check for unbridled optimism.
Contemplating less-robust outcomes isn’t meant to kill your plan, or paralyze you to the point you give up before you start. The goal is exactly the opposite. When you ratchet down your optimism during the crucial planning stage--and make the tradeoffs to give yourself a long runway--you’ve just raised the odds of your success.
BILL HARRIS | Columnist | CEO, Personal Capital
Bill Harris, CEO of Personal Capital, was formerly CEO of PayPal and also Intuit, the makers of Quicken, QuickBooks and TurboTax. He founded numerous financial technology and security companies, and served on the boards of RSA Security, Macromedia, SuccessFactors, GoDaddy and EarthLink.