Are you willing to lose 100% of your investment? That’s the starting point for any angel investment. As it should be. With no product, customers, and team – angel investing is a risky proposition. (If you’re not convinced, even VC professionals have a 90% failure rate.) Yet people do it. I’ve done it. And have my share of doughnuts to show for.
This reminds me of another risky proposition – me quitting your job without a plan. The lack of plan, comes with the lack of something else: income. Like an angel investment, there was a high guarantee of a loss, making the decision to leave a high-risk venture. But where there’s risk, there’s reward. And at the time, I felt that not only had I de-risked my circumstances – I had tried to create the conditions for equity-like returns in myself.
What’s the worst thing that could happen?
Given our tendencies to always assume the worst, I began with two simple questions that would serve as guardrails. First, if I took a break from finance, would I be able to return? Second, how much of our savings were we willing to burn through during this discovery process?
The first question was easy to answer. My decision to leave was conditioned on not burning any bridges. I’d honor all the legal terms of my contract, would not talk any crap, and give 110% of myself to the transition process (i.e. finding my replacements, handing-off projects).
And with nearly fifteen years of experience and a good network, I knew I’d be employable. I didn’t assume I could get my old job (nor my old income) back. Nor did I assume I’d like this hypothetical new job. But I knew I could find something if we ever found ourselves in a financial panic – which de-risked the decision to quit.
How much is this gonna cost me?
Next, came the scary financial part. Nothing can prepare your reptilian brain for the first time you see your bank account go down. Then rinse and repeat. Every. Damn. Month. But again, you can put guard rails around this feeling.
I’d accumulated some savings over my fifteen year career and had a good sense of our monthly spending (including monthly contributions to our kids’ 529 plans). Then looking at our savings, my wife and I determined an amount that we were ok “losing” (in finance parlance, the “monthly burn”) during this transition period. We took this “willing to lose number” and divided it by “monthly burn” (and multiplied it by 1.3 for a margin of safety). The result: the number of months (18) that could comfortably support my transition into entrepreneurship.
Language influences our mindset
Nothing I’ve described above is earth-shattering (yet few people make it this far). But notice the language used above: burn, lose, worst-case, scary, cost. For starters, these are memento moris – meditations on death. And as human beings we’re susceptible to being primed, which Wikipedia defines as:
The exposure to one stimulus influences a response to a subsequent stimulus, without conscious guidance or intention.
All those words invoke a loss (stimulus one) which influences fear (stimulus two). This then triggers our fight-or-flight reflex, which immediately raises our stress levels, clouds our thinking and stunts our creativity. On the Rad Awakenings podcast, behavioral scientist Caroline Webb suggested a simple reframing to circumvent your reptilian brain:
Replace “What’s the worst thing that can happen?” with “What can I learn from this?”
And when it comes to taking risk as an entrepreneur, I’ve replaced:
“How much am I willing to lose?” with “How much am I willing to invest in myself?”
There’s power and confidence in priming your psyche to pick possibility over fear. Irrespective of whether you succeed or fail, you’ve made you’ve made an investment in yourself.
Back to Angel investing
I know what you’re thinking. I spent the entire first part of the post detailing the awful risk-return profile of an angel investment. Does becoming an entrepreneur share the same risk profile? The answer is, I don’t know. It’s risky, for sure. But upon deeper inspection the risk is very defined – and thus manageable.
And even if you don’t have the funds to quit – the same thinking applies to classes or side projects. You aren’t burning money. You’re making an investment in yourself. Those always pay off.