tl;dr: let's apply the Kelly criterion to entrepeneurship, I don't think I've ever seen anyone do it before. I was thinking about it, then decided to finish UNSCRIPTED before asking here, just in case MJ mentioned it. I was excited to see that MJ mentioned expected value, but then sad when the Kelly criterion didn't show up. Looks like there are no results for it here:
www.thefastlaneforum.com
.
I am afraid to take some big risks. The kind where you can lose everything. Russian roulette kind of risks.
But I paid my bills for a short time in college by playing online poker. I love taking all the big risks that I can as long as they are EV+ and "safe" for the amount of money I have.
If you want to make it as a poker player, you never go all in with everything on the line.
You start by grinding up from the lowstakes, because you don't have much money, so it's not "safe" to start higher (unless you want to keep depositing- not gonna happen for a broke student!), and you probably suck and are unprepared to continuously make good, EV+ decisions.
How much is safe? Well, it's hard to say. It depends on the game format. I played sit n goes (SNGs) which were small, single-table "tournaments" with an entry fee and a limited amount of chips. Rewards went to the few players remaining, but I played 1v1 ("heads up") SNGs, or HUSNGs.
We could determine which stakes you could play at by plugging your winrate and the possible outcomes (win/loss) into a formula called the Kelly criterion: Kelly criterion - Wikipedia
Let's say I have been saving my money from a slowlane job.
So when can I quit my job and pursue my own thing, where like a poker player, I am never worried about losing because my lifestyle will almost certainly never take a hit because I know 1. that the expected value of my time is far above my cost of living and 2. that my living expenses + anything else I may spend on my business attempts are no more - and perhaps well below - than the amount I can safely spend according to the Kelly criterion?
If 9/10 businesses fail, according to whoever it is that likes to create and propagate stupid statistics, then how fast can you fail? If you can test and validate/rule out/"hard proof" (7P process from UNSCRIPTED ) one idea per month, then your probability of finding a "hit" in a year is 1-.9^12 = about 72%. In two years? 1-.9^24 = about 92%.
Well, can we do better? As I think I saw MJ write somewhere here, you can do things to increase the odds: NOTABLE! - Moving the Needle on Probability
And it looks like among people here, 10% might be too pessimistic:
www.thefastlaneforum.com
Okay, so maybe we have better than 10%. But how many businesses fail AFTER the hard proof stage, assuming you don't make any big execution mistakes that you don't eventually correct?
And how fast can we fail?
If we say we have a 10% chance of any idea passing out validation stage, and assume that:
- 100% of validated ideas will be worth $1m with no extra work needed to realize that $1m (we can get more complicated later and say a validated idea has X probability of success and costs Y dollars and Z months to execute, to also compute an EV of that validated idea... But lets keep things simple for now and assume X, Y, Z all determine each idea is worth $1m)
- you have some ridiculous living expenses like $5k/mo
- you spend $5k/mo on each validation attempt
- every idea takes exactly one month to validate
Then with the Kelly criterion (taken from Wikipedia), the amount of our bankroll (i.e., savings) we can spend per month (which in our example is equivalent to an idea):
f = (p(b + 1) - 1)/b
f = (0.1*(100 + 1) - 1)/100
f = (0.1*(101) - 1)/100
f = (10.1 - 1)/100
f = 9.1 / 100
f = 9.1%
So under the above conditions, where you're spend $10k per month or idea, you must have at least $109,899, let's say $110k saved up.
If it doesn't work out, then you either need to either calculate the amount you'll be able to risk next month (which means you're lowering your living expenses next month- hard to do on a whim for most people) or... You need to start with significantly more than $110k.
In reality, nobody is spending $10k/mo, and $1m sounds too optimistic. But the numbers $10k and $1m seem clean. You can replace them with whatever you like, or we can plug in $2k and $200k if you like, or whatever.
I'm just trying to figure out, and I didn't see this in UNSCRIPTED , how much does it really take? Because it sounds like people think entrepeneurship is "risky" like Russian roulette is risky, when on inspection, it seems to be risky like poker is risky. I.e., it looks like for someone learning, there is virtually zero risk of "failure" (your savings goes to zero and you are homeless or have to get a job) in the sense that most non-entrepeneurs think.
As a poker player, I never considered it "risky" to play poker. It was virtually guaranteed that over any meaningful number of hands, I'd have more money.
I don't think entrepeneurship looks risky either.
I think you could get tons of people to drop what they're doing and become entrepeneurs just like tons of people learned poker a decade ago, if it could be expressed more accurately:
1. How many "hard-proofed" (to use UNSCRIPTED 's language) and CENTS-compliant ideas actually fail for non-execution reasons?
2. How can you maximize the amount of CENTS-compliant ideas you validate and make a go/no-go decision on?
3. Just as you can maximize probability of success by following advice in UNSCRIPTED , can you maximize the amount of ideas you validate in a given period of time? If you could validate two ideas per month instead of one, things get way better. How can you validate faster? Well, there are some b2b ideas where I can only imagine you have to track down decision makers and make calls, etc. You might not be able to validate that often and even when you do, it's hard to be sure people will buy. But then, there are also ideas where you can set up a website and pay for traffic from Google ads over a a week or two. You could probably validate several ideas in parallel that way, maybe 10+ per month instead of just one per month. And if you are taking pre-orders (which you do say you might cancel) or running a Kickstarter, you also can be pretty confident that if an idea passes, it can be executed.
4. How long does it take you all to validate an idea and decide whether to execute or not?
5. For those of you have decided to execute on validated ideas, how many validated ideas failed? Did you find that some types of validated ideas (e.g., expensive b2b service "validated" by asking business owners if they would buy vs product offered for pre-order online where people actually attempted to buy) were more likely to succeed following validation than others?
What do you all think of applying the Kelly criterion here? What do you think of questions 1-5? Do you think I left anything out or am completely wrong about anything?
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www.thefastlaneforum.com
I am afraid to take some big risks. The kind where you can lose everything. Russian roulette kind of risks.
But I paid my bills for a short time in college by playing online poker. I love taking all the big risks that I can as long as they are EV+ and "safe" for the amount of money I have.
If you want to make it as a poker player, you never go all in with everything on the line.
You start by grinding up from the lowstakes, because you don't have much money, so it's not "safe" to start higher (unless you want to keep depositing- not gonna happen for a broke student!), and you probably suck and are unprepared to continuously make good, EV+ decisions.
How much is safe? Well, it's hard to say. It depends on the game format. I played sit n goes (SNGs) which were small, single-table "tournaments" with an entry fee and a limited amount of chips. Rewards went to the few players remaining, but I played 1v1 ("heads up") SNGs, or HUSNGs.
We could determine which stakes you could play at by plugging your winrate and the possible outcomes (win/loss) into a formula called the Kelly criterion: Kelly criterion - Wikipedia
Let's say I have been saving my money from a slowlane job.
So when can I quit my job and pursue my own thing, where like a poker player, I am never worried about losing because my lifestyle will almost certainly never take a hit because I know 1. that the expected value of my time is far above my cost of living and 2. that my living expenses + anything else I may spend on my business attempts are no more - and perhaps well below - than the amount I can safely spend according to the Kelly criterion?
If 9/10 businesses fail, according to whoever it is that likes to create and propagate stupid statistics, then how fast can you fail? If you can test and validate/rule out/"hard proof" (7P process from UNSCRIPTED ) one idea per month, then your probability of finding a "hit" in a year is 1-.9^12 = about 72%. In two years? 1-.9^24 = about 92%.
Well, can we do better? As I think I saw MJ write somewhere here, you can do things to increase the odds: NOTABLE! - Moving the Needle on Probability
And it looks like among people here, 10% might be too pessimistic:
NOTABLE! - CHAT - How many Business Failures did you have before success?
What I consider success has changed, before I considered just a time for money side gig was a success. Took me 4 attempts to find something that got me "profit". Now success is something that I will be able to scale and separate from my time and location, so still failing..
www.thefastlaneforum.com
Okay, so maybe we have better than 10%. But how many businesses fail AFTER the hard proof stage, assuming you don't make any big execution mistakes that you don't eventually correct?
And how fast can we fail?
If we say we have a 10% chance of any idea passing out validation stage, and assume that:
- 100% of validated ideas will be worth $1m with no extra work needed to realize that $1m (we can get more complicated later and say a validated idea has X probability of success and costs Y dollars and Z months to execute, to also compute an EV of that validated idea... But lets keep things simple for now and assume X, Y, Z all determine each idea is worth $1m)
- you have some ridiculous living expenses like $5k/mo
- you spend $5k/mo on each validation attempt
- every idea takes exactly one month to validate
Then with the Kelly criterion (taken from Wikipedia), the amount of our bankroll (i.e., savings) we can spend per month (which in our example is equivalent to an idea):
f = (p(b + 1) - 1)/b
f = (0.1*(100 + 1) - 1)/100
f = (0.1*(101) - 1)/100
f = (10.1 - 1)/100
f = 9.1 / 100
f = 9.1%
So under the above conditions, where you're spend $10k per month or idea, you must have at least $109,899, let's say $110k saved up.
If it doesn't work out, then you either need to either calculate the amount you'll be able to risk next month (which means you're lowering your living expenses next month- hard to do on a whim for most people) or... You need to start with significantly more than $110k.
In reality, nobody is spending $10k/mo, and $1m sounds too optimistic. But the numbers $10k and $1m seem clean. You can replace them with whatever you like, or we can plug in $2k and $200k if you like, or whatever.
I'm just trying to figure out, and I didn't see this in UNSCRIPTED , how much does it really take? Because it sounds like people think entrepeneurship is "risky" like Russian roulette is risky, when on inspection, it seems to be risky like poker is risky. I.e., it looks like for someone learning, there is virtually zero risk of "failure" (your savings goes to zero and you are homeless or have to get a job) in the sense that most non-entrepeneurs think.
As a poker player, I never considered it "risky" to play poker. It was virtually guaranteed that over any meaningful number of hands, I'd have more money.
I don't think entrepeneurship looks risky either.
I think you could get tons of people to drop what they're doing and become entrepeneurs just like tons of people learned poker a decade ago, if it could be expressed more accurately:
1. How many "hard-proofed" (to use UNSCRIPTED 's language) and CENTS-compliant ideas actually fail for non-execution reasons?
2. How can you maximize the amount of CENTS-compliant ideas you validate and make a go/no-go decision on?
3. Just as you can maximize probability of success by following advice in UNSCRIPTED , can you maximize the amount of ideas you validate in a given period of time? If you could validate two ideas per month instead of one, things get way better. How can you validate faster? Well, there are some b2b ideas where I can only imagine you have to track down decision makers and make calls, etc. You might not be able to validate that often and even when you do, it's hard to be sure people will buy. But then, there are also ideas where you can set up a website and pay for traffic from Google ads over a a week or two. You could probably validate several ideas in parallel that way, maybe 10+ per month instead of just one per month. And if you are taking pre-orders (which you do say you might cancel) or running a Kickstarter, you also can be pretty confident that if an idea passes, it can be executed.
4. How long does it take you all to validate an idea and decide whether to execute or not?
5. For those of you have decided to execute on validated ideas, how many validated ideas failed? Did you find that some types of validated ideas (e.g., expensive b2b service "validated" by asking business owners if they would buy vs product offered for pre-order online where people actually attempted to buy) were more likely to succeed following validation than others?
What do you all think of applying the Kelly criterion here? What do you think of questions 1-5? Do you think I left anything out or am completely wrong about anything?
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