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The Great Ideas Letter Forum
How to choose between different business projects... Part 3
Posted By: Dien Rice In Response To: How to choose between different business projects... (Dien Rice)
Date: Tuesday, 11 January 2005, at 6:39 p.m.
Okay...
You've figured out your "expectation value". You've figured out how much you could lose on a project - your "down side".
Well, there's one more - VERY IMPORTANT - step.
That is - to figure out how you can ACTIVELY REDUCE YOUR RISK.
I also like to work with both my MONETARY (financial) RISK as well as my TIME RISK. Figure out what these are - then brainstorm how I can reduce them...
To take an example. Let's say you have the opportunity to buy a lot of "widgets" at a very cheap price, which you think you can resell on eBay at a profit.
One way to do it is to buy $1,000 worth of "widgets", and resell them. If they don't sell at all (nobody wants a widget), then you're out $1,000. How can you reduce your TIME and MONETARY risk?
One way is to see if people are selling similar widgets online. If they're selling $100 per widget, and your widgets are identical, you can probably sell them for $100 per widget too.
That's one way to reduce the risk.
What if nobody is selling widgets on eBay? Well, perhaps you could buy a small number of widgets, and use them to "test" the market. See if they sell at a profit. If they do - and ONLY if they do - do you go back and buy a lot more widgets.
Of course, exactly HOW to reduce the risks will depend on the specific situation. Every situation is different. You've got to write down what the risks are, then brainstorm how to reduce those risks.
Here are a few ways that risks can be reduced with some projects...
- TEST the market first, for example, by starting the business with the MINIMUM amount you need to get done to get it started. Then complete the rest if it looks likely that the business will succeed... As well as the "widget" example above, another example of this is to sell the product using a "mock-up". Then you don't need to actually create the product, until you've made a sale.
- Follow an existing model of success.
- Plan multiple ways to profit from a project. That way, just in case you don't make money through method A, figure out methods B and C that could make you money instead.
- Re-use existing resources you already have, rather than spending money buying new resources, or using time to create new resources. Or borrow or rent any expensive equipment you'll need, and don't buy it until you know the business will succeed.
- Negotiate - for example, to get a better deal from suppliers.
- Shift the risk to others - for example, by doing JVs with suppliers rather than buying from them outright. By not paying them up front, but by sharing a proportion of the profits with them instead, they also take on part of the risk, since you won't have to pay them if the project isn't profitable. (The flip side of this though is that if the project is wildly successful, they'll make more money - so it can still be a winning proposition for them too.)
I've found (from doing this for my own projects) that with some projects, it's easy to reduce the risk to next-to-nothing - for example, by figuring out a low-cost way to "TEST" the market for the project first. On other projects, however, no matter what I think of, it's hard to reduce the risks. Every project is truly different. Only when you undertake this for yourself will the differences between projects become clear ...
By the way, if you have a "fear" of launching yourself into projects, doing this will probably help you conquer your fear. Your fear is most likely due to the perceived risks involved. By figuring out how to reduce your risks as much as possible for various projects, you can easily identify which projects have the least risk.
Of course, this step and the previous ones (Parts 1 and 2) are inter-related. Once you figure out how to reduce the risks - you're changing how you do the project. It will definitely change the downside risk (and hopefully improve it). If your idea to reduce the risk changes the project structure radically, it could even change the "expectation value" for the project. So it can be a cyclical process, as you figure out the best way to do the project.
I hope that this helps!
- Dien Rice
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